Earnings Review: Unfavorable FX Fluctuations Eat Into Toyota’s Operating Margin

by Trefis Team
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Toyota Motors (NYSE:TM) reported earnings for the third quarter of fiscal year 2017 on Monday, February 6th. The Japanese auto maker posted an 11.2% decline in earnings per share in dollar terms as its operating income dropped by 32.6% to $4 billion compared to the third quarter in the previous fiscal year. (Fiscal years end with March.)  Geographically, the company’s operating income dropped in all three regions- Japan, North America and international markets, despite Toyota posting unit sales growth in each geography over the quarter. According the company, 205 billion Yen ($1.88 billion) of the loss in operating income was attributable to the change in foreign exchange rates.

Toyota reports its earnings in Yen. This means that if the Yen appreciates relative to the U.S. dollar, Europe and other currencies, sales made in these currencies are less valuable in Yen terms. Moreover, since close to half of Toyota’s production is based in Japan, these sales are more expensive in dollar terms, thereby lowering the company’s operating income in dollar terms. Year over year, the company’s operating margin declined by 365 basis points.

tm fy17

Toyota is the second highest selling car manufacturer globally with a dominant position in the U.S. and Japan car markets, two of the three biggest car markets in the world. It has been doing well in China in recent months as the 16% increase in unit sales was mostly driven by growth in China sales. However, Toyota will have to readjust its strategy for one of its most important market—the U.S.—over the coming years. This is because Toyota’s strength in that market has been passenger car sales, but this segment is now on the decline. The company has increased its presence in the SUV, Crossover and Luxury segments but it doesn’t have a position that is competitive with the major Detroit auto makers in these segments yet. Going forward, in order to retain its dominance, Toyota will have to take the same leading position GM and Ford have in the SUV and pick-up truck segments, and BMW and Daimler have in the luxury vehicle segments. It is unlikely that the Yen will move so much relative to the dollar over the coming months, so the company’s reported earnings are likely to be stable and proportional to changes in transaction pricing, but growth is likely to be a function of the company’s newer products gaining market share at the expense of these competitors.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Toyota Motor

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