Toyota is working on a fix for its giant $4.3 billion problem

Negotiations with Iran were not headed in a positive direction Monday, May 11. This is bad news for Toyota, the world’s largest automaker, because the war across the Middle East has already cost it billions.

Toyota says that “Middle East impacts” will cost the company 670 billion yen ($4.3 billion) in its fiscal quarter. The Japanese automaker is now forecasting operating income of 3 trillion yen for the current fiscal year, representing a year-over-year decrease of 766.2 billion yen and well below consensus estimates of 4.59 trillion yen.

It will be the third consecutive year of falling operating income for the company and its worst showing since 2023.

The war in the Middle East and U.S. tariffs are placing a heavy one-two punch on the company, and Toyota has “yet to fully offset their impacts,” according to Toyota Accounting Group Officer Takanori Azuma.

U.S. tariffs cost the company 1.4 trillion yen ($8.9 billion) in operating income in fiscal 2026.

“In the current fiscal year ending March 2027, we will work to absorb increases in labor cost and other expenses through marketing such as price revisions and the expansion of value chain profits,” Azuma said in a briefing. “However, we do not believe we can fully offset the negative 670 billion yen Middle East impact.”

Middle East conflict is not the only factor weighing down Toyota

Toyota’s decline in operating profit predates both the U.S. tariff war and the Iran war, even though those two events are also causing major disruptions to its bottom line.

Toyota has been dealing with rising material costs (which are only being made worse by the war and tariffs). To offset that, the company says it is making “comprehensive investments” in cost reductions and “value chain profits.”

Since fiscal 2024, the company has spent 1.465 trillion yen on those comprehensive investments, and it says those improvement efforts have resulted in 1.73 trillion yen in cost improvements. However, due to rising material prices, the impact of tariffs, and the Middle East, Toyota now expects an operating profit in fiscal 2027 that is 2.3 trillion yen ($1.5 billion) lower than in fiscal 2024.

Toyota reported a nearly 50% drop in quarterly operating profit in its earnings release last week, despite a 5.5% increase in revenue. Consolidated vehicle sales fell in the quarter to 2.29 million from 2.36 million.

Many headlines, such as CNBC’s, pointed to tariffs as the reason for the decline.

Steve Hochman, managing director for the Americas at consulting firm Nagarro, offered TheStreet a different take. “Toyota’s results reflect a reality many manufacturers now confront: The automotive operating model was built for relative stability, and that environment no longer exists.”

Rising material prices, the impact of tariffs, and the Middle East war have negatively affected Toyota’s profits.

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Toyota’s plan to turn its operating profit around

Toyota has some issues to iron out as it looks to maintain its status as the best-selling car brand in the world, but it isn’t sitting on its hands. It has a two-pronged approach to pulling out of its three-year decline in operating income.

The first part of the plan is to make “ever-better-cars.”

Toyota’s plan to “reinforce core earning power”Enhance hybrid electric production capacityReorganize production modelsAccelerate procuring of materials locally to reduce costsPursue cost reduction by addressing costs “beginning at the source, including the reconstruction of parts scenarios.”
Source: Toyota

The second part of Toyota’s plan is to “transform into a mobility company” through greater investment in robotics and software-defined vehicles, the company says. Toyota is targeting 20% return on equity from its mobility transformation as connected services and other revenue streams add to its bottom line.

The mobility transformation is more of a long-term goal for Toyota, however. In the meantime, Toyota says it is working diligently to return to growth.

“Going forward, by transforming to a business structure that more reliably secures stable growth, through the expansion of value chain businesses and nurturing new business domains, we aim to create a greater capacity to provide shareholders with stable and continuous dividend increases,” Azuma said in his briefing.

Toyota says it plans to raise its fiscal 2027 annual dividend to 100 yen from 95 yen.

Related: This is how Ford CEO Jim Farley “future proofs” F-Series trucks

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