Three Challenges Facing Toyota As It Enters 2013

Toyota Motors (NYSE:TM) has had a good year. The company’s stock is up more than 30% since the start of the year, helped by strong earnings and a positive outlook. Its sales suffered in 2011 due to production constraints, but the fact that sales have rebounded in 2012 is reflective of sustained customer interest in Toyota’s vehicles. However, some recent developments indicate that things might get tougher for the automaker in the coming year.

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North American Pressure

Toyota’s Prius accounts for about 12% of Toyota’s American sales, but its dominance could fade as rival automakers introduce new and improved hybrids and electrics. Ford’s hybrid C-Max, launched in 2012, received good reviews and outsold the Prius by 400 units in October. ^[1] The Michigan-based automaker also debuted a new plug-in called C-Max Energi at the recently concluded Los Angeles auto week. At the same event, GM unveiled a new Spark EV, with the lowest priced model costing less than $25,000. ^[2]

Toyota’s star seller, Camry, is under considerable pressure now that the refreshed models of Honda Accord and Ford Fusion have been introduced. Moreover, the U.S. automobile market may not be able to replicate its 2012 growth rate due to weakening of macroeconomic environment caused by the fiscal cliff. North America accounts for about a fourth of Toyota’s global sales so any disruptions here will have a significant impact on its total sales. ^[3]

Negative Japanese Market

Japan’s economy suffered in 2011 due to natural disasters like earthquakes and a tsunami. To help lift the automobile market, the government provided tax incentives to encourage people to buy cars. Japanese buyers rushed to purchase new vehicles before the subsidies ended in September, and now with its expiry the market is expected to decline next year. The automaker forecasts its Japanese sales to fall as much as 20% next year. Sales volumes in Japan account for 30% of Toyota’s total sales volumes. ^[4]

China Still A Worry

Sales of Japanese automakers have suffered due to an anti-Japanese backlash in China. As a result, Korean and German automakers are benefiting at the expense of Japanese automakers in this region. Sale figures showed improvement in November and we can see them getting back to normal in the next 2-3 months. Toyota had earlier targeted sales of 1 million vehicles in China, but now it has lowered its expectations to be no more than 800,000.

Still, escalated tensions between the two nations could send the sales plummeting just when things might begin to appear normal. China is the world’s largest automobile market and Toyota’s inability to capitalize on this huge, growing market will have a considerable effect on its long term profitability.

We currently have a $91 price estimate for Toyota’s stock, which is about 5% higher than the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. U.S. Auto Sales, wsj.com [↩]
2. General Motors to make 500,000 electric vehicles by 2017, November 15, 2012, dnaindia.com [↩]
3. Toyota 20-F [↩]
4. Toyota sees Japan sales dropping 20 percent in 2013: media, December 6, 2012, reuters.com [↩]