Toyota falls into the "increased revenue without increased profit" vortex

On May 8, Toyota Motor Corporation released its annual report for fiscal year 2025 (April 2025 to March 2026).

The world's largest automaker achieved an unprecedented breakthrough in Japanese corporate history, with consolidated revenue reaching 50.68 trillion yen, a year-on-year increase of 5.5%, making it the first Japanese company to cross the 50 trillion yen threshold.

However, beneath this, net profit attributable to shareholders fell by 19.2% year-on-year to 3.85 trillion yen, and operating profit dropped 21.5% to 3.77 trillion yen. Toyota's forecast for operating profit in fiscal 2026 is 3 trillion yen, about 20% lower than fiscal 2025. This means Toyota's profits will decline for three consecutive years, continuing to be stuck in a "revenue growth without profit growth" situation.

The shrinking profits are not due to product strength or market demand issues. In fiscal 2025, Toyota's sales of hybrid models surpassed 5 million for the first time, and global retail sales hit a record high of 11.3 million vehicles.

The decline in profits mainly stems from two external variables: U.S. tariffs and Middle Eastern geopolitical conflicts.

Toyota President Kenta Kon replied frankly, "With the external environment changing dramatically, the upward trend of the 'break-even sales volume' has yet to be curbed."

This company, known worldwide for its "lean management", is exposed to systemic risks brought about by the fragmentation of the globalization system.

Who “ate up” Toyota’s profits?

Toyota's financial performance in fiscal 2025 can be summarized in one sentence: revenue up, profit down.

Revenue of 50.68 trillion yen set a record among Japanese listed companies. Global sales grew 2% year-on-year to 10.47 million vehicles (including Daihatsu and Hino), with hybrid model sales surpassing 5 million. North America’s annual sales were about 2.93 million vehicles; hybrid demand was the main engine of revenue growth.

However, the profit side tells a different story. Looking at the quarters, in the fourth fiscal quarter (January-March 2026), operating profit was only 569.4 billion yen, down 49% year-on-year, almost halved.

Annually, operating profit fell from 4.795 trillion yen last fiscal year to 3.766 trillion yen, a drop of 21.5%; net profit dropped from 4.765 trillion yen to 3.848 trillion yen, a decline of 19.2%.

What has "eroded" Toyota's profits? The financial report points to two factors.

The first is U.S. tariffs. Starting April 2025, the Trump administration imposed a 25% tariff on imported cars. Although subsequent U.S.-Japan trade negotiations reduced the rate to 15%, the impact had already been felt.

Toyota’s Chief Financial Officer Takashi Azuma revealed that U.S. tariffs had an actual impact of 1.38 trillion yen on operating profit in fiscal 2025. This figure is slightly narrower than the previous estimate of 1.45 trillion yen, but still explains nearly 70% of the annual profit decline.

The transmission path of tariffs is not singular. Firstly, a significant proportion of Toyota vehicles sold in the U.S. market are exported from Japan, directly bearing the tariff cost. Secondly, even for models produced in the U.S., core components still rely heavily on imports from Japan. Toyota’s North American business recorded an operating loss for the year, the first since the 2008 financial crisis.

The second is turmoil in the Middle East. In early 2026, the U.S. and Israel launched military actions against Iran, dramatically escalating geopolitical conflict in the region. This event delivered a "double blow" to Toyota, impacting both end sales and upstream supply chain.

On the sales end, the Middle East is an important export market for Toyota. In 2025, Toyota exported over 320,000 vehicles to the Middle East from Japan, accounting for about 16% of Japan's total vehicle exports.

In March 2026, sales in the Middle East plummeted nearly 33% year-on-year to about 34,000 vehicles. Toyota has issued commands to cut Japan's domestic production capacity for the Middle East: in April, a reduction of about 24,000 vehicles, and further reduction of about 38,000 vehicles from May to November.

The supply chain’s impact is more hidden but equally deadly. The situation in the Middle East caused a significant decrease in the navigability of the Strait of Hormuz. Japan’s auto industry relies on imports from the Middle East for 70% of its automotive aluminum and 65% of automotive-grade naphtha, almost all transported through this strait. The blocked shipping lanes caused prices of key raw materials like aluminum and rubber tires to soar, extended raw material import transport times by more than 20 days, and many Japanese automakers’ raw material inventories can only sustain about one and a half months.

