Toyota set for third straight quarterly profit drop as costs and tariffs weigh

Summary

Toyota Motor Corporation is expected to report a third consecutive quarterly decline in operating profit, as rising production costs and U.S. import tariffs pressure margins. Despite the profit dip, Toyota’s record global sales and strong hybrid demand continue to underline its relative strength in a flat global auto market. A weaker yen could help cushion earnings, while investors remain focused on governance reforms and restructuring moves.

TOKYO, Toyota Motor is likely to post another quarterly profit decline when it reports earnings on Friday, as higher labour and material costs — combined with U.S. tariffs on imported vehicles — erode margins even as sales volumes hit new highs.

Analysts surveyed by LSEG forecast operating profit of about 1.09 trillion yen ($6.95 billion) for the October–December quarter, representing a roughly 10% year-on-year drop.

Resilience in a flat auto market

Even with falling profit, Toyota is viewed as one of the strongest performers in an industry facing stagnating global demand.

With overall vehicle volumes largely flat, automakers are increasingly competing for market share rather than relying on market growth — a dynamic where Toyota’s scale, hybrid leadership and inventory discipline continue to give it an advantage.

“For the industry, we are not expecting any volume increase, so it means Toyota needs to gain share from competitors,” said James Hong, head of mobility research at Macquarie Group, calling Toyota a current “winning position” player.

Hybrids drive record global sales

Toyota and its luxury brand Lexus saw global sales rise nearly 4% in 2025 to a record 10.5 million vehicles.

The United States — Toyota’s largest market — stood out with 8% growth, largely fueled by strong consumer appetite for higher-margin hybrid models.

Hybrids accounted for around 42% of total Toyota and Lexus sales, while fully electric vehicles made up less than 2%, highlighting the company’s continued bet on hybrid technology rather than an all-EV strategy.

Regionally, performance was mixed:

• China: flat demand
• India: strong momentum, with sales up 17% to over 350,000 vehicles

Weaker yen offers some relief

Currency movements could help soften the earnings hit.

The yen has remained weaker than Toyota’s internal assumptions for the second half of the fiscal year — potentially boosting overseas earnings when converted back into Japanese currency.

Toyota previously based forecasts on exchange rates of 146 yen per dollar and 169 yen per euro.

Costs and tariffs squeeze margins

Despite strong sales, profitability continues to face pressure from:

• Rising labour and raw-material costs
• Higher logistics and manufacturing expenses
• U.S. tariffs of about 15% on imported vehicles from Japan

These levies weigh heavily on margins in one of Toyota’s most critical markets.

Governance under growing scrutiny

Investor focus is also turning to Toyota’s corporate structure and governance.

The automaker has faced pushback from activist shareholders over plans involving its affiliate Toyota Industries Corporation, including proposals related to taking the group company private — raising concerns around transparency, capital allocation and shareholder value.

Toyota last raised its full-year earnings outlook in November and now expects operating profit of around 3.4 trillion yen for the fiscal year ending in March, supported by strong sales, currency tailwinds and cost-cutting efforts.

Why This Matters

Toyota’s results highlight a key shift in the global auto industry:

• Sales growth alone is no longer enough to protect profits
• Cost inflation and trade barriers are reshaping margins
• Hybrids are proving more commercially resilient than pure EVs in many markets

While many automakers struggle with EV profitability and slowing demand, Toyota’s hybrid-led strategy continues to deliver volume strength — even as rising costs test earnings.

The coming quarters will reveal whether strong sales and currency support can continue offsetting structural cost pressures facing global manufacturers.

FAQs

Q1. Why is Toyota’s profit falling despite record sales?

Higher labour costs, raw material prices and U.S. import tariffs are squeezing margins.

Q2. How much is profit expected to decline?

Around 10% year on year for the latest quarter.

Q3. What is driving Toyota’s sales growth?

Strong demand for hybrid vehicles, especially in the United States.

Q4. How important are hybrids to Toyota?

They made up about 42% of global sales in 2025, far exceeding EV volumes.

Q5. How does the weaker yen help Toyota?

It increases the value of overseas earnings when converted into yen.

Q6. Why are investors focused on governance issues?

Proposals involving Toyota Industries have raised concerns about transparency and capital use.