Friday, July 21, 2006

Toyota's low profit is interesting

I bought a Toyota Camry a couple of years ago and it is a great medium-large sedan. It is economical to run and reliable. If fuel prices ever fall, and one of my stock market speculations proves more than a bit profitable, I would like to buy a Toyota LandCruiser and tour outback Australia. Toyota has a good market image in all types of vehicle markets and indeed sold a record 214,072 vehicles in 2005/06. It exported 71,748 vehicles and earned export income of $1.3 billion on this.

But overall Toyota made a net profit after tax of only $54.9 million (down from $70.8 million last year) on sales of $7.6 billion representing a return on sales of only 0.7%. Toyota claimed there was a sales slowdown because of increased petrol prices but its sales volumes performed well. Of course there was strong price competition from other local assemblers. Toyota also claims that the low profits reflect large capital expenditures of $420 million in 2006 compared to $176.8 million in 2005 for production of a new model Camry and the V6 Aurion salon. I will cjheck with my accounting colleagues but I thought large capital items would not be written off as quickly as this.

Toyota's low claimed profit figures have been challenged by the Australian Tax Office who, for several years have been pursuing claims of alleged transfer pricing of imported components for the Camry that allowed profits to be shifted offshore. At stake could be between $400 million-$1 billion in back taxes and penalties. In part such tax issues might vreflect squabbles between tax offices in Australia and Japan - with each party trying to maximise its slab of the surplus.

Also, recording low profits across the whole industry will be beneficial in maintaining high levels of protection paid as a production bounty to assemblers under the ACIS scheme. Tariff protection on locally produced cars has been substantially cut.

Toyota has been involved in transfer pricing claims in India and other countries. One interesting feature of the current Australian performance is that over 20065/06 the Japanese parent increased its global net income by b17.2% to $A119.9 billion. Of course Australia's sales would be a tiny part of this performance but they did increase strongly over the year.

Toyota would be a fascinating - and delightfully down-to-earth - case study for a PhD student interested in Australian industry economics and I would enjoy supervising such a project. Yes, this is advertising!

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