Toyota’s Profits Decline for Second Straight Quarter Amid U.S. Tariff Impact

Toyota Motor (7203.T-JP) on Wednesday adjusted its operating profit forecast upward for the fiscal year ending March, anticipating a 3.4 trillion yen profit, a move from the previous 3.2 trillion yen forecast. This revision comes despite headwinds from U.S. tariffs, estimated to cost the automaker 1.45 trillion yen.

While the full-year outlook received a boost, Toyota’s operating profit for the quarter ending in September fell short of analyst estimates, highlighting the immediate impact of tariffs and other economic pressures.

“Despite the impact of U.S. tariffs, strong demand supported by the competitiveness of our products has led to increased sales volumes mainly in Japan and North America and has expanded value chain profits,” Toyota stated in its earnings report.

Here’s a snapshot of Toyota’s September quarter performance, compared against LSEG consensus estimates:

• Revenue: 12.38 trillion yen (approximately $81 billion) vs. 12.18 trillion yen estimate
• Operating Profit: 834 billion yen vs. 863.1 billion yen estimate

The automotive giant, leading the world in sales volume, reported a nearly 28% year-over-year decline in quarterly profit, despite an 8% increase in revenue. Net income climbed to 972.9 billion yen.

Toyota’s six-month results, spanning April to September, were officially released; CNBC calculated the quarterly figures based on the company’s statement and LSEG data.

The decline in operating profit for the September quarter marks the second consecutive drop since the U.S. implemented “reciprocal” tariffs in April. In July, Japan secured a trade agreement with Washington, reducing tariffs on its exports to the U.S. to 15%, lowered from the initially proposed 25%. These duties took effect on August 7th.

The company emphasized that tariffs constitute the most significant drag on Toyota’s profitability in the U.S. Exchange rate fluctuations and rising expenses, in turn, affect earnings in Japan.

During the earnings call, a Toyota executive shared that the company is “assessing challenges” and “making preparations” for a plan to ship vehicles manufactured in the U.S. to Japanese customers, aligning with a new investment framework between Tokyo and Washington. This initiative aims to broaden access to certain products for Japanese consumers, despite potential economic challenges.

The effects of U.S. tariffs are palpable across Japan’s automotive industry. Japanese automobile shipments to the U.S. experienced a 24.2% drop in September, an improvement over the 28.4% decline in August.

While Toyota maintains a considerable North American production footprint, approximately one-fifth of its U.S. sales still rely on Japanese imports. According to Liz Lee, Associate Director at Counterpoint Research, Toyota is primarily absorbing tariff costs on these imports, rather than passing them on to consumers. This strategy is aimed at preserving market share amid intense competition.

“We’re expecting profitability to remain under pressure in [the current quarter] as tariff and currency headwinds persist, with gradual improvement likely from the [March quarter] onwards,” Lee noted.

“Profitability should recover modestly next fiscal year if trade costs stabilize and the yen weakens, though rising EV competition will continue to cap upside potential,” she added. This highlights a critical challenge for Toyota: navigating the intensifying electric vehicle landscape.

Toyota is increasingly committed to electrified vehicles, with these representing 46.9% of Toyota and Lexus vehicle sales in the first half of the fiscal year. This growth is spearheaded by hybrid electric vehicles, particularly in North America and China. However, the company’s relatively limited portfolio of fully electric, battery-powered vehicles could render it more vulnerable to competition from Chinese EV manufacturers in Europe and Southeast Asia. The analysts at Counterpoint Research noted that strategic partnerships and intensified R&D efforts in battery technology and EV platforms will be crucial for Toyota to maintain its leadership position in the long run.

Despite diminishing profits, Toyota continues to demonstrate robust global demand. Recent reports show that vehicle sales, including its luxury brand Lexus, reached 5.3 million units in the nine months leading up to September, marking a 4.7% increase from the previous year. In its earnings report, Toyota affirmed its commitment to boosting sales volume and implementing further cost-cutting measures, indicating a sustained focus on operational efficiency and market expansion to counteract the challenges posed by tariffs and the evolving automotive market.