How Toyota Makes Money

To hear American carmakers and the United Auto Workers tell it, government assistance is non-negotiable. Cash infusions courtesy of the taxpayer are necessary to protect a vital industry, keep people employed, and maintain Detroit’s place as one of commerce’s "shining beacons."

Despite these claims, the world’s largest car company continues to not only survive without help but generated $245 billion in revenue for the fiscal year 2021. Toyota Motor Corp. (TM) generates revenue through three primary operations: automotive, financial services, and other business, including the manufacturing of non-automotive machines and various other activities.

Toyota's Financials

Headquartered in Japan, Toyota began in the 1920s as a loom manufacturer. After developing and selling the patent for an automated loom, founder Sakichi Toyoda entered into the automobile business. The first Toyota vehicles were built in the early 1930s, while the Toyota Motor Company was established in 1937.

First focusing on compact cars, Toyota eventually expanded to produce pickups, SUVs, trucks, sports cars, and other vehicles as well. Along the way, the company developed into one of the largest automotive manufacturers in the world. As of 2020, Toyota is the second-largest manufacturer globally by revenue after Volkswagen.

In the fiscal year of 2021, Toyota sold 7.6 million vehicles, 5.5 million (72.2%) of which were outside of Japan. Outside of Japan, Toyota views North America as the largest source market. From April 2020 to March 2021, Toyota sold 2.3 million vehicles in North America.

In the same year, Toyota reported revenues of 27.2 trillion yen, or about $245 billion. This marked a —8.9% decrease from the previous year. As of Oct. 2, 2021, Toyota's market capitalization is $247.6 billion.

Toyota's Business Segments

Toyota generates the large majority of its revenue from its automotive business, which can be further divided into separate subsegments based on brand and geographic focus. The company also earns revenue from its financial services branch and through a third, much smaller wing that focuses on miscellaneous business.

Toyota's Automotive Business

Toyota's automotive business has multiple distinct business units, each of which seeks to reflect streamlined Japanese efficiency. The first and most profitable of those is Lexus, the automaker’s renowned luxury brand.

In 2019, Lexus celebrated its 10 millionth vehicle sale. Despite being a Japanese brand, Lexus sells a hugely disproportionate share of its vehicles in the United States, with North American Lexus sales figures reaching in the area of 300,000 per year.

The Lexus brand originated in the early 1990s as a competitor to other mass-market Japanese automakers’ new luxury brands, such as Honda’s Acura and Nissan’s Infiniti. A generation later, Lexus has surpassed those brands to compete directly with the heavyweights of the luxury division, including BMW and Mercedes-Benz. So far, success for Lexus at the next level has been less than forthcoming.

The corporation also has divisions relating to the sale of vehicles by geographic region. Toyota Motor North America, for instance, is a Texas-based holding company that engineers, produces, and sells certain Toyota vehicles throughout North America. Stateside, Toyota's Camry was America’s sixth best-selling vehicle in 2020 and the best-selling Sedan so far in 2021.

Toyota's Financial Services Business

Unlike some other major carmakers, Toyota derives a relatively small portion of its revenue from its financial operations. While Toyota’s financial services division is growing faster than automotive sales, the company is still a manufacturer first and a lender second. Automotive activities accounted for 90.5% of worldwide sales revenue in the fiscal year of 2021, while financial services accounted for only 7.9%.

Toyota Financial Services is a subsidiary that focuses on automotive sales financing, credit cards, and other related services. It operates in roughly 40 countries.

Toyota's Other Businesses

Besides vehicle sales and financing, Toyota generates revenue from other business operations and investments as well. The company holds stakes in other automotive companies like Subaru, Isuzu, and Mazda.

It also has interests in biotechnology, robotics, aerospace, and other industries as well. In the last decade, Toyota has been particularly focused on the development of hybrid electric vehicles and related technology.

Toyota's Recent Developments

The majority of Toyota's vehicle sales take place in Japan and North America, though a smaller portion of sales occurs in Europe and other parts of Asia as well.

Since its founding, Toyota has followed what it refers to as the "Guiding Principles of Toyota," a set of seven values and guidelines which inform all company decisions. According to its 2019 Corporate Governance Report, the company has decided to focus in the short term on fostering innovation, particularly in the areas of robotics and artificial intelligence (AI), and on growing its business.

In its Corporate Governance Report of 2021, the company stressed fostering innovation as an "initiative that we must carry through, in order to survive in a time of profound transformation that could happen only once in a hundred years and realize a new mobility society."

Among other goals, the company seeks to enhance the "connected" capability of its vehicles and to create new mobility services going forward. The company is also focused on sustainability and the environment: Toyota has also set the goal of reducing new vehicle emissions by 90% by 2050.

Toyota's Key Challenges

Although Toyota is a dominant automotive company, it nonetheless faces a wide variety of challenges. One of the biggest of these is competition, particularly from other well-established vehicle makers around the globe. Because Toyota now competes in all classes of vehicles, it faces threats to its sales from several rivals.

Adaptation Is Key

In order to remain successful, the company must also continue to adapt. Although Toyota enjoys tremendous name recognition and customer loyalty, changing tastes, new technologies, and an invigorated sense of environmental responsibility on the part of customers require that Toyota invest large amounts of money in developing new products and tools. If Toyota does not anticipate how the automotive industry will change and react accordingly, it may lose business.

The Bottom Line

Toyota is one of the largest motor vehicle companies in the world. Though it has other businesses, such as financial services, the bulk of its business is through the production and sale of vehicles. Its largest markets are in Japan, North America, and China, where it is concentrating its efforts and sees growth opportunities. To remain competitive amongst the many vehicle companies in the world, Toyota needs to remain competitive and move with market trends, including sustainability and artificial intelligence (AI).