Why Has Toyota’s North American Operation Remained Weak?

Toyota Motor Corp. (NYSE: TM) has historically remained a dominant player in the North American region. However, a changing consumer preference in the aforementioned region has put pressure on the company’s performance and its consequent operating margin over the past 2 years, and this trend is likely to continue in the upcoming financial year 2019.

Toyota’s total sales volume in the North American region has displayed a declining trend which is likely to continue in the current year. The decline in sales volume has largely being driven by a consumer shift in the U.S. towards more comfortable and more space-oriented sports utility vehicles (SUVs) and crossovers. However, most of the Japanese automobile giants who have historically been dominating the U.S. automobile market have been enjoying their significant market shares through sales of sedan variants whose demand has been tumbling.  According to research firm, J.D. Power, SUVs and pickup trucks accounted for 67% of new vehicle retail sales in April ’18, the highest level ever for the month, thus depicting the deteriorating small car market.

Thus, to counter the impact of declining demand, Toyota has been increasing its marketing and incentive spending in the North American region in order to maintain its current market position. However, as a consequence of increased spending, Toyota’s North American operating margins have been suffering which is, in turn, weighing on the company’s overall operating margin as well. Toyota reported a 55.4% year-on-year (y-o-y) decline in its North American operating income in its FY18 results as a consequence of this.

Although there is a probability of North American demand shifting back towards sedans with rising gasoline prices as summer driving season begins, this trend seems very less likely as consumer incomes have also risen and the fuel efficiency of crossovers remain nearly as good as sedans. Additionally, consumers have developed a preference for the high seating position that SUVs and trucks have to offer, and would require gasoline prices to reach $5-$6 per gallon to see some change in consumer demand. As stated by Mike Jackson, chief executive of AutoNation Inc, with the U.S.’s fracking technique for shale oil and gas extraction, such an upside remains limited.

Toyota has planned to ramp up production of its successful SUV variant RAV4 in Canada as strong consumer demand led the automaker to import more than half of its sales in the U.S. from Japan. Toyota plans to spend nearly $ 1 billion upgrading its factories in Canada and, additionally, aims to begin producing Tacoma pickup trucks in Mexico by 2019. However, despite these efforts, an intense competition in the North American SUV market is expected to weigh on the company’s performance before the company exhibits improving results.

The graph below depicts the company’s overall expectations for its 2019 results. These have been created by using our interactive dashboard.

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