20-F 1 d549954d20f.htm ANNUAL REPORT Annual Report
Table of Contents

As filed with the U.S. Securities and Exchange Commission on June 25, 2018

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: March 31, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-14948

 

 

TOYOTA JIDOSHA KABUSHIKI KAISHA

(Exact Name of Registrant as Specified in its Charter)

TOYOTA MOTOR CORPORATION

(Translation of Registrant’s Name into English)

Japan

(Jurisdiction of Incorporation or Organization)

 

 

1 Toyota-cho, Toyota City

Aichi Prefecture 471-8571

Japan

+81 565 28-2121

(Address of Principal Executive Offices)

Nobukazu Takano

Telephone number: +81 565 28-2121

Facsimile number: +81 565 23-5800

Address: 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan

(Name, telephone, e-mail and/or facsimile number and address of registrant’s contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class:

 

Name of Each Exchange on Which Registered:

American Depositary Shares*   The New York Stock Exchange
Common Stock**  

 

* American Depositary Receipts evidence American Depositary Shares, each American Depositary Share representing two shares of the registrant’s Common Stock.
** No par value. Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the U.S. Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 2,909,923,992 shares of common stock (including 45,002,629 shares of common stock in the form of American Depositary Shares) and 47,100,000 First Series Model AA class shares as of March 31, 2018

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☒    Accelerated filer  ☐    Non-accelerated filer  ☐
      Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act: ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ☒             International Financial Reporting Standards as issued by the International Accounting Standards Board  ☐            Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item  17  ☐    Item  18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):Yes  ☐    No  ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      1  

ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE      1  

ITEM 3.

   KEY INFORMATION      1  

 3.A

   SELECTED FINANCIAL DATA      1  

 3.B

   CAPITALIZATION AND INDEBTEDNESS      4  

 3.C

   REASONS FOR THE OFFER AND USE OF PROCEEDS      4  

 3.D

   RISK FACTORS      5  

ITEM 4.

   INFORMATION ON THE COMPANY      8  

 4.A

   HISTORY AND DEVELOPMENT OF THE COMPANY      8  

 4.B

   BUSINESS OVERVIEW      9  

 4.C

   ORGANIZATIONAL STRUCTURE      54  

 4.D

   PROPERTY, PLANTS AND EQUIPMENT      55  

ITEM 4A.

   UNRESOLVED STAFF COMMENTS      56  

ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS      56  

 5.A

   OPERATING RESULTS      56  

 5.B

   LIQUIDITY AND CAPITAL RESOURCES      87  

 5.C

   RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES      90  

 5.D

   TREND INFORMATION      92  

 5.E

   OFF-BALANCE SHEET ARRANGEMENTS      92  

 5.F

   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS      93  

 5.G

   SAFE HARBOR      94  

ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      94  

 6.A

   DIRECTORS AND SENIOR MANAGEMENT      94  

 6.B

   COMPENSATION      100  

 6.C

   BOARD PRACTICES      101  

 6.D

   EMPLOYEES      103  

 6.E

   SHARE OWNERSHIP      103  

ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      104  

 7.A

   MAJOR SHAREHOLDERS      104  

 7.B

   RELATED PARTY TRANSACTIONS      105  

 7.C

   INTERESTS OF EXPERTS AND COUNSEL      106  

ITEM 8.

   FINANCIAL INFORMATION      106  

 8.A

   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION      106  

 8.B

   SIGNIFICANT CHANGES      106  

ITEM 9.

   THE OFFER AND LISTING      107  

 9.A

   LISTING DETAILS      107  

 9.B

   PLAN OF DISTRIBUTION      107  

 9.C

   MARKETS      107  

 9.D

   SELLING SHAREHOLDERS      108  

 9.E

   DILUTION      108  

 9.F

   EXPENSES OF THE ISSUE      108  

ITEM 10.

   ADDITIONAL INFORMATION      108  

 10.A

   SHARE CAPITAL      108  

 10.B

   MEMORANDUM AND ARTICLES OF ASSOCIATION      108  

 10.C

   MATERIAL CONTRACTS      116  

 10.D

   EXCHANGE CONTROLS      116  


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 10.E

   TAXATION      117  

 10.F

   DIVIDENDS AND PAYING AGENTS      123  

 10.G

   STATEMENT BY EXPERTS      123  

 10.H

   DOCUMENTS ON DISPLAY      123  

 10.I

   SUBSIDIARY INFORMATION      123  

ITEM 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      123  

ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      125  

 12.A

   DEBT SECURITIES      125  

 12.B

   WARRANTS AND RIGHTS      125  

 12.C

   OTHER SECURITIES      125  

 12.D

   AMERICAN DEPOSITARY SHARES      125  

ITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      127  

ITEM 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      127  

ITEM 15.

   CONTROLS AND PROCEDURES      127  

ITEM 16.

   [RESERVED]      128  

ITEM 16A.

   AUDIT COMMITTEE FINANCIAL EXPERT      128  

ITEM 16B.

   CODE OF ETHICS      128  

ITEM 16C.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES      128  

ITEM 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      130  

ITEM 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      130  

ITEM 16F.

   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      131  

ITEM 16G.

   CORPORATE GOVERNANCE      131  

ITEM 16H.

   MINE SAFETY DISCLOSURE      134  

ITEM 17.

   FINANCIAL STATEMENTS      135  

ITEM 18.

   FINANCIAL STATEMENTS      135  

ITEM 19.

   EXHIBITS      136  


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As used in this annual report, the term “fiscal” preceding a year means the twelve-month period ended March 31 of the year referred to. All other references to years refer to the applicable calendar year, unless the context otherwise requires. As used herein, the term “Toyota” refers to Toyota Motor Corporation and its consolidated subsidiaries as a group, unless the context otherwise indicates.

In parts of this annual report, amounts reported in Japanese yen have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for this translation was ¥106.24 = $1.00. This was the approximate exchange rate in Japan on March 31, 2018.

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

Written forward-looking statements may appear in documents filed with the U.S. Securities and Exchange Commission, or the SEC, including this annual report, documents incorporated by reference, reports to shareholders and other communications.

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as the information is identified as forward looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. Toyota relies on this safe harbor in making forward-looking statements.

Forward-looking statements appear in a number of places in this annual report and include statements regarding Toyota’s current intent, belief, targets or expectations or those of its management. In many, but not all cases, words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “plan,” “predict,” “probability,” “risk,” “should,” “will,” “would,” and similar expressions, are used as they relate to Toyota or its management, to identify forward-looking statements. These statements reflect Toyota’s current views with respect to future events and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those which are anticipated, aimed at, believed, estimated, expected, intended or planned.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ from those in forward-looking statements as a result of various factors. Important factors that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements are identified in “Risk Factors” and elsewhere in this annual report, and include, among others:

(i) changes in economic conditions, market demand, and the competitive environment affecting the automotive markets in Japan, North America, Europe, Asia and other markets in which Toyota operates;

(ii) fluctuations in currency exchange rates, particularly with respect to the value of the Japanese yen, the U.S. dollar, the euro, the Australian dollar, the Russian ruble, the Canadian dollar and the British pound, and interest rates fluctuations;

(iii) changes in funding environment in financial markets and increased competition in the financial services industry;

(iv) Toyota’s ability to market and distribute effectively;

(v) Toyota’s ability to realize production efficiencies and to implement capital expenditures at the levels and times planned by management;

(vi) changes in the laws, regulations and government policies in the markets in which Toyota operates that affect Toyota’s automotive operations, particularly laws, regulations and government policies relating to vehicle safety including remedial measures such as recalls, trade, environmental protection, vehicle emissions and vehicle fuel economy, as well as changes in laws, regulations and government policies that affect Toyota’s other operations, including the outcome of current and future litigation and other legal proceedings, government proceedings and investigations;


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(vii) political and economic instability in the markets in which Toyota operates;

(viii) Toyota’s ability to timely develop and achieve market acceptance of new products that meet customer demand;

(ix) any damage to Toyota’s brand image;

(x) Toyota’s reliance on various suppliers for the provision of supplies;

(xi) increases in prices of raw materials;

(xii) Toyota’s reliance on various digital and information technologies;

(xiii) fuel shortages or interruptions in electricity, transportation systems, labor strikes, work stoppages or other interruptions to, or difficulties in, the employment of labor in the major markets where Toyota purchases materials, components and supplies for the production of its products or where its products are produced, distributed or sold; and

(xiv) the impact of natural calamities including the negative effect on Toyota’s vehicle production and sales.


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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

3.A SELECTED FINANCIAL DATA

You should read the U.S. GAAP selected consolidated financial information presented below together with “Operating and Financial Review and Prospects” and Toyota’s consolidated financial statements contained in this annual report.

U.S. GAAP Selected Financial Data

The following selected financial data have been derived from Toyota’s consolidated financial statements. These financial statements were prepared in accordance with U.S. GAAP.

 

     Year Ended March 31,  
     2014     2015     2016     2017     2018  
     (Yen in millions, except share and per share data)  

Consolidated Statement of Income Data:

          

Automotive:

          

Revenues

     23,781,404       25,062,129       25,977,416       25,081,847       26,397,940  

Operating income

     1,938,778       2,325,310       2,448,998       1,692,973       2,011,135  

Financial Services:

          

Revenues

     1,421,047       1,661,149       1,896,224       1,823,600       2,017,008  

Operating income

     294,891       361,833       339,226       222,428       285,546  

All Other:

          

Revenues

     1,151,280       1,255,791       1,177,387       1,321,052       1,646,118  

Operating income

     64,270       65,650       66,507       81,327       100,812  

Elimination of intersegment:

          

Revenues

     (661,820     (744,548     (647,909     (629,306     (681,556

Operating income

     (5,827     (2,229     (760     (2,356     2,369  

Total Company:

          

Revenues

     25,691,911       27,234,521       28,403,118       27,597,193       29,379,510  

Operating income

     2,292,112       2,750,564       2,853,971       1,994,372       2,399,862  

Income before income taxes and equity in earnings of affiliated companies

     2,441,080       2,892,828       2,983,381       2,193,825       2,620,429  

Net income attributable to Toyota Motor Corporation

     1,823,119       2,173,338       2,312,694       1,831,109       2,493,983  

Net income attributable to Toyota Motor Corporation per common share (yen):

          

Basic

     575.30       688.02       741.36       605.47       842.00  

Diluted

     574.92       687.66       735.36       599.22       832.78  

Shares used in computing net income attributable to Toyota Motor Corporation per common share, basic (in thousands)

