Working Toward the Mobility Society of the Future

Message from the President The Source of Our Value Creation: What Makes Us Toyota Value Creation Story: Working toward the Mobility Society of the Future Business Foundations for Value Creation Corporate Data >Message from the CSO > Roundtable Discussion with the Outside Directors >Dialogue with Institutional Investors on Corporate Governance > Corporate Governance Message from the CFO > Capital Strategy >The Environment > Vehicle Safety >Quality and Information Security > Intellectual Property and Privacy >Value Chain Collaboration Human Rights Diversity and Inclusion Human Resource Development Health and Safety and Social Contribution Activities > Risk Management and Compliance Message from the CFO: Changes in Profit Structure Figure 2 Changes in Break-even Vehicle Sales Volume*1 (FY2009 = 100% ) Operating income basis 100% Figure 3 FY2016 to FY2022: The Six Years Following the Adoption of the In-house Company System*¹ Increased profit despite the negative effects of forex rates, sales volumes, and materials prices ●Consolidated vehicle sales (thousands of vehicles) Operating income (billions of yen) Toyota Times Figure 4 Market Share of New Car Sales: From 2015 to 2021 FY2022 Financial Results Used Car Appraisal: The U.S. Small SUV Market 70 Complete redesign since the introduc- tion of TNGA RAV4 60 The Fruits of Many Years of Working to Make Ever-better Cars At Toyota's financial results press conference in May 2022, CFO Kenta Kon spoke about changes in Toyota's profit structure. The following is based on his presentation. Figure 1 shows two graphs comparing operating income for the fiscal year ended March 2009, the year of the global financial crisis, and the fiscal year ended March 2021, the year that the COVID-19 pandemic hit, with that of previous fiscal years. In both cases, vehicle sales volume decreased by 15% year on year. But at the time of the global financial crisis, profits decreased significantly, pushing Toyota into the red, while in the fiscal year ended March 2021, we were able to secure a profit. Figure 1 Comparison of Before and After the Global Financial Crisis and COVID-19 Outbreak*1 Before and after the global financial crisis Before and after the COVID-19 outbreak ●Consolidated vehicle sales (thousands of vehicles) Operating income (billions of yen) FY2008*2 FY2009*2 8,913 7,567 FY2020*3 8,955 (-15% YOY) 2,270.3 2,399.2 FY2021*3 7,646 (-15% YOY) 2,197.7 -461.0 ¥101/USD ¥144/Euro ¥109/USD ¥121/Euro ¥106/USD ¥124/Euro ¥114/USD ¥162/Euro 50%- 8,681 -800.0 50 -451 8,230 +2,141.7 Profit Increased market share in 11 out of 15 countries 40 30 improvement, etc. 2,995.6 prices -200.0 Fixed costs 9/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 20/3 21/3 22/3 Forex/ -1,000.0 2,853.9 Volume Materials. Figure 2 shows the break-even vehicle sales volume from the fiscal year ended March, 2009, onward. If we assign our break-even volume at the time of the global financial crisis a value of 100, we have lowered our break-even volume to, most recently, around 60 to 70, demonstrating that we have made significant progress in improving our condition over the past 13 years. This was not something that could be done overnight. Immediately after the global financial crisis, we had to put the brakes on all R&D expenditures and capital invest- ments. We could do nothing to invest in the future. But, even as we fought to overcome the numerous crises known in Japan as the "Six Hardships," including recall issues, we continuously worked to improve profitability. Improved profitability was not something that Toyota was able to achieve on its own. Rather, it was the result of a desperate and concerted effort with all of our stake- holders. To them, we say thank you. During that period, as one of Toyota's strengths is hav- ing a full lineup of products globally, we transitioned to an in-house company system that would allow us to better provide high-quality and reasonably priced vehicles at the right place and time. Along with the in-house company system, we intro- duced the Toyota New Global Architecture (TNGA) shared vehicle platform to improve the basic performance and product appeal of our vehicles and enhance the reflection of regional characteristics in products, aiming not to be the best in the world, but the best in town. In the past, we often introduced completely new vehi- cle models on a one-off basis as the market grew. Now, however, we are continuously evolving our long-time, best-selling cars, such as the Yaris and Corolla, to keep them current so that they can go on being long-time, best sellers. We believe that these initiatives have resulted in increased profitability. FY2016*2 ¥120/USD ¥133/Euro +141.6 FY2022*3 ¥112/USD ¥131/Euro Figure 3 illustrates the changes in our profit structure over the six years since we transitioned to the in-house company system. A look at the factors behind the increases and decreas- es in operating income reveals that our profit has increased despite major negative factors, such as poor foreign exchange rates, low sales volumes, and increases in materials prices. In terms of sales, the more than 2 tril- lion yen improvement in profit is due to sales price revi- sions and a reduction in selling expenses. We believe that this is the result of our customers highly evaluating our products. Also, post-sale vehicle quality helped customers maintain high vehicle value, leading to improved profitabili- ty not only in the automotive business but also in the finan- cial services business. In terms of cost reduction, we believe that significant improvements have been achieved by the effect of switch- ing to new products that are based on the TNGA platform and through the power of our production worksites, including those of suppliers, which can respond to the launch of various new products and environmental chang- es as well as produce high-quality products. We used to increase profit through favorable foreign exchange rates and volume growth. Over the past six years, however, this has steadily been changing. *1 This analysis has not been adjusted to account for differences between U.S. GAAP and IFRS. *2 U.S. GAAP *3 IFRS 2017 2018 2019 2020 2021 2022 Note: Data from ALG (a U.S. company). Percentages are the expected wholesale used car price 36 months in the future, divided by the new car retail price. Comparing new car sales in 2015 and 2021, we have increased our market share in 11 of 15 major countries, including China, the United States, and Japan. The graph on the right side of Figure 4 shows U.S. used car prices three years post purchase by model. Toyota's RAV4 has received higher appraisals than vehi- cles from other manufacturers in the same segment, and it is evident that those appraisals have gotten even higher since we switched to the TNGA-based RAV4. Being able to command a high price in the used car market protects the value of customer assets, and we believe this builds trust in our brand. Changes in Profit Structure Although our performance in the fiscal year represents our situation in only that single fiscal year, it is the result of long-term, ongoing efforts, including the in-house compa- ny system, "best in town" activities in each region, the TNGA, product lineup strategies, ever-better car making from a starting point in motorsports, and the human resource development that supports these activities, as well as various in-house system reforms. We would once again like to thank everyone involved for their support. TOYOTA MOTOR CORPORATION 38 INTEGRATED REPORT