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What Really Drove Toyota’s Margins in Fiscal 2016?

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A good reputation in margins

Toyota Motor Corporation (TM) has a good reputation of having industry leading margins among its peers. In fiscal 2016 (which ended March 31, 2016), Toyota reported an expanded gross margin of 20.4%, as compared to 19.8% in fiscal 2015. Higher sales of heavyweight vehicles in North America and pricing improvements in Europe and Asia were key drivers.

Mainstream US automakers (FXD) General Motors (GM) and Ford (F) have lower margins than Toyota. This is due to Toyota’s strong presence in the luxury vehicles segment as luxury vehicles tend to have higher margins than mass-targeted vehicles. In the past several years, Toyota’s margins have also seen a positive impact of the depreciating Japanese yen. By contrast, Italian-American auto giant Fiat Chrysler (FCAU) has had the lowest profitability among peers.

What Really Drove Toyota's Margins in Fiscal 2016?

Similarly, Toyota’s EBITDA (earnings before interest, tax, depreciation, and amortization) margin also moved higher in fiscal 2016, rising to 15.8% as compared to 15.3% in fiscal 2015. The company’s net profit margin came in almost flat at 8.1% in fiscal 2016, as compared to 8.0% in fiscal 2015.

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Marketing efforts and currency factor

In recent years, Toyota has been trying to adjust its pricing strategy to protect its margins in different geographical markets. Improved pricing as a result of these efforts helped the company to expand its margins in fiscal 2016. Higher vehicle exports from manufacturing plants in Asian countries with weak local currencies also gave a boost to the company’s margins.

Additionally, Toyota’s recent efforts in the direction of cost reduction supported its margin expansion in fiscal 2016. These cost-reduction efforts included minimizing manufacturing and logistics costs and improving plant efficiencies.

In the next part, we’ll look at how Toyota’s Financial Services division performed in fiscal 2016.

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