China woes weigh on profits at Toyota, Honda and BMW

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Slowing demand in China led to steep falls in quarterly profit for Toyota, Honda and BMW, dragging even the strongest carmakers into a broader downturn hitting the sector.

Until now, Japan’s Toyota and Honda had outperformed their European and US rivals due to strong hybrid and petrol sales in North America.

But for the latest quarter, both groups suffered a sales decline in China due to increased competition with local brands, while Toyota and BMW were also hit by recalls.

China, the world’s largest market for cars, has become fiercely competitive as homegrown electric-focused brands such as BYD rapidly gain market share and consumer demand cools following the country’s property crisis.

Operating profit at Toyota dropped for the first time in two years, slipping 20 per cent to ¥1.16tn ($7.5bn) in the three months to the end of September after the world’s largest carmaker by sales was hit by a quality-testing scandal and suspended production of two models in the US.

The group also lowered its annual vehicle sales target to 10.8mn units from 10.9mn, even as it maintained full-year profit guidance. For the quarter, sales in China for Toyota and its luxury Lexus vehicles dropped 9.7 per cent to 456,000 cars.

At a news conference in Tokyo, Yoichi Miyazaki, Toyota’s executive vice-president, warned that there could be “more intensified” price competition in China to come but said Toyota’s profit levels in the country were at a similar level as Chinese rivals.

The company was seeking to move beyond simply “enduring” the price competition, he said, to creating cars better suited for Chinese consumers, who spend a significant amount of time relaxing in their cars without driving them.

Profits in North America plunged 83 per cent during the quarter due to recalls and production suspensions for the Camry sedan and Lexus models due to testing data falsification. Toyota truck and bus subsidiary Hino also recalled vehicles as part of the sprawling data scandal.

Still, Toyota executives said there was no slowdown in hybrid demand in the North American market, which is the key profit engine for the Japanese group.

Hybrid vehicle sales — which are more profitable for Toyota than regular vehicles — continued to power ahead, totalling a record 524,790 units in North America, with low inventory levels holding back sales numbers.

“We have not noticed in a straightforward manner any change in economic activities,” Miyazaki said. “Our hybrid cars are extremely popular.”

Honda cut its net profit outlook by 14 per cent to ¥950bn, due also to flagging Chinese demand.

Shares in Honda fell 6 per cent following the profit downgrade on Wednesday, while Toyota’s stock price was up 1.7 per cent as the company maintained its profit guidance.

On Wednesday, BMW said earnings before interest and taxes slid 61 per cent year on year to €1.69bn, which the company blamed on “extraordinary challenges”. Vehicle sales in China dropped 30 per cent.

In September, the Munich-based company cut its full-year profit forecast and warned that 1.5mn cars sold in the past two years could have faulty brake systems, adding that sales in China were also sliding.

The company’s comments on its woes in China came after German carmakers Volkswagen and Mercedes-Benz, which are also heavily dependent on China for sales, had similarly warned of big slumps in demand.

VW last week announced a 64 per cent plunge in quarterly net profits, following slow Chinese sales.