The world's largest automaker in terms of vehicle sales estimates that these measures have already cost it over $600m per month in April and May. It is true that more than a quarter of the vehicles it sells in the United States are directly imported from Japan.
Furthermore, Toyota's hybrid engines are a big hit in North America. This segment is the group's main source of profit, and its success enables the manufacturer to post operating margins that rival those of Mercedes-Benz.
But it's not just the United States. Toyota is also under fire at home following a series of scandals relating to rigged quality controls. At the same time, the group is accused by its shareholders of maintaining such an opaque structure—with hundreds of subsidiaries, affiliates, cross-shareholdings, and mysterious re-invoicing—that it is virtually impossible to understand.
Last year, three-quarters of the group's institutional investors said they were dissatisfied with the manufacturer's governance — a seismic shock in the land of the rising sun, where such breaks with consensus are unusual.
In response, the group's president, Akio Toyoda — grandson of Toyota founder Kiichiro Toyoda — is preparing an offer to privatize Toyota Industries, the group's subsidiary that manufactures weaving looms and forklifts. In theory, this would be a first step toward simplifying the group.
The share price immediately jumped following this announcement, and the impact was not limited to Toyota, as several large industrial groups in similar situations also saw their market valuations rise in the wake of the news. After decades of wait-and-see, Japan Inc. is clearly preparing for a wave of activism.
The other elephant in the room is, of course, the Chinese market, which is rapidly slipping away from foreign manufacturers. Toyota's sales there are continuing to decline, while local manufacturers such as BYD and Li Auto are posting almost unreal double-digit growth.
Finally, there is the dependence of the manufacturer—and, in reality, of the Japanese economy as a whole—on the weak yen. It is because the yen is constantly depreciating that Japanese exporters are able to remain competitive in international markets.
The proof is in the numbers: in ten years, from 2016 to 2025, Toyota's revenue grew at an annualized rate of 6.2% in yen, but only 2.7% in US dollars; the same is true for profits, which grew at an annualized rate of 8.2% in yen, but 5% in dollars.
The sum of these headwinds is weighing on Toyota's cash flow, which have eroded significantly over the past two years. Curiously, this has not prevented the group from returning over $15bn to its shareholders this year—a historic record. In the absence of sufficient free cash flow, these substantial amounts are being financed by a sharp increase in debt. In yen, the manufacturer's net debt has quadrupled since 2019.
This development does not seem to be causing panic in the market. However, analysts at MarketScreener are openly expressing their concern.