     3,168,989       3,158,851       3,111,306       3,008,088       2,947,365  

Shares used in computing net income attributable to Toyota Motor Corporation per common share, diluted (in thousands)

     3,170,911       3,160,429       3,144,947       3,055,826       2,994,766  

 

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     Year Ended March 31,  
     2014      2015      2016      2017      2018  
     (Yen in millions, except per share and numbers of vehicles sold data)  

Consolidated Balance Sheet Data (end of period):

              

Total Assets:

     41,437,473        47,729,830        47,427,597        48,750,186        50,308,249  

Short-term debt, including current portion of long-term debt

     7,780,483        8,963,492        8,521,088        9,244,131        9,341,190  

Long-term debt, less current portion

     8,546,910        10,014,395        9,772,065        9,911,596        10,006,374  

Toyota Motor Corporation shareholders’ equity

     14,469,148        16,788,131        16,746,935        17,514,812        18,735,982  

Common stock

     397,050        397,050        397,050        397,050        397,050  

Other Data:

              

Dividends per share (yen)

     165.0        200.0        210.0        210.0        220.0  

Number of vehicles sold

              

Japan

     2,365,410        2,153,694        2,059,093        2,273,962        2,255,313  

North America

     2,529,398        2,715,173        2,839,229        2,837,334        2,806,467  

Europe

     844,003        859,038        844,412        924,560        968,077  

Asia

     1,608,355        1,488,922        1,344,836        1,587,822        1,542,806  

Other*

     1,768,867        1,755,037        1,593,758        1,347,182        1,391,731  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Worldwide total

     9,116,033        8,971,864        8,681,328        8,970,860        8,964,394  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East, etc.

Dividend Information

Toyota normally pays dividends twice per year, including an interim dividend and a year-end dividend. Toyota’s articles of incorporation provide that retained earnings can be distributed as dividends pursuant to a resolution of its board of directors. Toyota’s board of directors resolves to pay year-end dividends to holders of common shares and registered pledgees of common shares of record as of March 31, the record date, in each year.

At the 111th Ordinary General Shareholders’ Meeting held in June 2015, Toyota’s shareholders approved amendments to Toyota’s articles of incorporation permitting the issuance of Model AA Class Shares in the future. The articles of incorporation currently provide that in the event that Toyota pays a year-end dividend to holders of common shares, it will pay a year-end dividend to any holders of Model AA Class Shares or registered pledgees of Model AA Class Shares of record as of the record date for the year-end dividend, in the amount payable on the Model AA Class Shares pursuant to their terms (“AA Dividends”), in preference to holders of common shares or registered pledgees of common shares.

In addition to these year-end dividends, Toyota may pay an interim dividend in the form of cash distributions from its distributable surplus to holders of common shares and pledgees of common shares of record as of September 30, the record date, in each year by a resolution of its board of directors. The articles of incorporation currently provide that in the event that Toyota pays such interim dividends, Toyota will pay an amount equivalent to one-half of the AA Dividends (“AA Interim Dividends”) as an interim dividend to any holders of Model AA Class Shares or registered pledgees of Model AA Class Shares of record as of the record date for the interim dividend, in preference to holders of common shares or registered pledgees of common shares.

If the amount of the dividends from surplus paid to holders of Model AA Class Shares or registered pledgees of Model AA Class Shares is less than the prescribed amount of AA Dividends in any fiscal year, the amount of the shortfall will be carried forward to and accumulate in the following fiscal year and thereafter. Dividends from surplus will be paid to holders of Model AA Class Shares or registered pledgees of Model AA Class Shares in preference to the payment of interim and year-end dividends until such payment reaches the amount of the accumulated unpaid dividends on the Model AA Class Shares.

 

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For a further discussion of Model AA Class Shares, please see “Additional Information—Memorandum and Articles of Association.”

In addition, under the Companies Act of Japan (the “Companies Act”), dividends may be paid to holders of common shares and pledgees of record of common shares as of any record date, other than those specified above, as set forth in Toyota’s articles of incorporation or as determined by its board of directors from time to time. Under the Companies Act, dividends may be distributed in cash or (except in the case of interim dividends mentioned in the third preceding paragraph) in kind, subject to limitations on distributable surplus and to certain other conditions.

The following table sets forth the dividends declared per common share by Toyota for each of the periods shown. The periods shown are the six months ended on that date. The U.S. dollar equivalents for the cash dividends shown are based on the noon buying rate for Japanese yen on the last date of each period set forth below.

 

       Cash Dividends per Common
Share
 

Period Ended

   Yen      U.S. dollars  

September 30, 2012

     30.0           0.38     

March 31, 2013

     60.0           0.63     

September 30, 2013

     65.0           0.66     

March 31, 2014

     100.0           0.97     

September 30, 2014

     75.0           0.68     

March 31, 2015

     125.0           1.04     

September 30, 2015

     100.0           0.83     

March 31, 2016

     110.0           0.97     

September 30, 2016

     100.0           0.98     

March 31, 2017

     110.0           0.98     

September 30, 2017

     100.0           0.88     

March 31, 2018

     120.0           1.12     

Toyota deems the benefit of its shareholders as one of its priority management policies, and it continues to work to improve its corporate structure to realize sustainable growth in order to enhance its corporate value. Toyota will strive to continue to pay stable dividends on its common shares aiming at a consolidated dividend payout ratio, defined as dividends per common share divided by net income attributable to Toyota Motor Corporation per common share, of 30% while giving due consideration to factors such as business results for each term, investment plans and its cash reserves. Toyota will pay dividends on the First Series Model AA Class Shares in accordance with a prescribed calculation method.

In order to successfully compete in this highly competitive industry, Toyota plans to utilize its internal funds for the early commercialization of technologies for next-generation environment and safety giving priority to customer safety and sense of security. Considering these factors, with respect to the dividends for fiscal 2018, Toyota has determined to pay a year-end dividend of 120 yen per common share by a resolution of the board of directors pursuant to Toyota’s articles of incorporation. As a result, combined with the interim dividend of 100 yen per common share, the annual dividend will be 220 yen per common share, and the total amount of the dividends on common shares for the year will be 642.6 billion yen. Furthermore, through repurchasing shares, Toyota will return capital to shareholders and promote capital efficiency and agile capital policy in view of the business environment.

In fiscal 2018, Toyota repurchased 33 million common shares, for an aggregate purchase price of 249.9 billion yen, in order to return to shareholders the profits derived from Toyota’s business operations in the interim period.

 

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Furthermore, Toyota has determined to repurchase 55 million common shares (maximum), for an aggregate purchase price of 300.0 billion yen (maximum), in order to return to shareholders the profits for the fiscal year ended March 31, 2018 by a resolution of the board of directors on May 9, 2018.

Exchange Rates

In parts of this annual report, yen amounts have been translated into U.S. dollars for the convenience of investors. Unless otherwise noted, the rate used for the translations was ¥106.24 = $1.00. This was the approximate exchange rate in Japan on March 31, 2018.

The following table sets forth information regarding the noon buying rates for Japanese yen in New York City as announced for customs purposes by the Federal Reserve Bank of New York expressed in Japanese yen per $1.00 during the periods shown. At the end of May 2018, the noon buying rate was ¥108.73 = $1.00. The average exchange rate for the periods shown is the average of the month-end rates during the period.

 

Fiscal Year Ended or Ending March 31,

   At End of Period      Average
(of month-end rates)
     High      Low  
            (¥ per $1.00)                

2014

     102.98        100.46        105.25        92.96  

2015

     119.96        110.78        121.50        101.26  

2016

     112.42        120.13        125.58        111.30  

2017

     111.41        108.31        118.32        100.07  

2018

     106.20        110.70        114.25        104.83  

2019 (through May 31, 2018)

     108.73        109.01        111.08        105.99  

Month Ended

     High      Low  
                   (¥ per $1.00)  

December 31, 2017

 

     113.62        111.88  

January 31, 2018

 

     113.18        108.38  

February 28, 2018

 

     110.40        106.10  

March 31, 2018

 

     106.91        104.83  

April 30, 2018

 

     109.33        105.99  

May 31, 2018

 

     111.08        108.62  

Fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect the dollar equivalent of the price of the shares on the Japanese stock exchanges. As a result, exchange rate fluctuations are likely to affect the market price of the American Depositary Shares (“ADSs”) on the New York Stock Exchange (“NYSE”). Toyota will declare any cash dividends on shares of capital stock in Japanese yen. Exchange rate fluctuations will also affect the U.S. dollar amounts received on conversion of cash dividends.

Exchange rate fluctuations can also materially affect Toyota’s reported operating results. In particular, a strengthening of the Japanese yen against the U.S. dollar can have a material adverse effect on Toyota’s reported operating results. For a further discussion of the effects of currency rate fluctuations on Toyota’s operating results, please see “Operating and Financial Review and Prospects — Operating Results — Overview — Currency Fluctuations.”

3.B CAPITALIZATION AND INDEBTEDNESS

Not applicable.

3.C REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

 

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3.D RISK FACTORS

Industry and Business Risks

The worldwide automotive market is highly competitive.

The worldwide automotive market is highly competitive. Toyota faces intense competition from automotive manufacturers in the markets in which it operates. Although the global economy continues to recover gradually, competition in the automotive industry has further intensified amidst difficult overall market conditions. In addition, competition is likely to further intensify in light of further continuing globalization in the worldwide automotive industry, possibly resulting in industry reorganizations. Factors affecting competition include product quality and features, safety, reliability, fuel economy, the amount of time required for innovation and development, pricing, customer service and financing terms. Increased competition may lead to lower vehicle unit sales, which may result in a further downward price pressure and adversely affect Toyota’s financial condition and results of operations. Toyota’s ability to adequately respond to the recent rapid changes in the automotive market and to maintain its competitiveness will be fundamental to its future success in existing and new markets and to maintain its market share. There can be no assurances that Toyota will be able to compete successfully in the future.

The worldwide automotive industry is highly volatile.

Each of the markets in which Toyota competes has been subject to considerable volatility in demand. Demand for vehicles depends to a large extent on economic, social and political conditions in a given market and the introduction of new vehicles and technologies. As Toyota’s revenues are derived from sales in markets worldwide, economic conditions in such markets are particularly important to Toyota.

