When it comes to profits, Toyota (NYSE:TM) remains the standard of the world: The Japanese auto giant reported net income of 446.4 billion yen ($3.73 billion) for its fiscal fourth quarter ended March 31, an increase of more than 50% from strong results a year ago.
Booming sales in North America and big gains from exchange-rate moves powered an operating profit of 635.7 billion yen ($5.31 billion), a 46% increase from a year ago. Global revenue was up over 8%, to 7.12 trillion yen ($59.5 billion).
That simply blows away the profits generated by all of Toyota's rivals in recent quarters. But it especially dwarfs General Motors' (NYSE:GM) recent earnings -- even though GM sells almost as many cars. What's the secret?
Similar sales, but a huge gap in profits
Here's the real comparison: $2.1 billion for GM, $5.31 billion for Toyota.
Those are the numbers each automaker uses as its own measure of real performance: earnings before the effects of taxes and interest charges. (They're actually calculated a bit differently -- both are essentially "operating income," or "earnings before interest and taxes (EBIT)," but GM excludes some one-time items from its calculation, which it calls "EBIT-adjusted income.")
For GM, that $2.1 billion represents its "EBIT-adjusted" income on $35.7 billion of revenue in the quarter ended March 31, for an operating margin (or as GM says, "EBIT-adjusted margin") of 5.8%. For Toyota, operating income of $5.31 billion on revenue of $59.5 billion gives an 8.9% operating margin for the same period.
Toyota generated a lot more revenue -- $23.8 billion more -- during the quarter. But the two companies' global sales weren't all that far apart: Toyota sold 2.542 million vehicles worldwide during the quarter, while GM sold 2.4 million.
What's the difference? Why can't GM post earnings like Toyota's?
Toyota's advantages over GM
The answer is that Toyota has two big advantages over GM right now.
First and foremost, recent exchange-rate movements -- namely, the strengthening of the dollar against the yen (and the euro) -- gave big boosts to profits of automakers that do business in the U.S. but report their results in other currencies. The numbers reported by Toyota on Friday suggest that the boost from foreign exchange added about 65 billion yen, or $543.3 million, to its operating income for the quarter (and about 280 billion yen, or $2.34 billion, to its full-year operating result).
But second, and more important, Toyota isn't in recovery mode. Even though GM is six years removed from its crash into bankruptcy court, CEO Mary Barra and her team are still fixing all of the things that went wrong with the General over the last several decades.
A lot of good work has already been done. GM's North America unit is generating good profit margins (8.8% last quarter) with much-improved products that are getting quality ratings close to Toyota's. But it's still posting big losses while it restructures in Europe, where Toyota has a much smaller (and profitable) operation. And while GM outsells (and outearns) Toyota in China, Toyota's operations elsewhere in Asia are strong and generating good profits -- thanks in big part to the company's exceptional manufacturing efficiency.
All of Toyota's global divisions are profitable, in other words, while GM has been posting losses in its Europe and South America units. That's one key difference. But another has to do with results from the two companies' home markets.
GM and Toyota both do best at home -- but Toyota does better, thanks to exports
Toyota doesn't earn anywhere near as much money in North America as GM does -- 80.9 billion yen in operating income last quarter ($675.34 million) versus $2.18 billion for GM. In fact, for the full year, Toyota's operating margin in North America was just 5.6%.
North America is Toyota's biggest market in terms of sales: It sold 2.72 million cars here in the year ended March 31, versus 2.15 million in its home market of Japan. But Toyota's operations in Japan bring home an outsize proportion of Toyota's bacon: 431.9 billion yen ($3.6 billion) in operating income last quarter.
Why the big difference? Part of it is because Toyota has been working on some big cost-cutting initiatives, and those are having a big impact on its operations at home. But it's also because the profits from the cars Toyota builds in Japan for export get reported as part of its Japan earnings. Toyota built almost 3.2 million vehicles in Japan last year -- but more than half of those, 1.78 million, were exported.
Those exports generated big profits, particularly on the cars that came to the U.S. Consider: Right now, one U.S. dollar is worth about 120 yen. A year ago, that same dollar bought about 102 yen. That means every dollar Toyota earns is now worth over 17% more in yen terms than it was a year ago.
GM is trying to close the profitability gap, but it will take several years
Long story short, Toyota is getting a (probably temporary) earnings advantage from some very favorable exchange rates, but it has a more meaningful advantage in terms of the health of its global operations.
Toyota is a well-run, efficient company that is working on being even more efficient. There are places where Toyota could improve, but its full-year operating profit margin of 10.1% is about as good as it gets for a mass-market automaker.
Meanwhile, GM is still in recovery mode. Barra has a strategic plan under way that is intended to get GM's global operating margins into the 9%-10% range by early next decade. It's a credible plan that stands a good chance of working.
But right now, Toyota is still far ahead.