Prius hot, but at other models’ expense?

High appeal may dent demand for lucrative Lexus

by Kae Inoue and Tetsuya Komatsu

Bloomberg

Toyota Motor Corp.’s new Prius hybrid won more than 80,000 orders even before going on sale, prompting departing President Katsuaki Watanabe to call it the carmaker’s “savior.” Investors don’t share his faith.

“Toyota shouldn’t be happy just because Prius orders are going up,” said Yuuki Sakurai, general manager of financial and investment planning at Fukoku Mutual Life Insurance Co. “What it should worry (about) now is Lexus and high-end customers may shift to driving a Prius.”

Toyota slashed production costs for the Prius by 30 percent in response to dwindling sales of bigger, more lucrative models. Lexus sales in the U.S. have fallen 37 percent this year through May, mirroring an overall plunge in demand caused by falling wages and rising unemployment.

Toyota earns between ¥100,000 to ¥200,000 in operating profit on the sale of one Prius, or about 7 percent to 12 percent of the profit it makes on the sale of a Lexus LS sedan or Tundra pickup truck in the U.S., according to an estimate by Credit Suisse Securities (Japan) Ltd.

Even with lower Prius production costs, Toyota fell short of its goal of cutting costs of the vehicle by 50 percent, according to Executive Vice President Masatami Takimoto.

“There is some profit” from the Prius, said Akio Toyoda, who will become president later this month. “We are trying hard to cut costs and at the same time, it’s important to make the customers want to buy the car.”

In early April, when Toyota started taking orders from customers, it slashed the price of the entry-level Prius by 12 percent to ¥2.05 million to compete with Honda Motor Co.’s redesigned Insight Hybrid priced from ¥1.89 million.

As a result, Prius became the most popular vehicle in Japan in May. The Insight had been the first hybrid to top Japan’s monthly regular auto sales.

Toyota has increased domestic orders for the new Prius by 75 percent since it went on sale May 18 after receiving 80,000 orders. The company introduced the latest Prius just 10 days after posting its first annual loss in 59 years. It expects the loss to widen to ¥550 billion this fiscal year, from ¥437 billion in the previous year.

The third-generation Prius, priced between ¥2.05 million and ¥3.27 million, gets 38 km per liter, according to Toyota, compared with the Insight’s 30 km per liter. Toyota has a goal of selling 1 million hybrids annually in the 2010s and offering hybrid versions of all of its vehicles in the 2020s.

Toyota’s sales of Toyota and Lexus brand vehicles in the U.S. have plunged 39 percent this year through May to 638,795 units.

“Toyota needs the cash cow models in the U.S., like the Lexus and the Tundra, to do well,” said Masayuki Kubota of Daiwa SB Investments Ltd. “Toyota is probably expecting a return from the Prius for the long term.”

For now, Toyota’s push into the U.S. market for large pickup trucks is compounding its financial problems.

The company opened a $1.3 billion plant in San Antonio, Texas, in late 2006 solely to build Tundras and spent an equal or greater amount to revamp the truck and develop V-8 engines to power it.

In 2007, the first full year for the redesigned Tundra, Toyota fell short of its initial 200,000-unit U.S. sales goal and last year plunging demand for pickups amid record high gasoline prices led Toyota to suspend production work in San Antonio for three months.

Toyota’s U.S. rivals, which relied on selling large pickup trucks and sport utility vehicles, have also suffered. Chrysler LLC filed for Chapter 11 bankruptcy protection on April 30 and will sell most of its business to Italy’s Fiat SpA, while General Motors Corp. filed for Chapter 11 on June 1.

Once Toyoda, the grandson of the founder of Toyota, becomes president, he may further slash costs, including cutting the domestic capacity and workforce by at least 10 percent, reducing 20 platforms and 70 model types by 10 percent, and consolidating the carmaker’s rural-dealer network in Japan, said Koji Endo, an analyst at Credit Suisse.

This may help trim Toyota’s fixed costs of ¥6 trillion by 10 percent.

The automaker expects vehicle sales to drop 14 percent to 6.5 million units this fiscal year. That would leave Toyota with costs related to about 3 million units’ worth of unused capacity, Endo said.

“It’s good to see demand is gradually coming back with surging Prius sales, but it’s not good enough,” said Yoshihiro Okumura of Chiba-gin Asset Management Co.