Toyota: Old inventory ways gone

Toyota and Lexus dealers' lots might not ever be as full as they once were.

Toyota Motor North America will aim to have 30 days of new vehicles on hand once automotive manufacturing returns to a more normal pace. That compares with its pre-pandemic target in the 40s, said Bob Carter, Toyota's North America sales chief.

"I'm of the belief that after stabilization of the supply chain, I don't believe it will be necessary for us to go back to a 40- to 45-day strike zone," he said during a media roundtable last week.

Like every automaker, Toyota has been struggling to meet high new-vehicle demand as the industry's supply chain woes compound. The automaker had 17 days' worth of inventory on hand as of March 1, according to the Automotive News Research & Data Center.

While low inventory levels have stifled U.S. new-vehicle sales in recent months, it hasn't been all bad for automakers and dealers. Low incentives and reduced inventory costs have translated into higher profits, raising the possibility that companies might choose to keep fewer cars and light trucks on hand even after production normalizes.

"We have learned how to be much more efficient," Carter said, adding that he sees "no reason" why the company should return to its 45-day target, which was already lower than the 60 or 70 days many of its competitors set.

Still, Toyota would like to see inventory levels much higher than today's: "Thirty days sounds like nirvana," Carter said.

Toyota is making "incremental improvements" to its production throughput, but supply chain issues are expected to persist throughout the year.

Toyota revised its annual sales forecast for the industry downward by about 6 percent given those issues, despite high demand. According to Carter, Toyota anticipates 15.5 million light-vehicle sales in the U.S. this year, down from the16.5 million it estimated in October.

"That is an adjustment that is, quite frankly, not based on consumer demand," he said. "It's based solely on our projections of what the supply environment is going to be in 2022."

The downward revision reflects the continued constraints resulting from the global semiconductor shortage, higher raw materials prices and the war in Ukraine's ripple effects on the supply chain.

Carter said Toyota has good insight into its supply chain for the second and third quarters of this year, but the outlook for the fourth quarter remains "murky."

If its assumption for fourth-quarter supply for the industry comes in too high, the annual sales tally could dip to as low as 14.9 million or 15 million, he said.

But the automaker is "reasonably confident" in its 15.5 million estimate.

Toyota expects to sell about 2.35 million vehicles in 2022, which would be a gain of 0.7 percent vs. last year's annual total. The automaker's first-quarter sales were down 15 percent from a year earlier.

He said the company is "cautiously optimistic" that it will hit its sales target, citing "record high" demand, particularly for its hybrids and plug-in hybrids.

"We have a lot going for us in our favor," he said.

Toyota and the industry at large will need to grapple with affordability after the industry sorts through its supply chain challenges, Carter said. According to Kelley Blue Book, the average new-vehicle transaction stood at $47,077 in 2021, up more than $6,000 from a year earlier.

Because supply and demand are so imbalanced, Toyota does not expect affordability issues to rise up during 2022.

"But sooner or later, this business cycles, and inventories will begin to normalize. And at that point, I think we've got to grasp affordability," he said.

Low new-vehicle inventories have led to a sharp reduction in the number of lease returns, said Toyota Financial Services CFO Scott Cooke. In a typical month, between 40 and 50 percent of leases would be returned. In recent months, that figure has stood at 8 or 9 percent, he said.

"That will likely continue as long as the new-car supply restraints are there," he said.

Cooke said Toyota is looking to "stay disciplined" on lease and loan terms, avoiding stretched-out terms that he said are "bad for our trade cycle and bad for customers."

He said the company aims to keep terms to about 72 months and wants to avoid longer terms when possible.