Yasuhiro Yasuda, Vice President of Toyota Gosei, a core component supplier within the Toyota Group, stated: “Naphtha supply can be guaranteed until the end of May, but some issues may arise at some stage in June.” For Toyota, known for “just-in-time” production, any break in the supply chain can trigger a chain reaction.

Besides the two above, exchange rate factors also played a subtle role.

The average exchange rate Toyota used in fiscal 2025 was 1 dollar to 151 yen. The depreciation of the yen objectively pushed up revenue figures, but increased material costs and greater investment spending partly offset the exchange rate benefits.

Entering fiscal 2026 (April 2026 to March 2027), Toyota's forecasted exchange rate is 1 dollar to 150 yen. Compared to the actual exchange rate in 2025, this points to yen appreciation, which will further squeeze profit margins.

Toyota did try to improve cost and efficiency.

Value chain businesses, such as after-sales services, parts sales, and auto finance, reached operating profits of 2.1 trillion yen, accounting for more than half of consolidated operating profits and becoming a ballast for profits.

But the speed of internal improvement cannot keep up with the intensity of external shocks. As Kenta Kon said: “We are still unable to fully offset the impact of major changes in the business environment, such as U.S. tariffs and the Middle East situation.”

The Deep Structural Changes Behind Conservative Forecasts

Toyota’s guidance for fiscal 2026 is quite conservative: revenue will increase slightly by 0.6% to 51 trillion yen; operating profit will fall 20.3% to 3 trillion yen; net profit will fall 22% to 3 trillion yen.

This forecast is far lower than Bloomberg's aggregated analyst estimate of 4.61 trillion yen operating profit. Such a large gap in expectations is rare in Toyota’s history.

Toyota’s main reasons include: the Middle East situation will cause a loss of about 670 billion yen in profits, continued hikes in raw material prices, increased human resources and future-oriented investment spending. Meanwhile, the lingering impact of U.S. tariffs will continue to affect the new fiscal year, at 1.38 trillion yen.

These factors combined mean Toyota’s break-even point — i.e., the sales volume needed for zero profit — is continually rising.

Toyota admits that rising labor costs, increased investments, and tariff pressure have caused a substantial rise in the break-even sales volume.

U.S. tariff policy itself continues to change.

In February 2026, the U.S. Supreme Court ruled the Trump administration's global tariffs unconstitutional, but Trump immediately imposed a new 10% baseline tariff via executive order. Despite U.S.-Japan trade negotiations lowering the auto tariff to 15%, this rate remains much higher than the previous level of 2.5%.

In the Chinese market, Toyota faces equally complex challenges.

In 2025, Toyota’s sales in China reached about 1.78 million vehicles, a year-on-year increase of just 0.23%, making it the only Japanese brand among the Big Three to achieve positive growth. But entering 2026, the situation changed abruptly. February sales were only 82,500 vehicles, down 13.9% year-on-year. The overall market share of Japanese brands in China has dropped from a peak of about 23% to less than 10%.

An industry veteran analyzed for Wallstreetcn, saying the cruel aspect of China’s market is that the competition paradigm has shifted from price war to value war. Domestic brands, relying on technological and cost advantages of pure electric and plug-in hybrid products, continue to squeeze the space of joint venture brands, and as these automakers change tracks in China, their voice gets weaker. In recent years, the auto groups that used to rely on joint ventures are now increasingly investing in their own brands.

Previously, Toyota launched the bZ series of electric models in China, but failed to gain traction.

Toyota is also making adjustments. At the recent Beijing Auto Show, Toyota officially established the "with China, for China" action guideline for its operations in China. All key information was released by the China management team and the Chinese chief engineers; not a single Japanese headquarters executive gave a speech. The Chinese chief engineer team expanded from 4 to 7 members, covering fuel, hybrid, and pure electric technology routes.

This means Toyota is shifting from adapting global models to China, to having the Chinese team define Chinese products. In the fiercely competitive Chinese auto market, how fast and thorough this transformation is will determine if Toyota can keep its last stronghold in China.

Returning to the financial report itself, Toyota's 50 trillion yen milestone is both a crown and a mirror. It reflects the institutional advantages Japanese carmakers enjoyed in globalization’s heyday, and also reflects that as this system fragments, even the strongest players cannot remain unscathed.

Faced with tariff barriers and geopolitical conflict, the question Toyota must answer is no longer how to be leaner, but how to rebuild defensive capabilities against systemic risks. This challenge concerns not just Toyota’s future alone.

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