Reviewing the general economic environment for the fiscal year ended March 2018, the world economy has continued its moderate recovery due to the global expansion of trade and production and solid domestic demand. The Japanese economy has been on a moderate recovery due to improvements in employment and income conditions. For the automotive industry, although markets have progressed in a steady manner in the developed countries and expanded in China, markets in some resource-rich countries have slowed down.

The changes in demand for automobiles are continuing, and it is unclear how this situation will transition in the future. Toyota’s financial condition and results of operations may be adversely affected if the changes in demand for automobiles continues or progresses further. Demand may also be affected by factors directly impacting vehicle price or the cost of purchasing and operating vehicles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations (including tariffs, import regulation and other taxes). Volatility in demand may lead to lower vehicle unit sales, which may result in downward price pressure and adversely affect Toyota’s financial condition and results of operations.

Toyota’s future success depends on its ability to offer new, innovative and competitively priced products that meet customer demand on a timely basis.

Meeting customer demand by introducing attractive new vehicles and reducing the amount of time required for product development are critical to automotive manufacturers. In particular, it is critical to meet customer demand with respect to quality, safety and reliability. The timely introduction of new vehicle models, at competitive prices, meeting rapidly changing customer preferences and demand is more fundamental to Toyota’s success than ever, as the automotive market is rapidly transforming in light of the changing global economy. There is no assurance, however, that Toyota will adequately and appropriately respond to changing customer preferences and demand with respect to quality, safety, reliability, styling and other features in a timely manner. Even if Toyota succeeds in perceiving customer preferences and demand, there is no assurance that Toyota will be capable of developing and manufacturing new, price competitive products in a timely manner with its available technology, intellectual property, sources of raw materials and parts and components, and production

 

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capacity, including cost reduction capacity. Further, there is no assurance that Toyota will be able to implement capital expenditures at the level and times planned by management. Toyota’s inability to develop and offer products that meet customers’ preferences and demand with respect to quality, safety, reliability, styling and other features in a timely manner could result in a lower market share and reduced sales volumes and margins, and may adversely affect Toyota’s financial condition and results of operations.

Toyota’s ability to market and distribute effectively is an integral part of Toyota’s successful sales.

Toyota’s success in the sale of vehicles depends on its ability to market and distribute effectively based on distribution networks and sales techniques tailored to the needs of its customers. There is no assurance that Toyota will be able to develop sales techniques and distribution networks that effectively adapt to changing customer preferences or changes in the regulatory environment in the major markets in which it operates. Toyota’s inability to maintain well-developed sales techniques and distribution networks may result in decreased sales and market share and may adversely affect its financial condition and results of operations.

Toyota’s success is significantly impacted by its ability to maintain and develop its brand image.

In the highly competitive automotive industry, it is critical to maintain and develop a brand image. In order to maintain and develop a brand image, it is necessary to further increase customers’ confidence by providing safe, high-quality products that meet customer preferences and demand. If Toyota is unable to effectively maintain and develop its brand image as a result of its inability to provide safe, high-quality products or as a result of the failure to promptly implement safety measures such as recalls when necessary, vehicle unit sales and/or sale prices may decrease, and as a result revenues and profits may not increase as expected or may decrease, adversely affecting its financial condition and results of operations.

Toyota relies on suppliers for the provision of certain supplies including parts, components and raw materials

Toyota purchases supplies including parts, components and raw materials from a number of external suppliers located around the world. For some supplies, Toyota relies on a single supplier or a limited number of suppliers, whose replacement with another supplier may be difficult. Inability to obtain supplies from a single or limited source supplier may result in difficulty obtaining supplies and may restrict Toyota’s ability to produce vehicles. Furthermore, even if Toyota were to rely on a large number of suppliers, first-tier suppliers with whom Toyota directly transacts may in turn rely on a single second-tier supplier or limited second-tier suppliers. Toyota’s ability to continue to obtain supplies from its suppliers in a timely and cost-effective manner is subject to a number of factors, some of which are not within Toyota’s control. These factors include the ability of Toyota’s suppliers to provide a continued source of supply, and Toyota’s ability to effectively compete and obtain competitive prices from suppliers. A loss of any single or limited source supplier or inability to obtain supplies from suppliers in a timely and cost-effective manner could lead to increased costs or delays or suspensions in Toyota’s production and deliveries, which could have an adverse effect on Toyota’s financial condition and results of operations.

The worldwide financial services industry is highly competitive.

The worldwide financial services industry is highly competitive. Increased competition in automobile financing may lead to decreased margins. A decline in Toyota’s vehicle unit sales, an increase in residual value risk due to lower used vehicle prices, an increase in the ratio of credit losses and increased funding costs are additional factors which may impact Toyota’s financial services operations. If Toyota is unable to adequately respond to the changes and competition in automobile financing, Toyota’s financial services operations may adversely affect its financial condition and results of operations.

Toyota’s operations and vehicles rely on various digital and information technologies.

Toyota depends on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including sensitive data, and to manage or

 

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support a variety of business processes and activities, including manufacturing, research and development, supply chain management, sales and accounting. In addition, Toyota’s vehicles may rely on various digital and information technologies, including information service and driving assistance functions. Despite security measures, Toyota’s digital and information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers, computer viruses, breaches due to unauthorized use, errors or malfeasance by employees and others who have or gain access to the networks and systems Toyota depends on, service failures or bankruptcy of third parties such as software development or cloud computing vendors, power shortages and outages, and utility failures or other catastrophic events like natural disasters. Such incidents could materially disrupt critical operations, disclose sensitive data, interfere with information services and driving assistance functions in Toyota’s vehicles, and/or give rise to legal claims or proceedings, liability or regulatory penalties under applicable laws, which could have an adverse effect on Toyota’s brand image and its financial condition and results of operations.

Financial Market and Economic Risks

Toyota’s operations are subject to currency and interest rate fluctuations.

Toyota is sensitive to fluctuations in foreign currency exchange rates and is principally exposed to fluctuations in the value of the Japanese yen, the U.S. dollar and the euro and, to a lesser extent, the Australian dollar, the Russian ruble, the Canadian dollar and the British pound. Toyota’s consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through translation risk, and changes in foreign currency exchange rates may also affect the price of products sold and materials purchased by Toyota in foreign currencies through transaction risk. In particular, strengthening of the Japanese yen against the U.S. dollar can have an adverse effect on Toyota’s operating results.

Toyota believes that its use of certain derivative financial instruments including foreign exchange forward contracts and interest rate swaps and increased localized production of its products have reduced, but not eliminated, the effects of interest rate and foreign currency exchange rate fluctuations. Nonetheless, a negative impact resulting from fluctuations in foreign currency exchange rates and changes in interest rates may adversely affect Toyota’s financial condition and results of operations. For a further discussion of currency and interest rate fluctuations and the use of derivative financial instruments, see “Operating and Financial Review and Prospects — Operating Results — Overview — Currency Fluctuations,” “Quantitative and Qualitative Disclosures About Market Risk,” and notes 21 and 22 to Toyota’s consolidated financial statements.

High prices of raw materials and strong pressure on Toyota’s suppliers could negatively impact Toyota’s profitability.

Increases in prices for raw materials that Toyota and Toyota’s suppliers use in manufacturing their products or parts and components such as steel, precious metals, non-ferrous alloys including aluminum, and plastic parts, may lead to higher production costs for parts and components. This could, in turn, negatively impact Toyota’s future profitability because Toyota may not be able to pass all those costs on to its customers or require its suppliers to absorb such costs.

A downturn in the financial markets could adversely affect Toyota’s ability to raise capital.

Should the world economy suddenly deteriorate, a number of financial institutions and investors will face difficulties in providing capital to the financial markets at levels corresponding to their own financial capacity, and, as a result, there is a risk that companies may not be able to raise capital under terms that they would expect to receive with their creditworthiness. If Toyota is unable to raise the necessary capital under appropriate conditions on a timely basis, Toyota’s financial condition and results of operations may be adversely affected.

 

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Regulatory, Legal, Political and Other Risks

The automotive industry is subject to various governmental regulations.

The worldwide automotive industry is subject to various laws and governmental regulations including those related to vehicle safety and environmental matters such as emission levels, fuel economy, noise and pollution. In particular, automotive manufacturers such as Toyota are required to implement safety measures such as recalls for vehicles that do not or may not comply with the safety standards of laws and governmental regulations. In addition, Toyota may, in order to reassure its customers of the safety of Toyota’s vehicles, decide to voluntarily implement recalls or other safety measures even if the vehicle complies with the safety standards of relevant laws and governmental regulations. Many governments also impose tariffs and other trade barriers, taxes and levies, or enact price or exchange controls. Toyota has incurred, and expects to incur in the future, significant costs in complying with these regulations. If Toyota launches products that result in safety measures such as recalls, Toyota may incur various costs including significant costs for free repairs. Furthermore, new legislation or changes in existing legislation may also subject Toyota to additional expenses in the future. If Toyota incurs significant costs related to implementing safety measures or meeting laws and governmental regulations, Toyota’s financial condition and results of operations may be adversely affected.

Toyota may become subject to various legal proceedings.

As an automotive manufacturer, Toyota may become subject to legal proceedings in respect of various issues, including product liability and infringement of intellectual property. Toyota may also be subject to legal proceedings brought by its shareholders and governmental proceedings and investigations. Toyota is in fact currently subject to a number of pending legal proceedings and government investigations. A negative outcome in one or more of these pending legal proceedings could adversely affect Toyota’s financial condition and results of operations. For a further discussion of governmental regulations, see “Information on the Company — Business Overview — Governmental Regulation, Environmental and Safety Standards” and for legal proceedings, please see “Information on the Company — Business Overview — Legal Proceedings.”

Toyota may be adversely affected by natural calamities, political and economic instability, fuel shortages or interruptions in social infrastructure, wars, terrorism and labor strikes.

Toyota is subject to various risks associated with conducting business worldwide. These risks include natural calamities; political and economic instability; fuel shortages; interruption in social infrastructure including energy supply, transportation systems, gas, water, or communication systems resulting from natural hazards or technological hazards; wars; terrorism; labor strikes and work stoppages. Should the major markets in which Toyota purchases materials, parts and components and supplies for the manufacture of Toyota products or in which Toyota’s products are produced, distributed or sold be affected by any of these events, it may result in disruptions and delays in the operations of Toyota’s business. Should significant or prolonged disruptions or delays related to Toyota’s business operations occur, it may adversely affect Toyota’s financial condition and results of operations.

