Toyota's faith in cars: ‘There's margin to be made’ in shrinking segment

As automakers continue to abandon slow-selling sedans and coupes in a U.S. market that now favors light trucks by just more than 3 to 1, Toyota is once again doing what has worked so well before: sticking around, sitting back and grabbing share.

It's a strategy the Japanese automaker adopted a decade ago with its Tacoma pickup — which now maintains a commanding share in the midsize segment — and one that Toyota executives believe will lead to bigger profits, even in a shrunken market.

"We're gobbling up car share right now," Bob Carter, head of sales for Toyota Motor North America, told Automotive News this month.

Toyota is not alone. Other Asian automakers, including longtime rivals Honda, Nissan and Hyundai-Kia, have also stuck around to lap up what's left of the American car buyer after the Detroit 3 largely stopped selling sedans in the market as consumers showed a strong preference for their more lucrative light trucks. Volkswagen also is still represented in car segments, but its commitment may be waning a bit: The German automaker is pulling the plug on the Passat sedan after the current model, has axed the Beetle and no longer offers many of its base-model Golf hatchbacks domestically.

The result is that cars — which represented more than half of all U.S. vehicle sales as recently as 2013 and which once were hypercompetitive street fights between domestic and foreign brands — are now the near-exclusive domain of Asian nameplates.

That might be fine for now, as consumers crave SUVs and crossovers and when even pickups outsell sedans on occasion. Profits have followed the consumers, and transaction prices have risen dramatically on the shift to light trucks. But if a new generation of customers begins to consider cars again, they may have few brands left from which to choose.

That, in a nutshell, is what Toyota did a decade ago with the Tacoma. Domestic competitors abandoned the midsize-pickup market to Toyota and, to a lesser extent, Nissan. Even after they came back years later with entries such as the Chevrolet Colorado and Ford Ranger, they haven't knocked the Tacoma off its perch. There now are seven midsize pickups, and the Tacoma still has more than double the market share of its next largest competitor.

Theoretically, at least, sedans and coupes could be a repeat performance.

"It's hard at this point to imagine the family sedan being 60 percent of the market again, but I do think that there is sort of a low point," said Stephanie Brinley, principal automotive analyst for the Americas at IHS Markit. "There are still a number of markets that want sedans: China, South America, Japan. So a global automaker like Toyota still needs [sedans] for a lot of other markets, where domestic automakers are less dependent on that."

Brinley said shrinking car share has led automakers to rethink just how many cars they need in their lineups, and whether they need to have a more emotional connection with their buyers.

"One of the differences long term is that Tacoma had a good level of share before the other automakers began to exit, and it has a bit more emotional connection with buyers than a Corolla does," Brinley said. "It skews the story a little bit, because people can't buy what doesn't exist. But there are people that prefer a passenger car — we're just trying to figure out how many of them there are."

Toyota Motor North America estimates that its share of car purchases in November rose more than 4 percentage points from a year earlier to 21 percent. That figure is an estimate because most automakers didn't report their November sales.

That would mean more than 1 of every 5 cars purchased in the U.S. in November either had a Toyota or Lexus badge — a market share that would have been a pipe dream for Toyota just five years ago.

In November, Toyota's midsize Camry opened up a commanding lead on the compact Honda Civic for top-selling car nameplate in the U.S. The two had been within 12,000 sales through the first 10 months of the year, but the Camry widened the margin to 23,806 over the Civic in November and now looks on track to retain its top-selling car title.

The Camry, Carter estimates, now commands 28 percent of the midsize-car market while the Corolla trails the Civic but is grabbing 27 percent of the compact-car market. According to the Automotive News Data Center, the Camry had a 26.4 percent share of its segment through the first nine months of this year, while the Corolla had 23.1 percent in its segment in the same period.
"We're really proud of the product, but there's less competition there, so we're getting a lot more share of a smaller market," Carter said.

Make no mistake: With the exception of the low-volume Toyota Supra sporty coupe and Lexus LC convertible, each of Toyota Motor North America's sedans and coupes is hemorrhaging sales this year, just like those of all the other automakers still selling them.

This year, Toyota scrapped the Yaris, a rebadged Mazda2, and sales volumes throughout the Toyota and Lexus car lineups are down at least 15 percent and some double or triple that. And, Carter said, the proportion of car sales may continue to slide even further.

"Operationally," Carter said, "it could go to 78 or maybe even 80 percent light truck, and then start leveling off at that point. But as a global manufacturer, and in what we're responsible for in North America, 20 percent of a 16 million market is still a lot of vehicles."

A year after proclaiming that "cars matter," executives at American Honda have decided that light trucks may matter a little more, at least right now. This fall, Honda launched a plan to beef up its light-truck lineup to broaden their appeal. But the automaker said in October that it still sees a valuable role for cars.

"The cars both in the Acura line and the Honda line get many first-time buyers," said Art St. Cyr, vice president of automobile operations at American Honda Motor Co. "Then we can move them up to light trucks."

Several manufacturers have eliminated nameplates because of the struggling North American market for sedans and coupes, such as Volkswagen officials confirming that the Passat would sunset after the current model and Ford ending the Fusion. But Toyota and Lexus will continue to invest in their car lineups, Carter said, even as they expand crossover offerings — including the return of the Venza this year and a new subcompact crossover due next year.

Toyota freshened the Camry this year, and a redesign of the low-volume 86 is due next year, according to sources that guided the Automotive News Future Product series. On the Lexus side, the IS sedan was reengineered in 2020, while the LS is due for a midcycle freshening in 2021.

"There is volume there. That is a very good business model for us," Carter said of the smaller market for sedans and coupes. "There's not the hypercompetition that we experienced [before], so there's margin to be made.

"So, are we going to continue in the sedan market and continue to invest in sedan market? Absolutely," Carter said. "What are our plans? No comment."