Look Out, World: Here Comes Toyota

You almost have to feel sorry for Toyota (NYSE: TM  ) after the challenges that have hit the company in recent years. Just as it was consolidating its long-sought position as the world's largest automaker, it got hit by the unintended-acceleration scandal -- and then, just as that challenge was starting to fade, the March tsunami trashed the company's supply chain, shutting down key production lines for months.

Sales have suffered as buyers have turned to other brands. But Toyota's production lines are coming back up to speed now, and the company is determined to make up the ground it has lost. Fiercely determined.

But can Toyota pull it off?

A recovery months in the making
Toyota's U.S. sales were down 18% in September on a year-over-year basis, as supply problems continued to constrain sales. The company's U.S. market share has fallen to about 11.5% from over 15% a year ago, and the company's U.S. sales now trail all three of the Detroit automakers. On a year-over-year basis, Toyota's U.S. inventories were down 40% as of the beginning of September.

But executives have been clear: October, they say, will be when that changes. The company expects U.S. sales in the month to show year-over-year growth for the first time in months and is expecting to make up considerable market-share ground in the fourth quarter.

As anyone who has driven a Ford (NYSE: F  ) (or a Hyundai (OTC BB: HYMTF.PK), or a Nissan, or a Chevy Cruze) lately knows, the competitive landscape has shifted dramatically over the past couple of years. Toyota still has strong products, but no longer are entries like the Corolla or Camry the unquestioned leaders of their classes. For Toyota, just having the cars on the lots won't be enough to win back lost market share.

Toyota clearly knows this and is planning a major effort:

  • New product. Toyota's product-introduction cadence has been overtaken lately by Ford and Hyundai, but the company's planning a strong comeback. The small Yaris and popular midsized Camry sedans are redesigned for 2012, and the company just launched the Prius V, a larger version of the company's iconic hybrid. More fresh products will follow.
  • Marketing. For the past couple of months, executives have been signaling that Toyota was planning a massive marketing blitz. Expect a lot of television ads and dealer support for those new models, as well as for the brand generally.
  • Incentives. Toyota will offer "zero-percent financing" on a bunch of 2011 models -- Camry, Corolla, RAV4, Tundra, Sienna, Avalon and Venza, to be specific -- during October to help jump-start sales and clear inventories of slower-selling vehicles. More deals may follow if sales stay sluggish -- expect Toyota to spend heavily here.

It's a solid plan, and it should generate significant sales gains. But for Toyota shareholders and industry observers, each of those points raises concerns.

Tight margins and lackluster products
Toyota's bread-and-butter compact Corolla was redesigned for 2009, but after so-so reviews, sales of the new car have been muted -- down 23% in September versus last year. Toyota blames the drop on inventory constraints, though Corolla production has been back up to speed since June. It's still the compact sales leader, but General Motors' (NYSE: GM  ) very good Chevy Cruze is now a close second, ahead of Honda's (NYSE: HMC  ) lackluster new Civic. Ford's new Focus and Hyundai's new Elantra are arguably even stronger entries, and had supplies of both not been limited in recent months, Corolla sales may have looked even worse.

The takeaway here is that Toyota -- and its shareholders -- can no longer assume that the company will dominate even the market segments it has owned for years. Competitors like Ford, Hyundai, GM, and even Chrysler have impressed with very strong new products, while Toyota's latest entries seem more evolutionary and conservative (and even, subjectively, rather cheap-feeling in comparison).

You won't like how this story ends
Incremental product improvements may be enough to keep Toyota loyalists (and there are many) coming back for another round. But at what cost? Toyota Senior Managing Officer Takahiko Ijichi said in August that the appreciation of the yen is costing the company nearly $4,000 in profits on every car sold in the United States. The aggressive marketing and incentive efforts that the company is about to launch will squeeze margins still further.

There's a story in the auto business about companies that saw their margins squeezed by lower-cost competitors, forcing them to reduce investments and make do with less competitive products, in turn meaning they had to resort to heavy incentives to keep those products selling to loyalists, while profits and market share continued to decline.

It's the story of Old Detroit, and it was an ugly one.

Is that really where Toyota wants to be going?

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 12:19 PM, baldheadeddork wrote:

    John, we talked a couple of months ago about Toyota needing a home run with the 2012 Camry. Do you think they got it?

  • Report this Comment On October 07, 2011, at 2:07 PM, TMFMarlowe wrote:

    Haven't seen it up close yet. But from the photos... it's an incremental improvement, and I do think they needed to make a bigger statement. It'll hold the loyalists, but it won't dent the Sonata's success. And I'd be worried about the upcoming new Fusion if I were them. What say you?

    John

  • Report this Comment On October 07, 2011, at 9:42 PM, baldheadeddork wrote:

    Keeping the baseball analogy, they didn't strike out but I think calling it anything more than a single is generous. Maybe it's a double because Honda also got an infield grounder with it's last Accord, and it might look better if the new Fusion and Malibu underwhelm. But on it's own it's not a great car and the styling is going to age quickly.

    Baseball over, the only way I see this being the best selling car in America in 2014 is if Toyota buys Avis.

    I know I'm a bit cynical when it comes to Toyota, but haven't we heard this "we're going to attack and retake our marketshare" speech at least eleventy times in the last couple of years? And when was the last time Toyota had a launch that wasn't overhyped and ultimately disappointing?

    That to me is the biggest and most damning similarity with old Detroit. They think their dominance is something they own. They may slip up occasionally, but that's mostly the media's fault and all they have to do is flex their muscles a bit to get it all back.

    The years-long lead times means Toyota was never going to turn around quickly, but I'm about done believing their bravado is just a facade to cover their rebuilding. Maybe it's time to take them at their word. Maybe they really believe they can snap their fingers and become the great company they once were.

    Oh, one more baseball reference: GO TIGERS!

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