Toyota Profits Beat Competition by Nearly 3-1… Why?

Toyota's "secret sauce" for outstanding profits may be linked to what they don't have: major legacy costs.

Toyota’s per-car profits are crushing the competition, according to a recent story published by The Detroit News.

In terms of financial performance, GM has had it pretty good, earning $6.5 billion dollars in 2014. Ford earned $6.3 billion dollars and Fiat Chrysler in turn enjoyed an excellent $3.9 billion dollars in earnings. These are great numbers, but Toyota has the bragging rights; $24.5 billion dollars earned across their 2014 fiscal year, ending March 31st.

Image courtesy The Detroit News

Image courtesy The Detroit News

Per car, Toyota is earning $2,726 dollars versus Ford’s $994 dollars, FCA’s $850 dollars and GM’s $654 dollars.

I’ve got to wonder, “Why?” The technology and manufacturing techniques employed by each company are the same. Many of the component suppliers are shared among these companies. It’s very unusual that we can make an apples-to-apples comparison between Toyota and its competitors, with no significant differences, but we can. The assembly of a Camry and a Malibu involves similar technologies, processes and materials, for example. Yet the huge gap in their earning says that something is different at Toyota.

What Might Toyota do, that we don’t?

So what’s going on? There are some theories.

The Japanese government may be manipulating currency to keep the Yen weak relative to the U.S. dollar, to give it an advantage. Industry experts in the U.S. and some politicians claim Toyota picks up anywhere from $2,000 dollars to $8,000 dollars per vehicle, an effective subsidy caused by manipulation of the Yen. Of course, the Japanese government denies this.

Wages and unions are another theory. Since 2007, there has been a two-tier wage structure, which has significantly reduced the labor cost for the Detroit 3 manufacturers. According to the Detroit News feature, U.S. hourly cost for GM is $5 billion this year. This was $16 billion in 2005 under the old contract. New hires now work for significantly lower wages and benefits and they form an ever-increasing percentage of the labor force for each of the Detroit 3 companies.

It’s no longer a question of whether GM has to overproduce vehicles to get the unit cost down to the point where it can get decent margins on a per-vehicle basis. So if it’s not wages or currency manipulation, I think the answer might be the legacy costs.

Previous UAW contracts included generous pension and medical benefits for retirees and there are a lot of them still around. Costs for medical care are increasing and so is the human lifespan, compared to 50 years ago. This means a lot more money is being funneled to retirees than what might have initially been planned.

This is not an easily resolved problem. Retirees are dependent on their contracts, which are essentially set in stone. I wonder why not enough money was set aside to account for this. Naturally, the industry bankruptcy/bailout issue is a factor, as is historically low interest rates which have crushed bond yields.

Regardless of the cause, the resulting drag on profitability had better not slow new product development in Detroit, or we’ll see an automotive world where Toyota and Volkswagen divide the planet between them. 

Written by

James Anderton

Jim Anderton is the Director of Content for Mr. Anderton was formerly editor of Canadian Metalworking Magazine and has contributed to a wide range of print and on-line publications, including Design Engineering, Canadian Plastics, Service Station and Garage Management, Autovision, and the National Post. He also brings prior industry experience in quality and part design for a Tier One automotive supplier.