Toyota to Keep Raising Capital Spending
$14 Billion This Fiscal Year Far Exceeds Plans by GM, Its Rival for Global Sales

By Jathon Sapsford
The Wall Street Journal
Thursday, May 11, 2006

TOKYO -- Toyota Motor Corp., which is threatening to surpass General Motors Corp. as the world's largest car producer, plans to pull further ahead of its U.S. rival when measured by the amount of money it is pouring into new plants and equipment.

Toyota, Japan's largest automaker by volume, reported a 39 percent rise in fiscal fourth-quarter profit yesterday. It said its current fiscal-year capital spending -- investment in product development, plants and equipment -- would reach about $14 billion, slightly more than it spent in the previous year. The number was bigger than the $12 billion or so that the industry was expecting.

Toyota President Katsuaki Watanabe described the increase in capital spending as a response to "unexpectedly strong demand" for the company's cars. He noted that one of the toughest management challenges facing the company was to maintain its quality as it increases production in Asia, Europe and North America.

The company's spending plans illustrate the different fortunes of Asian-based automakers and their Detroit rivals as they compete in similar markets. Toyota lacks the costs of pension and medical benefits borne by GM and Ford Motor Co. for union employees and retirees, a legacy of their previous labor agreements.

In Japan, Toyota spends $97 per vehicle on employee health care, while the government covers retirees. That compares with $462 per vehicle for employees and $1,038 per vehicle for retirees for GM, according to consulting firm A.T. Kearney Inc.

Toyota also has designs that have won over consumers, carry a perception of higher quality and are more fuel-efficient than many rivals' vehicles, giving the company some insulation against rising gasoline prices. The automaker, which produces such models as the Camry sedan, the Sienna minivan and the Lexus line of luxury cars, has begun making inroads in the profitable light-truck segment with models such as its Tundra and Tacoma pickups. Overall, its share of the key U.S. market has risen to about 14 percent so far this year from about 10 percent in 2000, while GM's share has fallen to about 24 percent from about 28 percent, according to Autodata Corp.

The continued high level of investment at Toyota is one of the most telling measures of the difference in resources between Toyota and GM. Toyota is flush with cash and is expanding sales and production in countries around the world. GM, while growing in some overseas markets such as China, is suffering at home. The company restated its earnings after regulators allowed it to change how it accounted for a health-care deal with the United Auto Workers union, and it now shows a profit for the first quarter of 2006. But GM has been unprofitable in its core automotive operations and is closing plants, laying off employees and selling assets.

The $14 billion that Toyota plans to invest in the fiscal year through March 2007 compares with $8.7 billion that GM plans to spend in its current fiscal year through December. "We maintain a commitment to product development, but our substantial legacy costs give us less available cash to invest relative to some of our competitors," GM said in its most recent annual report.

The difference in investment has implications for the rivalry between the two carmakers over which will be the world's largest car producer by volume. Toyota is increasing sales by roughly 500,000 a year and expects to sell 8.45 million vehicles in its current fiscal year.

GM sold 9.2 million vehicles in 2005, up 200,000 from the previous year. GM has said its worldwide sales rose 4.4 percent in the first quarter, to 2.2 million vehicles, driven by a 16 percent increase in sales outside North America. GM has not released a forecast for its current fiscal year.

Despite its strong performance in China, few analysts say GM can grow enough to compensate for the share it is losing to Toyota and other Japanese rivals in its home market, and match Toyota's growth abroad.

Most analysts expect Toyota to surpass GM in the next year or two as the world's largest car producer by volume.

Toyota's market capitalization, about $200 billion, is already more than GM's and Ford Motor Co.'s combined. Toyota said yesterday that it would ask its shareholders this year for approval to buy back about $1.8 billion worth of its shares. The company also said it would boost its dividend for this fiscal year to about 81 cents a share, up from about 58 cents.