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Gas prices slash Toyota’s profits

Business Materials 9 August 2008 11:20 (UTC +04:00)

RIA Novosti economic commentator Oleg Mityaev

On August 7, Toyota, the world's number one auto maker, reported a 28% decline in profits from April to June. Its main rivals, General Motors (GM) and Ford, are doing worse.

Both have sustained heavy losses. Having grounded airlines, skyrocketing oil prices have now impacted auto makers. Expensive fuel compels people to fly and drive less. Russian drivers, on the other hand, seem completely unaffected. Russian car-makers have achieved a tremendous growth in sales, and are currently first in European sales.

Toyota, which is vying with GM for the world's sales lead, has earned what would seem a huge $3.2 billion profit for last quarter. But executives consider it a failure because last year the company made 28% more.

Executives complain about the unprofitable rate of the yen relative to the weaker dollar, and high costs due to more expensive materials. It is also obvious that people in industrialized countries are driving less, and buying fewer cars because of higher gas prices. Gas prices jumped up during the summer, the peak driving season, in the wake of oil price hike that reached an absolute record of $147 per barrel on July 11.

Although Toyota sold 1.1% more cars globally, in North America, the largest market, sales dropped by 4.6%. This summer, the price for gas in the U.S. increased to four dollars per gallon (3.8 liters). This compelled many Americans to give up their habit of crossing the country in SUVs, which swallow more than five gallons (two dozen liters) per a hundred kilometers. SUV sales have also dipped. Toyota sales have gone down by nine percent in Western Europe, where gas is even more expensive.

Now Toyota has reduced its forecast for 2008 sales from 9.85 million cars to 9.5 million, and questioned its ambitious goal of selling more than 10 million cars globally in 2009.

But the Japanese do not lose heart. They offer less expensive, more compact cars plus hybrid vehicles to increase sales in the United States and Europe. Toyota was the first to develop a hybrid car which can run on gas and batteries (there are limited numbers of hybrid cars that can run on hydrogen and electricity and do not need gas).

However, Toyota and its American rivals are pinning their hopes primarily on fast-developing markets - China, India, Brazil, and, of course, Russia. The incomes of the well-to-do in these countries are growing with every passing year, and the rich are ready to pay for what many Americans and Europeans can no longer afford. AI-95 gas in Russia is already 24-25 rubles per liter, which is practically the same as in the United States. Nevertheless, SUVs are now becoming more popular here.

In the first six months of this year, car sales have increased by 41% to reach about 1.7 million vehicles. This impetuous growth is making Russia Europe's number one market this year, edging former sales leader, Germany. About 3.8 million cars are expected to be sold in Russia by the end of the year compared with 3.2 million in Germany.

The hopes for foreign makers' success in Russia are justified because Russians have always preferred foreign makes. In the first six months, foreign car sales jumped 41% to surpass the one million mark.

Sales of Russian brands have gone up 19%, to 700,000 vehicles. The leading domestic car-maker AvtoVAZ has increased its sales by 13% (to over 320,000 cars). Some domestic analysts see the growing sales of economy cars as a sign of an overheated economy (similar to the boom of the American mortgage market two or three years ago). In other words, less prosperous Russians are starting to buy cars on credit and may not be able to repay their loans.

The opinions expressed in this article are the author's and do not necessarily represent those of Trend .

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