TM: China and Japan are Barriers for Toyota Stock

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Sales of vehicles in 2014 went up in the world’s three largest markets: the United States, China and the European Union. The U.S. market was particularly strong and is expected to have another banner year in 2015. China, the biggest automotive market in the world, continues to grow but not like it used to.

toyotaWith the industry expected to also be strong this year, why has the world’s biggest auto producer, Toyota Motor Corp (ADR) (NYSE:TM), cut its sales expectations?

Other major players in the industry, such as General Motors Company (NYSE:GM) and Volkswagen AG, are well-positioned to take advantage of a strong 2015. However, Toyota has become the prisoner of a less-than-promising domestic economic landscape that has spurred even worse policy in Japan. The problem is compounded by a host of problems Toyota is facing in the Chinese market.

And there are no easy fixes to turn these problems around.

Toyota Stock: Weakened Sales Forecast

Toyota beat both Volkswagen and GM by selling 10.2 million vehicles in 2014. However, the company stated that the parent and subsidiaries — Daihatsu Motor Co and Hino Motors Ltd, expect to fall by 1% and only sell 10.1 million vehicles this year.

Toyota itself expects its sales to only go up 0.4% percent to nearly 9.2 million vehicles. But the red flag is the market in Japan, where it forecasted a decline of 7%. Internationally, TM expects a sales increase of 2% and most of that can be contributed to a strong U.S. market.

In the midst of this news, Chief Executive Akio Toyoda has said that he is intent on following a path of profitable growth and that Toyota will not build a new factory through March 2016.

Toyota is being prudent — and it has to, because problems at home and in the world’s largest vehicle market will weigh heavily upon TM stock for the foreseeable future.

Toyota Stock: The Japanese Market

Toyota’s biggest obstacle in 2015 is Japan. The International Monetary Fund (IMF) convinced Tokyo that it needed to raise its consumption tax from 5% to 8% in April 2014 in a step toward fiscal sustainability.

The IMF was concerned about Japan’s rising government debt — baseline public debt was projected to skyrocket to more than 275% of GDP by 2030.The increase in the tax was suppose to fund a new stimulus package to jump-start the economy.

However, it did just the opposite. Now the rising cost of living has contracted the economy. Japanese GDP fell by 1.8% in the second quarter of 2014 and by another 0.4% in the third quarter.

The consumption tax hit the Japanese automobile industry especially hard. Automakers like Toyota have to now pay more for vehicle parts and raw materials. The tax translates into higher prices for new vehicles in a depressed economy.

Toyota Stock: The Chinese Market

Toyota missed its 2014 goal of selling more than 1.1 million vehicles in China and expects growth to halve for 2015. This is a major problem when you’re talking about the world’s largest market for vehicles. There are three reasons why Toyota is finding it tough sledding in China.

China’s economy grew at its slowest pace — 7.4% — in 24 years in 2014. The real estate market has cooled and both corporations and governments are dealing with heavy debt burdens.

Next, good old nationalism has created headwinds against Toyota’s efforts in China. The relationship between China and Japan have been strained over a group of islands that each country claims. Tensions came to a head in 2012 when the Japanese government purchased three of the islands. Chinese consumers were so outraged that the boycotted Toyota and other Japanese automakers. These tensions still linger today.

Finally, Toyota finds itself in a price war with premium German brands, such as like Bayerische Motoren Werke AG. The dealers of these upscale brands are attempting to increase their growth by substantially marking down lower-end cars of product lineups. So now the price of BMW’s 3 Series is in the neighborhood of a top-of-the-line Toyota Camry. The markdown squeezes the sales of comparable Toyota vehicles.

The Bottom Line

Japan’s current economic situation and a host of obstacles in China will knock Toyota out of its position as the global leader in vehicles sales this year.

Especially with so much uncertainty regarding Japan’s future, it’s a smart move to sit back out of TM stock and see how Toyota executives go about preserving the company’s bottom line.

As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/tm-japan-and-china-barriers-toyota-stock/.

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