ITEM 4. INFORMATION ON THE COMPANY

4.A HISTORY AND DEVELOPMENT OF THE COMPANY

Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan and continues to exist under the Companies Act. Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.). Toyota became a separate company in August 1937. In 1982, the Toyota Motor Company and Toyota Motor Sales merged into one company, the Toyota Motor Corporation of today. As of March 31, 2018, Toyota operated through 606 consolidated subsidiaries (including variable interest entities) and 199 affiliated companies, of which 57 companies were accounted for through the equity method.

 

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See “— Business Overview — Capital Expenditures and Divestitures” for a description of Toyota’s principal capital expenditures and divestitures between April 1, 2015 and March 31, 2018 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota’s principal executive offices are located at 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan. Toyota’s telephone number in Japan is +81-565-28-2121.

4.B BUSINESS OVERVIEW

Toyota primarily conducts business in the automotive industry. Toyota also conducts business in finance and other industries. Toyota sold 8,964 thousand vehicles in fiscal 2018 on a consolidated basis. Toyota had net revenues of ¥29,379.5 billion and net income attributable to Toyota Motor Corporation of ¥2,493.9 billion in fiscal 2018.

Toyota’s business segments are automotive operations, financial services operations and all other operations. The following table sets forth Toyota’s sales to external customers in each of its business segments for each of the past three fiscal years.

 

     Yen in millions  
     Year Ended March 31,  
     2016      2017      2018  

Automotive

     25,923,813        25,032,229        26,347,229  

Financial Services

     1,854,007        1,783,697        1,959,234  

All Other

     625,298        781,267        1,073,047  

Toyota’s automotive operations include the design, manufacture, assembly and sale of passenger vehicles, minivans and commercial vehicles such as trucks and related parts and accessories. Toyota’s financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Toyota’s financial services business also provides retail installment credit and leasing through the purchase of installment and lease contracts originated by Toyota dealers. Related to Toyota’s automotive operations, Toyota is working towards having all of its vehicles become connected vehicles, creating new value and reforming businesses by utilizing big data obtained from those connected vehicles, and establishing new mobility services. Toyota’s all other operations business segment includes the design and manufacture of prefabricated housing and information technology related businesses including a web portal for automobile information called GAZOO.com, etc.

Toyota sells its vehicles in approximately 190 countries and regions. Toyota’s primary markets for its automobiles are Japan, North America, Europe and Asia. The following table sets forth Toyota’s sales to external customers in each of its geographical markets for each of the past three fiscal years.

 

     Yen in millions  
     Year Ended March 31,  
     2016      2017      2018  

Japan

       8,588,437        8,798,903        9,273,672  

North America

     10,822,772        10,033,419        10,347,266  

Europe

     2,507,292        2,517,601        2,940,243  

Asia

     4,475,623        4,279,617        4,497,374  

Other*

     2,008,994        1,967,653        2,320,955  

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

During fiscal 2018, 25.2% of Toyota’s automobile unit sales on a consolidated basis were in Japan, 31.3% were in North America, 10.8% were in Europe and 17.2% were in Asia. The remaining 15.5% of consolidated unit sales were in other markets.

 

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The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 97 million units in 2017.

Automobile sales are affected by a number of factors including:

 

    social, political and economic conditions;

 

    introduction of new vehicles and technologies; and

 

    costs incurred by customers to purchase and operate automobiles.

These factors can cause consumer demand to vary substantially from year to year in different geographic markets and in individual categories of automobiles.

In fiscal 2018, the U.S. saw steady employment growth as well as enhanced consumer spending, economies in Europe expanded at a solid pace under monetary easing measures, and Japan continued to experience favorable employment environment supporting consumption. In emerging markets, China continued to recover due to economic stimulus measures, which led to stronger growth of the global economy, while consumption in resource-rich countries has also been gradually recovering.

The automotive industry was also impacted by these economic trends. In 2017, with respect to developed countries, the automotive market contracted in the United States from the effect of interest-rate hikes, while on the other hand, it expanded in Europe. In addition, in Japan, demand expanded due primarily to the introduction of new models. The automotive markets in emerging countries, including China, as a whole also expanded.

In the medium- to long-term, Toyota expects the automotive market to continue growing driven principally by growth in China and other emerging markets. Global competition is expected to be severe, as competition in compact and low-price vehicles intensifies, and the pace of technological advancement and development of new products quickens, including in response to a heightened global awareness of the environment and more stringent fuel economy standards.

In 2017, China, North America, Europe and Asia were the world’s largest automotive markets. The share of each market across the globe, which Toyota estimates based on the available automobile sales data in each country and region information, was 30% for China, 22% for North America (21% excluding Mexico and Puerto Rico), 22% for Europe and 10% for Asia. In China, new vehicle sales increased to approximately 29.3 million units. In North America, new vehicle sales decreased from the previous year to approximately 20.9 million units. In Europe, new vehicle sales increased to approximately 20.7 million units. In Asia (including India but excluding Japan and China), new vehicle unit sales increased from the previous year to approximately 10 million units.

The worldwide automotive industry is affected significantly by government regulations aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of manufacturing vehicles. Many governments also mandate local procurement of parts and components and impose tariffs and other trade barriers, as well as price or exchange controls as a means of creating jobs, protecting domestic producers or influencing their balance of payments. Changes in regulatory requirements and other government-imposed restrictions can limit or otherwise burden an automaker’s operations. Government laws and regulations can also make it difficult to repatriate profits to an automaker’s home country.

The development of the worldwide automotive market includes the continuing globalization of automotive operations. Manufacturers seek to achieve globalization by localizing the design and manufacture of automobiles and their parts and components in the markets in which they are sold. By expanding production capabilities beyond their home markets, automotive manufacturers are able to reduce their exposure to fluctuations in foreign exchange rates as well as to trade restrictions and tariffs.

 

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Over the years, there have been many global business alliances and investments entered into between manufacturers in the global automotive industry. There are various reasons behind these transactions including the need to address excessive global capacity in the production of automobiles, and the need to reduce costs and improve efficiency by increasing the number of automobiles produced using common vehicle platforms and by sharing research and development expenses for environmental and other technology, the desire to expand a company’s global presence through increased size and the desire to expand into particular segments or geographic markets.

Toyota believes that its research and development initiatives, particularly the development of environmentally friendly new vehicle technologies, vehicle safety and information technology, provide it with a strategic advantage.

Toyota’s ability to compete in the global automotive industry will depend in part on Toyota’s successful implementation of its business strategy. This is subject to a number of factors, some of which are not in Toyota’s control. These factors are discussed in “Operating and Financial Review and Prospects” and elsewhere in this annual report.

Toyota Global Vision

In March 2011, Toyota unveiled its “Toyota Global Vision” corporate outline for the future, which serves not only to give direction to Toyota employees around the world, but also to convey such direction to customers and to the public at large. Toyota will work to achieve sustained growth through the realization of the following ideals which are parts of the Vision:

Toyota Global Vision

Toyota will lead the way to the future of mobility, enriching lives around the world with the safest and most responsible ways of moving people.

Through our commitment to quality, constant innovation and respect for the planet, we aim to exceed expectations and be rewarded with a smile.

We will meet challenging goals by engaging the talent and passion of people, who believe there is always a better way.

“The safest and most responsible ways of moving people”

 

    Safety is Toyota’s highest priority, and Toyota will continue to provide world-class safety.

 

    Toyota will also continue to contribute to environmental quality and to human happiness by using leading environmental technology and by deploying that technology in a growing line of vehicle models. At the same time, Toyota will work through the provision of products, sales and services that exceed customer expectation to offer a rewarding experience for customers.

“Enriching lives around the world”

 

    Toyota has been consistently true to its founding spirit of serving society through conscientious manufacturing, and it will continue working in that spirit to contribute to enhance the quality of life wherever it has operations.

 

    Toyota will strive to continue contributing to economic vitality wherever it has operations by generating stable employment and by participating in mutually beneficial business relationships with dealers and suppliers. It will also strive to continue to actively engage in initiatives for human resources development and the promotion of cultural activities of its host communities.

 

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“Lead the way to the future of mobility”

 

    Toyota will lead the industry in technological development that will spawn next-generation mobility. For example, it will explore possibilities in personal mobility and in the convergence of information technology for automobiles and “smart grids” for optimizing energy generation and consumption. Toyota will strive to offer products and services that match the needs in each market.

 

    Toyota will strive to advance environmental technology and develop low-carbon technologies and technologies for maximizing safety through interaction with the transport infrastructure to lay a foundation for sustainable and amenable future mobility.

“Our commitment to quality, constant innovation”

 

    Toyota is committed to providing quality vehicles that are highly reliable and driven with a sense of safety and reliability.

 

    Toyota will constantly reinvent itself and continue to engage in cutting-edge technology development. Toyota will work towards offering vehicles around the world that address the needs of today and of tomorrow at affordable prices.

“Respect for the planet”

 

    Toyota will continue working to minimize environmental impact in its manufacturing and other operations, as well as in its products.

 

    Toyota’s activities will include conserving energy and reducing output of carbon dioxide, as well as conserving material resources through recycling; it will also include establishing mindsets and production methods appropriate for coexistence with nature.

“Exceed expectations and be rewarded with a smile”

 

    Everyone at Toyota will continuously maintain a sense of gratitude to customers and will strive to earn smiles with products and services that are stimulating and inspiring and exceed customer expectations.

“There is always a better way”

 

    All Toyota employees will share the recognition that there is always a better way and share a commitment to continuous improvement, which are fundamental to The Toyota Way.

“Meet challenging goals by engaging the talent and passion of people”

 

    Toyota will nurture a corporate culture where teamwork and individual creativity thrive and where people will approach their work with pride and passion.

 

    Toyota will honor the spirit of diversity in recruiting, training and promoting capable individuals around the world. Human resources development at Toyota will continue to promote the transfer of the company’s monozukuri spirit of conscientious manufacturing and related skills and know-how from one generation to the next.

Based on these initiatives, the Toyota group will contribute to “enriching lives of communities” by providing “ever-better cars.” This is expected to encourage more customers to purchase Toyota cars and thereby lead to the establishment of a stable business base. The automotive industry is facing a time of profound transformation that could happen only once in a hundred years in response to significant technological innovation such as electrification, connected vehicles and automated driving. Toyota is committed to realizing a mobility society of the future that enables everyone to enjoy freedom of movement beyond the conventional concept of vehicles.

