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Toyota feeling the pinch of the global economic mess

Year after year, it all seemed so easy for Toyota. Fat profits, relentless sales growth, the successful drive to become the No. 1 auto maker in the world, great residual values, unsurpassed quality, and on and on and on.

It's not so easy now.

Then again, it's not easy for any of the world's auto makers. This is a global economic mess we're in and it's whacking big and small car companies, rich and not-so-rich ones, alike.

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And so we have Toyota Canada flogging cars with discounts like never before in history. The latest is Toyota's 2009 Red Tag Days campaign.

Toyota has slapped 0.0 per cent financing for 36 months on four models - the Yaris, Corolla, Matrix and RAV4 -- as well as job loss insurance. Lose your job, take back your new Toyota to the dealer worry-free.

Hyundai did the latter first in the United States, but Hyundai Canada has yet to follow suit and now Toyota Canada has beaten Hyundai to the punch here with this novel sales promotion specifically tailored to recessionary economies.

There is plenty of fine print in the deal, but the whole thing boils down to a $10,000 credit protection for a Toyota buyer who loses a job "involuntarily." The program is slated to run until June 1.

Toyota can do this because Toyota Financial Services has plenty of cash and is willing to spend it to goose sales. The Corolla, Matrix and RAV4 are built in Canada and here we have one incentive program dovetailing nicely with Toyota's marketing efforts.

By that I mean, Toyota has been busy underscoring the fact that about 50 per cent of the vehicles it sells in Canada are actually built in plants here in Canada.

Which manufacturer is the most Canadian? If it's the one that sells the most of what it builds in our country, Toyota Canada.

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Expect to see a media blitz touting the deals and Toyota's commitment to Canada. And right away.

Toyota, like most other auto makers in Canada, has no time to lose. Toyota brand sales were down 26.3 per cent in Canada last month and March is not shaping up well either.

In Canada, the heart of the selling season is March, April, May; if a car company does not do well in those months, the year is likely to be a disaster.

These latest deals are good for consumers in the short run, but long term they could hurt both Toyota and Toyota owners. As the Detroit auto makers know all too well, discounting is a slippery slope - it's the "crack" of the car business, one marketing executive said to me.

Customers get used to discounts and like any deflationary spiral, learn to wait for the next great deal that further slashes pricing. So that's one problem.

Here's another: Down the road, discounting will hurt Toyota's resale values. Right now, according to Automotive Lease Guide, Toyota now has the second-best three-year residual values among mainstream brands in Canada - 39.4 per cent, compared to 40.4 per cent for Honda.

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But for a sobering look at where Toyota Canada could be heading, look no further than the United States, where Toyota began heavy discounting much earlier than in Canada. Toyota's residuals in the U.S., says ALG, are plummeting.

This year the average three-year-old Toyota brand vehicle was expected to retain only 46.5 per cent of its value, below the 50.5 per cent projected by the guide in 2006.

But times are changing fast. In fact, ALG officials say the changes they have been seeing recently in residual values have been "dramatic."

Indeed, the 46.5 per cent figure may already be out of date. Automotive News reports that according to the guide, 2006 model vehicles with leases that ended in January and February retained an average value of 40 per cent of their sticker prices - six percentage points below the original projection.

One Toyota dealer is calling the residual plunge "a nightmare."

The problem is even worse on the truck side. Last year Toyota's pickups and SUVS in the U.S. retained more than 60 per cent of their value, but ALG expects that to plunge to 45.4 per cent in 2009. The Tundra pickup? Down to 40.1 per cent from 59.5 per cent last year.

The lesson here, as the Detroit Three know only too well, is that car companies may be able to prime the sales pump with giveaways now, but eventually there is a price to be paid for a discounting addiction.

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