What's Driving Toyota Down?

As the US and world economy struggles the auto industry continues to get hammered. Sales have fallen to historic lows and the US government recently lent a $17.4 billion lifeline to GM and Chrysler to help those companies get through the first quarter of 2009. Even the so-called import brands are feeling the pain as Toyota (TM) recently announced its first ever annual operating loss. The company has forecast a $1.7 billion loss for the fiscal year ending March 31, 2009, driven by poor sales and the rising value of the yen. Standard & Poors is even considering downgrading the company’s debt for the first time.

So what’s driving the bad news at Toyota? Are they a victim of a poor worldwide economy or is it something more? Compete data show that Toyota’s pain comes from a drop in demand after a great first half of 2008. For context, Toyota Division has historically attracted about 20% of in-market shoppers market-wide. In the first half of 2008 the launches of Corolla, Matrix and Sequoia drove Toyota demand up; Toyota outperformed the market overall, as seen by its Share of Market Interest (SMI) approaching 30% (meaning nearly 30% of all in-market shoppers shopped a Toyota). That translated into 231,000 units sold in May ’08, Toyota’s 2nd best sales month in over 5 years. Of course, high gas prices and Toyota’s wealth of small and fuel efficient models helped. As gas prices hit record highs in June and July, demand for Prius, Corolla, Yaris and Camry increased dramatically—as did sales, with Prius reaching record heights.

But since then, Toyota demand has fallen to record lows. While demand for the entire market is at record lows, Toyota has actually underperformed the market, with SMI returning to pre-2008 levels. Demand for the hot models from the summer has cooled significantly, driving overall Toyota demand lower. Lower demand is at the core of Toyota’s lower sales, down to 114,000 units in November ’08. Lower demand can be partially offset with better conversion of shoppers to buyers—exactly why Toyota began its 0% financing efforts.

At the model level, results are somewhere between steady and soft relative to the market. Share of Market Interest for most Toyota models has dropped back to more traditional levels—with the exception of Corolla and Prius, the SMI of both is down year-over-year. SMIs for some of Toyota’s trucks are better, with RAV4 and Highlander up year-over-year. Even Tundra has a pulse, no doubt aided by lower gas prices and the recent launches of the Ford F-150 and Dodge Ram.

But while on a Share of Market Interest basis several Toyota models are steady or even up, the problem is the context: with overall market demand at all-time lows, a steady share means much lower demand, and hence sets the stage for much lower sales.

For Toyota (or any OEM) to regain footing in this market, it will need to boost Share of Market Interest not just maintain it—as the Toyota results show all too well. And since the global recession is likely to keep oil and gas prices below 2008 highs for a while, Toyota will need to boost SMI with cost-effective, targeted marketing and very successful launches of must-have products. For Toyota, those include the ’09 Venza, ’10 Highlander and ’10 Prius. And while Compete’s early demand results for Venza look promising, it is too early to say whether it will drive overall Toyota Share of Market Interest upwards. Stay tuned.

Comments

[Jeff B.:]

One thing to consider is that Toyota is never the value leader in any model range. They certainly offer, good, reliable cars, but they also charge a premium for them. Consider the Corolla. Comparably equipped, it's quite a bit more expensive than a Honda Civic, and the Civic drives much better, IMHO. The few buyers who are out there now may be looking not only for a great car, but for a great deal too. For my money, that's usually Honda, Mazda, or even Hyundai -- not Toyota.

Jan 06 03:20 PM

[Rick W.:]

Although Toyota builds the vehicle I want they will not sell it here in New England but they will in Florida . The message is clear to me: “Buy what we want to sell you, not what you want”.
Funny way to run a car company, especially in this economy.

Jan 06 03:54 PM

[Mister Jimmy:]

Even Toyota's arch-cheerleader Consumer Reports have caught on that Toyota's "bullet-proof" quality has quite a few holes in it (engine sludge, transmission problems, recalls). That's why CR took them off their "automatic recommendation" list. Others have stopped drinking the Toyota Kool-Aid, too, and that's why they're losing U.S. market share and "driving down".

Jan 06 05:14 PM

[Roger Knights:]

Have desperate competitors been cutting prices to the bone? That would hurt Toyota's sales.

Jan 06 06:38 PM

[Detfan:]

GM sure is on a roll. Look for GM to continue to build market share against Toyota in 2009. In fact, I predict that GM will sell more cars than Toyota in 2009, while keeping thier truck share intact. I'll even predict that Ford will reduce the gap with Toyota in sales in 2009 and could go back to the number 1 position in 2010. Those two manufacturers cars are getting too good and the car buying public is starting to pick up on it.

Jan 06 11:19 PM

[Detfan:]

Whoops, regarding Ford--number 2 position.

Jan 06 11:20 PM

[Jonas:]

It's also good to look at the second hand market. Value for a second hand toyota drops 15% faster than ford or a GM model. As the current cars are now about 10% older than a year ago, people are seing the differences.

Jan 07 05:30 AM

[Jonas:]

Toyota also announced that their electric cars will only be ready for the market not earlier than 2016. Mitshubischi, GM en Ford will be faster with these introductions. Why? Because they have to. That is a better motivator than the motivator the people at Toyota have. They are still in the fase where they think it is temporarily.

Jan 07 05:34 AM

[wee:]

Why is my Tundra the MotorTrend truck of that year and on the list of top ten most reliable vehicles? TM is here to stay. The big three are struggling with lopsided product offerings, poor management and high labor costs. I am staying long TM.

Jan 07 12:04 PM

[Sekar:]

Most auto analysts including this author are missing an important point in Toyota's weekness. Watanabe and his American team became so bullish in 2004-05 that they jumped to open two new plants in US (San Antonio to build Tundras and Mississippi to build Highlanders). This decision is the nail in the coffin for Toyota. Toyota hastily jumped into making full-size pickup trucks and competing with F-150 and Silverado. The cost of building two auto plants is enormous and Toyota completely missed the point on selling these gas guzzlers in a downturn economy. Toyota has to either abandon San Antonio and Mississippi plants altogether and focus on making small and medium cars in US. I have driven Tundra truck and it rides like a Camry sedan. All American truck fans like a truck that roars like a truck and not mew like a cat. Nissan was clever to abandon Titan's progress and decided to rebadge Dodge Ram as Titan starting 2010. Carlos Ghosn is clever than Toyota's drunk management. Moreover Toyota's reliability is also falling. The 2009 best reliable sedan is Ford Fusion and not Camry. Consumer Reports rates Fusion higher than Accord and Camry and just below Altima. This endorsement speaks volumes in itself. Starting this spring, gas prices will start going up and Toyota is going to feel the pinch much stronger.

Jan 07 04:40 PM