 

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Toyota Environmental Challenge 2050

Positioning responding to environmental issues as one of the most prioritized challenges for management, Toyota has tackled head-on activities such as the development and promotion of next-generation vehicles including hybrid vehicles (“HVs”) and fuel cell vehicles (“FCVs”), efficient production that puts less of a burden on the environment, the recycling of end-of-life vehicles and hybrid vehicle batteries, planting trees for the coexistence of humans and nature in harmony, and conservation of ecosystems.

However, in recent years, the seriousness and reach of environmental issues has increased, as evidenced by global warming, water shortages, resource depletion, and degradation of biodiversity. In response to the situation, Toyota believes it is necessary to take on new challenges that consider the world 20 or 30 years in the future, in order to remain closely aligned with the global environment. Accordingly, Toyota announced Toyota Environmental Challenge 2050 in October 2015.

In order to contribute to the realization of a sustainable society, the Toyota Environmental Challenge 2050 has set forth the following six challenges for Toyota to address. Those challenges are to reduce CO2 emissions from driving and producing, as well as throughout the lifecycle of, vehicles, and to ensure a net positive impact on the Earth and society toward 2050.

 

  1. New Vehicle Zero CO2 Emissions Challenge

 

  2. Life Cycle Zero CO2 Emissions Challenge

 

  3. Plant Zero CO2 Emissions Challenge

 

  4. Challenge of Minimizing and Optimizing Water Usage

 

  5. Challenge of Establishing a Recycling-Based Society and Systems

 

  6. Challenge of Establishing a Future Society in Harmony with Nature

Further strengthening collaboration with the Toyota group and all other stakeholders, Toyota will consolidate new ideas, dynamism and technology to tackle together the realization of a truly sustainable society from a long-term perspective.

Automotive Operations

Toyota’s revenues from its automotive operations were ¥26,397.9 billion in fiscal 2018, ¥25,081.8 billion in fiscal 2017 and ¥25,977.4 billion in fiscal 2016.

Toyota produces and sells passenger vehicles, minivans and commercial vehicles such as trucks. Toyota Motor Corporation’s subsidiary, Daihatsu Motor Co., Ltd. (“Daihatsu”), produces and sells mini-vehicles and compact cars. Hino Motors, Ltd. (“Hino”), also a subsidiary of Toyota Motor Corporation, produces and sells commercial vehicles such as trucks and buses. Toyota also manufactures automotive parts, components and accessories for its own use and for sale to others.

With an aim to strengthen competitiveness in the small car segment, on January 29, 2016, Toyota and Daihatsu entered into a share exchange agreement to make Daihatsu a wholly-owned subsidiary of Toyota as of August 1, 2016. From January 2017, Toyota and Daihatsu established the “Emerging-market Compact Car Company” to promote development of competitive products in emerging markets. Through planning and implementation of optimal strategies including combining their technical expertise and bases of operations, bold cost reduction and expansion of product lineups with a global brand strategy, Daihatsu will play a key role in developing globally competitive small cars of both brands based on the technology Daihatsu has developed through manufacturing of mini-vehicles.

 

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Vehicle Models

Toyota’s vehicles (produced by Toyota, Daihatsu and Hino) can be classified into three categories: HVs, conventional engine vehicles, and FCVs. Toyota’s product line-up includes subcompact and compact cars, mini-vehicles, mid-size, luxury, sports and specialty cars, recreational and sport-utility vehicles, pickup trucks, minivans, trucks and buses.

Hybrid Vehicles

The world’s first mass-produced hybrid car was Toyota’s Prius. It runs on an efficient combination of a gasoline engine and motor. This system allows the Prius to travel more efficiently than conventional engine vehicles of comparable size and performance. The hybrid design of the Prius also results in the output of 75% less emission than the maximum amount allowed by Japanese environmental regulations. Toyota views the Prius as the cornerstone of its emphasis on designing and producing eco-friendly automobiles.

In the last three years, Toyota has strengthened its hybrid lineup by introducing the fully remodeled Alphard HV and Vellfire HV in January 2015, the Sienta HV in June 2015, the fully remodeled RX-HV in September 2015 and the fully remodeled Prius in November 2015, as well as adding Auris HV in April 2016, Prius PHV and the new model C-HR HV in October 2016, the new model LC HV in March 2017, the fully remodeled Camry HV in June 2017, the fully remodeled LS HV in October 2017, JPN TAXI, which employs a newly developed LPG HV, in October 2017, the fully remodeled Avalon HV in April 2018, the fully remodeled Corolla HB HV in May 2018 and the fully remodeled Crown HV and Century HV in June 2018. In the area of HVs, where strong growth is seen, Toyota aims to continue its efforts to offer a diverse line-up of HVs, enhance engine power while improving fuel economy and otherwise work towards increasing the sales of HVs.

Fuel Cell Vehicles

Toyota began limited sales of a fuel cell vehicle in Japan and the United States in December 2002. Since then, Toyota has made advances by solving technological issues such as the above and worked towards the practical use of such solutions, culminating in the general sale of the world’s first mass produced fuel cell vehicle MIRAI in Japan beginning in December 2014, in the United States beginning in June 2015 and in Europe beginning in September 2015. Toyota also launched “SORA,” the first production model fuel cell bus to receive vehicle type certification in Japan, in March 2018.

Conventional Engine Vehicles

Subcompact and Compact

Toyota’s subcompact and compact cars include the four-door Corolla sedan, which is one of Toyota’s bestselling models. The Yaris, marketed as the Vitz in Japan, is a subcompact car designed to perform better and offer greater comfort than other compact cars available in the market with low emissions that are particularly attractive to European consumers. In Europe, Toyota introduced the fully remodeled Aygo in June 2014. In Japan, Toyota introduced, in addition to the Corolla and Vitz, the Prius C (named Aqua in Japan), as well as Passo, Roomy and Tank, which three vehicles are OEM vehicles supplied by Daihatsu. In India, Asia, China and other markets, Toyota introduced the Etios and Vios, as well as the AGYA and Rush, which are designed and manufactured by Daihatsu, and Yaris iA, which is designed and manufactured by Mazda Motor Corporation (“Mazda”).

Mini-Vehicles

Mini-vehicles are manufactured and sold by Daihatsu. Daihatsu manufactures mini-vehicles, passenger vehicles, commercial vehicles and auto parts. Mini-vehicles are passenger vehicles, vans or trucks with engine displacements of 660 cubic centimeters or less. Daihatsu sold approximately 586 thousand mini-vehicles and

 

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220 thousand automobiles on a consolidated basis during fiscal 2018. Daihatsu’s largest market is Japan, which accounted for approximately 80% of Daihatsu’s unit sales during fiscal 2018. From 2011, Toyota began to sell some mini-vehicles manufactured by Daihatsu under the Toyota brand.

Mid-Size

Toyota’s mid-size models include the Camry, which has been the bestselling passenger car in the United States for twenty of the past twenty-one calendar years (from 1997 to present) and also for the last sixteen consecutive years. The Camry was fully remodeled in June 2017. Camry sales in the United States for 2018 were approximately 387 thousand units (including Camry hybrids). In addition, Toyota’s other mid-size models include the REIZ for the Chinese market and the Avensis for the European market.

Luxury and Large

In North America, Europe, Japan and other regions, Toyota’s luxury lineup consists primarily of vehicles sold under the Lexus brand name. Lexus passenger car models include the LS, the GS, the ES, the IS, the CT, the LC and the RC. Lexus models also include the LX, the GX, the RX and the NX sold as luxury sport-utility vehicles. Toyota commenced sales of its luxury automobiles in Japan under the Lexus brand in August 2005. As of March 31, 2018, the Lexus brand lineup in Japan includes the LS, the GS, the IS, the CT, the LX, the RX, the NX, the LC and the RC. The Toyota brand’s full-size luxury car, the Avalon, was remodeled in April 2018, and the Crown was fully remodeled in June 2018. Toyota also fully remodeled the Century limousine in Japan in June 2018.

Sports and Specialty

In April 2012, Toyota introduced the 86 (called Scion FR-S in the U.S.), a compact sports car with a front-mounted engine and rear-wheel drive. In October 2014, Toyota introduced the RC coupe that leads the image of Lexus, which engages drivers on a sentimental level. In March 2017, Toyota introduced LC, the new model flagship coupe for Lexus.

Recreational and Sport-Utility Vehicles and Pickup Trucks

Toyota sells a variety of sport-utility vehicles and pickup trucks. Toyota’s sport-utility vehicles available in North America include the Sequoia, the 4Runner, the RAV4, the Highlander, the FJ Cruiser and the Land Cruiser, and pickup trucks available are the Tacoma and Tundra. The Tacoma, the Tundra, the Highlander and the Sequoia are manufactured in the United States. Toyota also offers four types of sport-utility vehicles under the Lexus brand, including the LX, the GX, the RX, and the NX. Toyota also manufactures the RX and RAV4 models in Canada. Toyota’s pickup truck, the Hilux, has been the bestselling model of all Toyota cars sold in Thailand. In July 2014, Toyota introduced the new NX model under the Lexus brand. In May 2015, Toyota introduced the fully remodeled Hilux and in September 2015, it introduced the fully remodeled RX of the Lexus brand. In December 2016, Toyota introduced C-HR, a model with a focus on both design and drive.

Minivans and Cabwagons

Toyota offers several basic models for the global minivan market. Its largest minivans in Japan, the Alphard and the Vellfire, were remodeled in January 2015. In addition, the Noah/Voxy was remodeled in January 2014 and the new model Esquire was introduced in October 2014 in Japan. The new model Calya, an original equipment manufacturing (“OEM”) vehicle by Daihatsu, was introduced in July 2016 in Indonesia. Toyota’s other minivan models include, in Japan, the Estima and the Sienta, and, in North America, the Sienna.

Trucks and Buses

Toyota’s product lineup includes trucks (including vans) up to a gross vehicle weight of five tons and micro-buses that are sold in Japan and in overseas markets. Toyota launched “SORA,” a production model fuel cell bus,

 

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in Japan in March 2018. Trucks and buses are also manufactured and sold by Hino, a subsidiary of Toyota. Hino’s product lineup includes large trucks with a gross vehicle weight of over eleven tons, medium trucks with a gross vehicle weight of between five and eleven tons and small trucks with a gross vehicle weight of up to five tons. Hino’s bus lineup includes medium to large buses used primarily as tour buses and public buses, as well as small buses and micro-buses.

