How Far Will Toyota Go?

We all knew that Toyota (NYSE: TM  ) was going to have to do something drastic after a disastrous February.

And as expected, they did: Toyota's spending on incentives soared in March, and coupled with a full-on marketing blitz, those incentives drove sales to a whopping 87% increase over February's dismal levels. Toyota's all-important U.S. market share rose to 17.5% from 12.8%, tied neck-and-neck-and-neck with Ford (NYSE: F  ) and General Motors.

Toyota has said that it will continue its blitz through April, possibly longer. But is spending money to gain market share a good strategy? And what happens when the discounts stop?

The best market share money can buy
Toyota said that it would continue March's heavy incentives at least through April -- zero-percent financing on 10 models and special cut-rate leases. This is somewhat unprecedented: Although the U.S. automakers have long relied on heavy incentive spending to boost sales, Toyota has largely avoided major incentives pushes in the past, aside from "year-end sales events" and the like.

With its incentives spending at an average $2,256 per car sold in March, Toyota hit its highest level ever, according to Edmunds.com. That's still below the industry average of $2,742, but it represents an increase of about $700 per vehicle over March 2009 levels -- and an additional $131 million in costs for the month. And that doesn't count Toyota's offer of two years' free maintenance to current customers who buy a new car, which will add several hundred dollars of additional costs to each of those sales.

Sure, GM and Ford and Chrysler still spend more -- though all three are spending less than they did a year ago. But Toyota's spending is going the other way -- and it's getting uncomfortably close to parity for a company that for decades was able to rely on its impeccable quality reputation to generate showroom traffic.

The price war that wasn't
I noted above that GM, Ford, and Chrysler are all spending less on incentives than they were a year ago, but it's also worth noting that, for all the talk of a "price war" set off by Toyota's aggressive push, the Detroit automakers didn't significantly change their level of spending in March. Chrysler's actually fell slightly from February's levels, while GM's and Ford's were essentially unchanged.

So what created the perception of a price war? Two factors: First, while the Detroit automakers didn't increase their incentives spending, there were certainly increases in advertising calling attention to those incentives -- a war of words rather than dollars.

Second, Honda (NYSE: HMC  ) and Hyundai, two key Toyota rivals, did increase incentives spending. Those increases were noteworthy because the two companies -- Honda in particular -- have shied away from incentives in the recent past.

The quality story still isn't dead
Late on Monday afternoon, U.S. Transportation Secretary Ray LaHood announced that the government will seek a $16.4 million fine against Toyota for "knowingly" hiding safety problems from regulators. That's the largest fine allowed under law, and would be far larger than any previously assessed against an automaker.

The financial hit is nothing to a company of Toyota's size, but the fine is still a big deal -- not least because it reminds us that Toyota's problems aren't over. If Toyota pays the fine in an effort to put the story behind it, is that an admission of guilt that will hurt it in the (large amount of) ongoing litigation over the unintended-acceleration problems? If they contest the fine, will the ongoing news reports keep consumers wary, requiring continued incentives?

The upshot
At this point, Toyota risks falling into a Detroit-style trap, where big margin-slicing incentives become an ongoing requirement of doing business. GM and Ford are working hard to get out of that pit now, but it took a bankruptcy (for GM) and a historic restructuring (for Ford) to get those companies to the point where escaping the incentives cycle even seemed possible.

Put another way, if the perception of quality problems continues, Toyota could become dependent on incentives to hold market share, just as GM has been for years. That's likely to be a losing battle, one that would reinforce what is increasingly becoming obvious:

Without its reputation for quality, Toyota is just another automaker.

Fool contributor John Rosevear owns shares of Ford. You can follow his Foolish twittering at @jrosevear as he continues to sort through the ongoing global auto shakeout. Ford Motor is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 07, 2010, at 8:51 AM, G35man wrote:

    One thing that I thing should be clearly noted that even with Toyota's current incentives, the amount Toyota is giving is significantly lower that GM's or Fords which means it does not cut into profits as much.

    I beleive GM is giving almost $800 more a car to try and sell the public.Larger incentives equal less profit, lower resale value. Toyota is being smart keeping the incentives where they are. They have plenty of room to bump the incentives up if needed for more sales.

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