Toyota Rules the Road

Toyota Motor (NYSE: TM  ) blew past the competition in its most recent quarter (fiscal Q3 for 2003), overtaking Ford (NYSE: F  ) to assume the No. 2 position among the world's auto makers -- and causing General Motors (NYSE: GM  ) to cast nervous glances at its rearview mirror. Toyota's net income rose 60%, despite operating income increasing a relatively modest 11% and sales 8%.

These results are particularly striking in light of the yen's rise against the dollar. The dollar-to-yen exchange rate is currently at a three-year low, and Toyota makes nearly one-third of its new car sales in the U.S. That means, for every sale of a Corolla, Camry or Tacoma in the U.S., dollar profits earned translate into fewer and fewer yen falling to Toyota's bottom line.

Toyota attributed its strong performance to cost cutting and increased sales. How did it achieve both?

For one, Toyota sparingly uses "incentives" -- rebates, 0% financing, and similar flavors of the financial heroin that U.S. car makers have become addicted to in recent years. Those kinds of measures may boost sales, but every dollar given back to a consumer is a dollar of profit lost to the seller.

Toyota has no need to offer generous incentives to attract customers. The quality of its cars does that. You see, I disagree here with Third Avenue Funds' Chief Investment Officer, Martin Whitman, who, in his interview with Tom Gardner in the June issue of Motley Fool Hidden Gems, argued that "on a worldwide basis Toyota Motor is going to turn out to be the Wal-Mart (NYSE: WMT  ) of the automobile industry."

Rather, I think Toyota is fast becoming the Tiffany & Co. (NYSE: TIF  ) of the auto industry: the place you go to shop when your primary interest is getting good quality, regardless of the price.

Remember, Toyota is now advertising its entry-level Scion cars as being "under $20,000." Once again, that was under $20,000 for an entry-level car. Not exactly cheap. But also, not exactly bad news for Toyota's profitability. If Toyota can command prices like those for its most basic offerings, I suspect it will not have to settle for the No. 2 slot in the world car biz for much longer.

Rich Smith does not own stock in any of the companies mentioned above, nor is he a certified "car guy."

Before he bought his truck last year, he consulted the experts on The Motley Fool's Buying and Maintaining a Car discussion board. You can find him most days hanging out there -- near, but not talking with, the cool kids -- just listening and nodding a lot.

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