Product Development

New cars introduced in Japan during fiscal 2018 and thereafter include the Hilux, the JPN TAXI and TOYOTA driving school vehicles. The remodeled car in Japan during fiscal 2018 and thereafter is the Camry HV. Remodeled cars outside of Japan during fiscal 2018 and thereafter include the Lexus LS, the Avalon and the Camry.

In addition, the IMV product lineup based on the IMV project to optimize global manufacturing and supply systems is a lineup of strategic multipurpose vehicles produced from a single platform to meet market demand. The IMV product lineup includes, as of March 31, 2017, the Hilux, Fortuner, and Innova, one or all of which are available in all regions.

Markets, Sales and Competition

Toyota’s primary markets are Japan, North America, Europe and Asia. The following table sets forth Toyota’s consolidated vehicle unit sales by geographic market for the periods shown. The vehicle unit sales below reflect vehicle sales made by Toyota to unconsolidated entities (recognized as sales under Toyota’s revenue recognition policy), including sales to unconsolidated distributors and dealers. Vehicles sold by Daihatsu and Hino are included in the vehicle unit sales figures set forth below.

 

    Year Ended March 31,  
    2014     2015     2016     2017     2018  
    Units     %     Units     %     Units     %     Units     %     Units     %  

Market

                   

Japan

    2,365,410       26.0     2,153,694       24.0     2,059,093       23.7     2,273,962       25.4     2,255,313       25.2

North America

    2,529,398       27.7       2,715,173       30.3       2,839,229       32.7       2,837,334       31.6       2,806,467       31.3  

Europe

    844,003       9.3       859,038       9.6       844,412       9.7       924,560       10.3       968,077       10.8  

Asia

    1,608,355       17.6       1,488,922       16.6       1,344,836       15.5       1,587,822       17.7       1,542,806       17.2  

Other*

    1,768,867       19.4       1,755,037       19.5       1,593,758       18.4       1,347,182       15.0       1,391,731       15.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    9,116,033       100.0     8,971,864       100.0     8,681,328       100.0     8,970,860       100.0     8,964,394       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East, etc.

 

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The following table sets forth Toyota’s vehicle unit sales and market share in Japan, North America, Europe and Asia on a retail basis for the periods shown. Each market’s total sales and Toyota’s sales represent new vehicle registrations in the relevant year (except for the Asia market where vehicle registration does not necessarily apply). All information on Japan excludes mini-vehicles. The sales information contained below excludes unit sales by Daihatsu and Hino, each a consolidated subsidiary of Toyota. Vehicle unit sales in Asia do not include sales in China.

 

     (Thousands of Units)  
     Fiscal Year Ended March 31,  
     2014     2015     2016     2017     2018  

Japan:

          

Total market sales (excluding mini-vehicles)

     3,433       3,126       3,126       3,360       3,340  

Toyota sales (retail basis, excluding mini-vehicles)

     1,605       1,439       1,462       1,607       1,565  

Toyota market share

     46.7     46.0     46.8     47.8     46.9
     (Thousands of Units)  
     Calendar Year Ended December 31,  
     2013     2014     2015     2016     2017  

North America:

          

Total market sales

     18,514       19,597       20,804       21,191       20,887  

Toyota sales (retail basis)

     2,520       2,670       2,817       2,798       2,791  

Toyota market share

     13.6     13.6     13.5     13.2     13.4

Europe:

          

Total market sales

     18,009       18,397       18,971       19,968       20,721  

Toyota sales (retail basis)

     848       888       874       928       1,002  

Toyota market share

     4.7     4.8     4.6     4.6     4.8

Asia (excluding China):

          

Total market sales

     8,899       8,785       9,287       9,541       10,078  

Toyota sales (retail basis)

     1,427       1,324       1,249       1,305       1,318  

Toyota market share

     16.0     15.1     13.4     13.7     13.1

Japan

Japan is one of the leading countries with respect to technological advancements and improvements in the automotive industry and will continue to demonstrate such strength. Toyota strives to earn customer satisfaction by introducing products distinctive of Japan’s manufacturing ability such as value-added products including Lexus models, FCVs, plug-in hybrid vehicles (“PHVs”) and HVs, vehicles with 3-seat rows and mini-vehicles. Toyota’s consolidated vehicle sales in Japan in fiscal 2018 was 2,255 thousand units, a decrease of 19 thousand units in comparison with the previous year. Toyota endeavors to secure and maintain its large share of and position atop the Japanese market. Toyota held a domestic market share (excluding mini-vehicles) on a retail basis of 46.8% in fiscal 2016, 47.8% in fiscal 2017 and 46.9% in fiscal 2018.

Although Toyota’s principle is to conduct production in regions where it enjoys true competitiveness, it considers Japan to be the source of its good manufacturing practices. Toyota supports its operations worldwide through measures such as the development of new technologies and products, low-volume vehicles to complement local production, production of global vehicle models which straddle multiple regions and supporting overseas factories. Toyota will continue the implementation of the new platform and the new unit for the Toyota New Global Architecture (“TNGA”) globally, with Japan at the core. In Japan, Toyota is implementing flexible production based on market needs, in order to support its large share of domestic sales.

Since Toyota formed an alliance with SUBARU CORPORATION (“SUBARU”) in 2005, Toyota and SUBARU have utilized each other’s resources in development and production. In April 2008, in order to create

 

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synergy and to further strengthen competitiveness, Toyota, Daihatsu and SUBARU agreed on joint development of a compact rear-wheel-drive sports car and OEM supply with compact cars and mini-vehicles. In order to promote a smooth cooperation, SUBARU transferred 61 million SUBARU shares owned by SUBARU to Toyota in July 2008. As a result of this transfer, Toyota owns 16.5% of SUBARU issued shares. While Toyota vehicles have been manufactured at SUBARU’s North American production center, Subaru of Indiana Automotive, Inc. (“SIA”), since 2007, Toyota and SUBARU ceased such production in May 2016, and the collaboration between Toyota and SUBARU has shifted to collaboration focusing on products and technology.

In 2011, Toyota and BMW Group agreed to conduct collaborative research in the field of next-generation lithium-ion battery technologies and for BMW to supply diesel engines to Toyota Motor Europe, Toyota’s European subsidiary. In 2013, as part of their strategic long-term cooperation in the field of sustainable mobility, Toyota and BMW Group entered into agreements for the joint development of a fuel cell system, joint development of architecture and components for sports vehicles and joint research and development of lightweight technologies. The two companies completed collaborative research on lithium-air batteries, a post-lithium-battery solution as planned by conducting the second phase of collaborative research into next-generation lithium-ion battery cells.

Toyota and Mazda have been engaged in collaboration such as the licensing of Toyota’s hybrid technologies to Mazda and the production of compact cars for Toyota at Mazda’s plant in Mexico. In May 2015, Toyota and Mazda entered into an agreement to build a mutually beneficial long-term partnership that will result in more appealing cars that meet the diverse needs and tastes of customers around the world, and after subsequent discussions, Toyota signed an agreement to enter a business and capital alliance with Mazda in August 2017. Based on this business and capital alliance, Toyota and Mazda mutually acquired shares of each other in value of 50 billion yen for each company in October 2017. Toyota also established EV C.A. Spirit Corporation with Mazda and Denso Corporation (“Denso”) to jointly develop basic structural technologies for electric vehicles (“EVs”). Furthermore, in March 2018, Toyota and Mazda established Mazda Toyota Manufacturing, U.S.A., Inc., a new joint venture company, to produce vehicles in the United States starting in 2021.

In February 2017, Toyota and Suzuki Motor Corporation (“Suzuki”), aiming to contribute jointly to resolution of social issues and achievement of the sound and sustainable development of an automobile-based society, entered into a memorandum of understanding on beginning concrete examination of a business partnership. In November 2017, the two companies agreed to move forward in considering a cooperative structure for introducing EVs in the Indian market around 2020, and in March 2018, concluded a basic agreement toward the mutual supply of hybrid and other vehicles with the aim of bolstering both companies’ product lineups and encouraging competition in the Indian automotive market. In May 2018, Toyota and Suzuki agreed to start discussing joint projects in the fields of technological development, vehicle production and market development. Specifically, the discussions will include matters such as Denso and Toyota providing Suzuki with technological support for a compact, ultrahigh-efficiency powertrain to be developed mainly by Suzuki, Toyota Kirloskar Motor Private Ltd. producing models developed by Suzuki for sale, under both the Toyota and Suzuki brands, in India, and supplying models developed by Suzuki to African markets and advancing cooperation in the domains of logistics and services for such models.

In December 2017, Toyota and Panasonic entered into an agreement to begin studying the feasibility of a joint automotive prismatic battery business for the purpose of contributing to finding solutions for pressing societal issues such as global warming, air pollution, the depletion of natural resources and energy security, as well as addressing growing demand and expectations for electrified vehicles. Both companies will consider details of the collaboration with the aim of achieving the best automotive prismatic battery in the industry and, ultimately, contributing to the popularization of Toyota’s and other automakers’ electrified vehicles.

In Japan, there are five major domestic manufacturers, five specialized domestic manufacturers and a growing volume of imports from major United States and European manufacturers. The prolonged economic slump in the Japanese economy and the recent increases in environmental awareness have also shifted consumer

 

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preference towards more affordable automobiles such as compact and subcompact vehicles and towards utility vehicles such as mini-vans. For more than 40 years, Toyota has maintained its position as the largest automobile manufacturer in Japan. Every year since fiscal 1999, Toyota, excluding Daihatsu and Hino, has achieved a market share (excluding mini-vehicles) of over 40%, reflecting in part the success of the introduction of new models for subcompact and compact cars, mini-vans and sedans. In August 2005, Toyota launched the Lexus brand in Japan and achieved a record top market share of 25.6% in the luxury market in 2011. Toyota aims to further distinguish the Lexus brand by continuing to attract new and affluent customers including customers that typically had purchased imported vehicles.

North America

The North American region is one of Toyota’s most significant markets. Toyota has reorganized its production structure and made improvements to its product lineup. In addition, Toyota is actively working to promote increased local operations independence in North America, in accordance with the Toyota Global Vision, announced in 2011.

In the North American region, of which the U.S. is the main market, Toyota has a wide product lineup (excluding large trucks and buses), and sold 2,806 thousand vehicles on a consolidated basis in fiscal 2018. This represents approximately 31% of Toyota’s total unit sales on a consolidated basis. The U.S., in particular, is the largest market in the North American region, which accounts for 87% of the retail sales of Toyota in such region. Sales figures for fiscal 2018 were 98.9% of those in the prior fiscal year.

