Toyota Motor Corporation announced in May that it expects its operating profit margin to fall 1.5 percentage points year-on-year to 5.9% in the fiscal year ending March 2027. The decline reflects mounting geopolitical risks, including escalating tensions in the Middle East, which are weighing on the company’s business environment.
The figure also falls well below the 7.3% recorded in the fiscal year ending March 2023, a period that was marked by semiconductor shortages and supply-chain disruptions from the COVID-19 pandemic.
Speaking at an online press conference the same day, President Kenta Kon struck a cautiously optimistic tone, saying the company would continue making solid growth investments. He pointed to the fiscal year ending March 2026, in which revenue surpassed ¥50 trillion (about $317.9 billion), as a positive milestone.
He nonetheless acknowledged the difficult conditions ahead, noting that the break-even sales volume continues to rise.
Three Pressures on Toyota
The challenges facing Toyota, known for its exceptional profitability within the auto industry, are three major challenges: escalating tensions in the Middle East, high tariffs under the Trump administration, and its struggle to compete in China.
At the press conference, Executive Vice President Yoichi Miyazaki said the company maintains earning power capable of generating ¥5 trillion ($31.8 billion) in operating profit, but has not yet been able to offset the impact of US tariffs and the Middle East situation.
The Toyota Motor Corporation logo.
Assuming the disruptions in the Middle East continue for a full year, Toyota projected a ¥400 billion ($2.5 billion) hit to operating profit from higher material costs and an additional ¥270 billion ($1.7 billion) from reduced vehicle sales in the fiscal year ending March 2027. Toyota exports 500,000 to 600,000 vehicles to the region annually, and said roughly half of those exports would be affected.
On how the company plans to manage the twin pressures of Trump-era tariffs, expected to persist at the same level as in the fiscal year ending March 2026, and the Middle East situation, President Kon said the most important thing was to continue delivering vehicles reliably.
Hybrid and EV Sales
Sales of fuel-efficient hybrid vehicles, an area where Toyota excels, remain strong, and the company has built up a large order backlog. Rising gasoline prices driven by Middle East tensions are also seen as a tailwind for electrified vehicle sales. Toyota forecasts hybrid vehicle sales will rise 9.8% year-on-year to 5.071 million units in the fiscal year ending March 2027, surpassing 5 million for the first time.
It also plans to increase electric vehicle (EV) sales by approximately 2.4 times to 598,000 units. The company believes profits will steadily improve if it can reliably supply new vehicles that meet customer demand while reducing costs.
Supply Chain Risks Persist
However, concerns remain about maintaining a stable supply. Procurement of rare earth elements needed for electrified vehicle components has become precarious due to Chinese export restrictions.
Securing naphtha, a petroleum-derived material used in plastic auto parts, has also grown difficult because of the situation in the Middle East. Yasushi Matsui, Executive Vice President of Denso Corporation, a major Toyota-affiliated parts supplier, said, “We cannot see even a few months ahead.”
Toyota also faces growing pressure to compete with emerging Chinese automakers that offer superior cost competitiveness and faster development cycles. In response, the company has begun structural reforms aimed at improving productivity and strengthening its supply chain in cooperation with suppliers. How well these efforts succeed will be key to future profit growth.
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(Read the article in Japanese.)
Author: Noboru Ikeda, The Sankei Shimbun
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