Toyota commenced sales of the first-generation Prius hybrid model in North America in 2000. The Prius became Toyota’s bestselling model behind the Corolla and Camry, having gained particular support among customers concerned with the environment. Toyota introduced the first hybrid model under the Lexus brand, the RX400h, and the Highlander hybrid in 2005. Toyota continued further expansion of its environmentally friendly vehicles with the introduction of models such as the CT200h in 2011, the ES300h and the Avalon HV in 2012, the NX300h in 2014, the fully remodeled all-new Prius and the all-new fuel cell vehicle MIRAI in 2015, the Prius PHV in 2016 and the fully remodeled Camry HV in 2017.

Since the introduction of the LS and ES models under the premium brand model, Lexus, in the United States in 1989, Toyota has expanded its Lexus sales with models including the GS, IS and RX. Toyota sold 311 thousand units through the introduction of the new NX and RC models in 2014, 344 thousand units through the introduction of the new RX model in 2015, 352 thousand units in 2016 and 305 thousand units in 2017.

Toyota is continuing to revise its vehicle models and North American production capacities in response to changes in market conditions. Starting 2011, Toyota, instead of importing from Japan, began production of the Corolla at its Mississippi plant. In 2013, the production capacity at the Woodstock plant in Canada increased from 150 to 200 thousand units per year, and the production capacity at the Indiana plant also increased. Toyota commenced production of the RX450h hybrid model at its Cambridge plant in Canada in 2014. Through the business alliance with Mazda Motor Corporation, the production of Toyota brand compact cars for sale mainly in North America began at Mazda’s plant in Mexico in June 2015. In addition, Toyota commenced production of the Lexus ES350 at its Kentucky plant for sale in the North America market starting in October 2015. Toyota also launched the all-new Camry with the first TNGA platform in North America at the Kentucky plant in 2017 and redesigned Avalon into an all-new model in 2018. Toyota plans to increase the production capacity of the Tacoma from 100,000 to 160,000 in Baja California, Mexico in 2018 and of the Highlander at its Indiana plant in 2019. In the meantime, consignment production that started at SIA in 2007 ceased in May 2016.

In terms of auto parts, Toyota increased production capacity of engine plants in Kentucky and Alabama in 2013 and 2014, respectively, to meet rising demand, and also increased production capacity of auto parts at its automatic transmission plant in West Virginia in 2014.

 

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In order to further strengthen competitiveness in North America, Toyota will continue the realignment of North American manufacturing operations going forward. As part of this effort, a new plant will be built in Mexico in 2019 to produce the Tacoma. Furthermore, production of the Corolla, which was initially planned to be shifted from the plant in Canada to the new plant in Mexico, instead will be shifted to a new plant in Alabama that will be established by the joint venture with Mazda around 2021. In addition to the plant in Mississippi, compact cars will also be produced at the new plant in Alabama. Toyota will consider focusing its production of mid-sized vehicles in the plant in Canada, along with the plants in Indiana and Kentucky, by commencing production of mid-sized vehicles instead of the Corolla in Canada starting in 2019.

As for Toyota’s vehicle development in North America, the Toyota Technical Center spearheads the design, planning, and evaluation of vehicles and parts as to their ability to meet customer needs. Toyota will continue to promote self-reliance towards producing even better cars in the future.

In July 2017, Toyota held an opening ceremony of its new North American headquarters in Plano, Texas. By unifying its North American manufacturing, sales and marketing, financial services and other functions, Toyota plans to promote collaboration and efficiencies across functions, position itself to deliver “ever-better cars” to customers and work towards realizing sustainable growth in the North America market.

Europe

Toyota’s principal European markets are Germany, France, the United Kingdom, Italy, Spain and Russia. Toyota’s principal competitors in Europe are Volkswagen, Renault, Ford, Opel and Peugeot, as well as Korean manufacturers Hyundai and Kia.

While competition in Europe continues to intensify, Toyota has expanded its lineup of hybrid models to further strengthen its sales operations, and has entered into supply agreements with BMW and PSA for diesel engines and light commercial vehicles, respectively. To strengthen its business setup so that it is less likely to be affected by exchange rates, Toyota launched RAV4 for Russia at OOO “TOYOTA MOTOR” (“TMR”) and C-HR at Toyota Motor Manufacturing Turkey Inc. (“TMMT”) in 2016 in the form of local production. In addition, Toyota is actively promoting production and sales measures that meet local demand by strengthening its value chain including used car dealerships, after-sales services and finance and insurance services.

In 2017, the European automotive market expanded from the previous year as the growth of the Russian and other European markets made up for the sluggish market in the United Kingdom.

Toyota sales in 2017 in Europe exceeded the previous year due to higher sales in principal markets such as the United Kingdom, Germany, France, Italy and Spain from the sales expansion of hybrid core models including C-HR and Yaris, even though the sales in Russia remained around the same as the previous year. Sales in Poland and Israel hit a new record. Toyota’s consolidated vehicle sales in Europe in fiscal 2018 was 968 thousand units, an increase of 4.7% from fiscal 2017.

Toyota has in the past increased European production in response to sales growth, establishing Toyota Motor Manufacturing (UK) Ltd. (“TMUK”) in 1992, TMMT in 1994 and Toyota Motor Manufacturing France S.A.S. (“TMMF”) in 2001. Further, in 2005, Toyota Peugeot Citroën Automobile Czech was formed as a result of a joint venture with PSA Peugeot Citroën as vehicle supply factories to Europe.

Toyota commenced production of the compact crossover C-HR by increasing the annual production capacity of TMMT from 150,000 units to 280,000 units (three-shift) in September 2016.

Toyota opened the Toyota Motor Manufacturing Russia plant in 2007 as a base for its manufacturing operations in the Russian market (integrated to sales entity TMR in March 2013). A two-shift production operation started in September 2012 and production capacity was increased from 20,000 units to 50,000 units

 

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per year. In August 2016, the production capacity was increased to 100,000 units and the production of the RAV4 commenced in addition to the Camry. Toyota commenced complete knock down, or CKD, production of the IMV Fortuner in Kazakhstan beginning in the spring of 2014. In April 2018, Toyota redesigned the Camry into an all-new model with the TNGA platform.

In terms of auto parts, in October 2016, Toyota decided to produce hybrid transaxles and gasoline engines in Poland. Toyota will start production of hybrid transaxles in 2018 at Toyota Motor Manufacturing Poland (“TMMP”), a production plant for transmissions and engines, and add two gasoline engines — a 1.5L in 2017 and a 2.0L in 2019 — at Toyota Motor Industries, Poland (“TMIP”), a production plant for diesel engines. In concert with the enhancement of the gasoline engine business, the two companies were integrated in April 2017.

Asia

Toyota’s consolidated vehicle sales in Asia (including China) in fiscal 2018 was 1,543 thousand units, a decrease of 2.8% from fiscal 2017.

In light of the importance of the Asian market that is further expected to grow in the long term, Toyota aims to build an operational framework that is efficient and self-reliant as well as a predominant position in the automotive market in Asia. Toyota has responded to increasing competition in Asia by making strategic investments in the market and developing relationships with local suppliers. Toyota believes that its existing local presence in the market provides it with an advantage over new entrants to the market and expects to be able to promptly respond to demand for vehicles in the region.

In this region, Toyota has been further strengthening its business foundations by improving its product line-up, expanding local procurement and increasing production capacities.

Toyota’s principal Asian markets are Thailand, India, Indonesia, Malaysia and Taiwan.

As part of Toyota’s efforts to expand business, Toyota Motor Thailand Co., Ltd. commenced production of HVs such as the Camry hybrid in 2009. Toyota also started operation of its second Gateway plant in 2013, expanding production capacity by 80 thousand units in Thailand to 810 thousand units. In April 2015, Toyota implemented a full model change for IMV models manufactured at its Samrong Plant and Ban Pho Plant in Thailand. In February 2018, Toyota started production of the C-HR at its second Gateway plant.

In India, Toyota constructed a second plant with an annual production capacity of 70 thousand units and commenced production and sales of the Etios compact model designed specifically for the Indian market in 2011. Furthermore, Toyota increased production capacity in India during 2012 and 2013 to 210 thousand units. Moreover, Toyota began exporting the gasoline-fueled model of the Etios to South Africa from India in 2012.

In Indonesia, Toyota introduced the Etios and commenced operation of a second plant in Karawang in 2013 in order to meet the diverse customer needs and the expanding market. In 2014, Toyota increased the initial production capacity of 70 thousand units per year to 120 thousand units per year with the introduction of the Vios and the Yaris, and also began exporting the Vios to the Middle East. Toyota also constructed a passenger vehicle engine plant that commenced production in February 2016.

In Malaysia, Toyota began production of the Camry hybrid in March 2015, and is planning to reorganize its production structure there in 2019 by building a new plant dedicated to passenger vehicles while making the existing plant dedicated to commercial vehicles. In addition, in 2016 Toyota began production and sales of the Sienta in Taiwan in response to diversifying demands.

China

Toyota has been conducting operations in China through joint ventures, and its success in producing products that meet local demands and in establishing its sales and service network has significantly contributed to

 

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Toyota’s profits. Based on the firm business foundation that it has established, Toyota is conducting its operations with the aim of promoting further growth and increasing profitability through further development of its sales and service network and expansion of its product lineup.

In China, Toyota has been conducting joint ventures with two major partners. First, with respect to the joint venture with China FAW Group Corporation since Toyota first launched the Vios through the joint venture in 2002, Toyota has been producing and selling the Land Cruiser Prado, the Corolla, the Corolla HV, the Crown, the REIZ, the Coaster and the RAV4 in China. With regard to production capacity, in 2007, Toyota commenced production at the new Tianjin Teda plant, which has an annual production capacity of 200 thousand units, and in 2012, commenced production at a new factory of Sichuan FAW Toyota Motor Co., Ltd. in Changchun, China, which has an annual production capacity of 100 thousand units. Toyota also increased annual production capacity of the plant in Sichuan from 30 thousand units to 50 thousand units in the spring of 2015 to increase production of the Prado. Toyota completed the construction of a new production line to replace an aging existing line at the Tianjin Teda plant in June 2018. In addition, Toyota sought to improve production efficiency by closing small, aging production lines at the Changchun East Plant of Sichuan FAW Toyota Motor Co., Ltd. in December 2016 and the Xiqing Plant of Tianjin FAW Toyota Motor Co., Ltd. in February 2017.

GAC Toyota Motor Co., Ltd., a joint venture between Toyota and Guangzhou Automobile Group Co., Ltd., commenced sales of the Camry in 2006, followed by production and sales of the Yaris, the Highlander, the E’z, the Levin and the Levin HV. In 2006, it commenced production at the first plant with an annual production capacity of around 200 thousand units. In addition, Toyota expanded its annual production capacity to approximately 560 thousand units by starting a second plant in 2009 and a third plant in early 2018. In 2017, Toyota redesigned the Camry into an all-new model with the TNGA platform.

In terms of auto parts, in 2014, Toyota opened a plant in Changshu in Jiangsu, China for the production of the Continuously Variable Transmission (“CVT”) as the first CVT plant outside of Japan and in September 2015, Toyota also began production of HV Transaxles at the CVT plant. Toyota also launched a plant to produce hybrid vehicle batteries in October 2015.

Total vehicle sales in the Chinese market increased 4% from 28.30 million in 2016 to 29.30 million in 2017. In this market, Toyota’s sales in 2017 were 1.30 million vehicles, up 6% from the previous year. In the domestically produced passenger vehicle market in mainland China (23.38 million units), Toyota had a market share of 5%. In 2017, sales of SUVs expanded as a result of customers’ value diversification. As for Toyota’s distribution network, Toyota has been expanding the distribution network for locally produced vehicles in cooperation with Chinese joint venture partners under Tianjin FAW Toyota Motor Co., Ltd. and Guanqi Toyota Motor Co., Ltd., and for imported vehicles, Toyota has also been expanding primarily the Lexus brand sales network. Toyota plans to further increase sales by expanding the number of dealers and the product lineup for both locally produced and imported vehicles. In addition, as the market in China develops, Toyota plans to promote the so-called “Value Chain” businesses such as used cars, services, financing and insurance.

South and Central America, Oceania, Africa and the Middle East

Toyota’s consolidated vehicle sales in South and Central America, Oceania, Africa and the Middle East (collectively, the “Four Regions”) in fiscal 2018 were 1,392 thousand units, an increase of 3.3% from fiscal 2017.

In these regions, which are expected to become increasingly important to Toyota’s business strategy, Toyota aims to develop new products which meet the specific demands of each region, increase production and further promote sales.

Toyota’s principal markets in the Four Regions are Brazil in South and Central America, Australia in Oceania, South Africa in Africa and Saudi Arabia in the Middle East.

 

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The core models in this region are global models such as the Corolla, IMV (the Hilux) and Camry. In order to increase production of IMVs, Toyota expanded the annual production capacity of its Argentina factory from 70 thousand units to 90 thousand units in 2011. Toyota further increased annual production capacity to 140 thousand units per year at the end of 2015 and is seeking to increase production to meet demand after 2016. In order to expand business in Brazil, Toyota constructed a new factory in Sorocaba with an annual production capacity of 70 thousand units, and in 2012, began production and sales of compact vehicles. Starting from the beginning of 2016, Toyota increased production capacity to 110 thousand units per year.

Further, Toyota began local production of the Fortuner in Egypt in 2012.

Moreover, in terms of auto parts, Toyota commenced production at a plant in Brazil for passenger vehicle engines in February 2016.

Toyota ended production of vehicles and engines at Toyota Motor Corporation Australia Ltd. in September 2017.

Production

Toyota and its affiliated companies produce automobiles and related parts and components through more than 50 overseas manufacturing companies in 26 countries and regions besides Japan. Toyota’s major manufacturing facilities include plants in Japan, the United States, Canada, the United Kingdom, France, Turkey, Thailand, China, Taiwan, India, Indonesia, South Africa, Argentina and Brazil. Daihatsu brand vehicles are produced at 4 factories in Japan and 2 manufacturing companies in 2 other countries of Indonesia and Malaysia. Hino brand vehicles are produced at 2 factories in Japan and 10 manufacturing companies in 10 countries, including Indonesia and Thailand. For a listing of Toyota’s principal production facilities, see “Information on the Company — Property, Plants and Equipment.”

In promoting a sustainable growth strategy, establishing a system capable of providing optimal supply of products in the global market is integral to Toyota’s strategy.

In line with its basic policy of manufacturing in countries or regions where there is demand and where Toyota is truly competitive, Toyota will make efficient use of and maximize capacity utilization at its existing plants to respond to the expanding market and will continue to focus on making efficient capital investments as necessary. Furthermore, Toyota will continue to place top priority on safety and quality in strengthening true competitiveness with the aim of achieving sustainable growth.

In 2017, 75.9% of Toyota vehicles sold in overseas markets were manufactured in overseas plants by Toyota and its unconsolidated affiliated companies. In 2017, approximately 71.1% of Toyota vehicles sold in North America were produced in North America. Of the vehicles sold in Europe in 2017, approximately 81.5% were produced in Europe. In fiscal 2018, Toyota produced on a consolidated basis 4,286 thousand vehicles in Japan and 4,678 thousand vehicles overseas, compared to 4,109 thousand vehicles in Japan and 4,866 thousand vehicles overseas in fiscal 2017.

 

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The following table shows Toyota’s worldwide vehicle unit production by geographic market for the periods shown. These production figures do not include vehicles produced by Toyota’s unconsolidated affiliated companies. The sales unit information elsewhere in this annual report includes sales of vehicles produced by these affiliated companies. Vehicles produced by Daihatsu and Hino are included in the vehicle production figures set forth below.

 

     Year Ended March 31,  
     2014      2015      2016      2017      2018  

Units Produced

              

Japan

     4,344,892        4,124,593        3,980,576        4,109,038        4,285,844  

North America

     1,759,439        1,932,618        1,970,053        2,062,862        1,902,304  

Europe

     506,556        556,462        564,934        637,352        681,048  

Asia

     1,938,155        1,829,048        1,605,345        1,674,468        1,601,473  

Other*

     483,123        487,166        454,991        491,789        493,464  

Total

     9,032,165        8,929,887        8,575,899        8,975,509        8,964,133  

 

* “Other” consists of Central and South America, Oceania and Africa.

Toyota closely monitors its actual units of sale, market share and units of production data and uses this information to allocate resources to existing manufacturing facilities and to plan for future expansions.

See “— Capital Expenditures and Divestitures” for a description of Toyota’s recent investments in completed plant constructions and for a description of Toyota’s current investments in ongoing plant constructions.

The Toyota Production System

Toyota pioneered the internationally recognized production system known as the “Toyota Production System” (“TPS”). The TPS is based on Toyota’s own concepts of efficient production of only necessary and quality products and efficient cost reduction, and has the following two principal elements:

 

    Just-in-Time,” and

 

    Jidoka.”

Just-in-Time is an approach in which necessary parts and components are manufactured and delivered in just the right quantity in a timely manner just as they are needed. This allows Toyota to maintain low levels of inventory while maintaining operating efficiency.

Jidoka is a production concept which involves immediate stop of work when problems arise in the production line in order to stop the production of defective items from being passed on to subsequent stages of the process, and therefore making quality assurance an inherent part of the production process. To achieve this, Toyota’s equipment is designed to detect and highlight abnormalities and to stop whenever abnormalities occur. Toyota also authorizes its machine operators and other members of its production team to stop production whenever they note anything suspicious. This helps Toyota to build quality into the production process by avoiding defects and preventing the waste that would result from producing a series of defective items.

Toyota believes that the TPS allows it to achieve mass-production efficiencies even in high-mix, low-volume production. This belief gives Toyota the flexibility to respond to changing consumer demand without significantly increasing production costs. While the TPS remains the basis of Toyota’s automobile production, the system has been expanded for use in Toyota’s parts production, logistics and customer service activities as well.

 

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Through the TPS, issues are identified and analyzed at the actual site, the entire production process is made visible and production efficiency as well as product quality are improved through the application of measures to address the sources of problems. As one method to implement these measures, Toyota utilizes sophisticated information technologies to improve each step of its vehicle development process, from product planning to commencement of mass-production. These technologies are intended to enhance flexibility, simplification, quality, cost competitiveness and speed. Specifically, detailed virtual assembly and other simulations of manufacturing processes are conducted on computers for a new vehicle or new production equipment/systems before a prototype is made. An actual prototype is made only after defects and related issues have been identified and resolved by computer simulation, thereby minimizing the time required for rebuilding prototypes and significantly shortening the time required before starting mass production. Moreover, this system is used to prepare virtual factories and other visual aids in order to facilitate training and communication at overseas plants and enable the efficient transfer of necessary technology and skills.

In January 2018, Toyota established the TPS Group, and in order to stay true to itself, Toyota has gone back to its roots, positioning TPS as the bedrock of its management, and is moving forward with initiatives to ensure that TPS is passed on to the future as part of Toyota’s DNA. Specifically, Toyota will have the concepts of “Just-in-Time” and “jidoka,” which are the two main pillars of the TPS, spread within the entire company and have all divisions, including technical and administrative divisions, work to reduce lead time and ensure that abnormalities are made visible, through which Toyota will achieve results by both cost reduction through improved productivity as well as improved work quality.

Distribution

Toyota’s automotive sales distribution network is the largest in Japan. As of March 31, 2018, this network consisted of 280 dealers employing approximately 32 thousand sales personnel and operating approximately 4.7 thousand sales and service outlets. Toyota owns 15 of these dealers and the remainder is independent.

Toyota believes that this extensive sales network has been an important factor in its success in the Japanese market. A large number of the cars sold in Japan are purchased from salespersons who visit customers in their homes or offices. In recent years, however, the traditional method of sales through home visits is being replaced by showroom sales and the percentage of automobile purchases through showrooms has been gradually increasing. Toyota expects this trend to continue, and accordingly, is working to improve its sales activities such as customer reception and meticulous service at showrooms to increase customer satisfaction.

Sales of Toyota vehicles in Japan are conducted through four sales channels — “Toyota,” “Toyopet,” “Corolla” and “Netz.” In addition, Toyota introduced the Lexus brand to the Japanese market in August 2005, and currently distributes the Lexus brand vehicles through a network of 168 sales outlets in order to enhance its competitiveness in the domestic luxury automotive market. The following table provides information for each channel as of March 31, 2018.

 

    Dealers       

Channel

  Toyota
Owned
     Independent     Total     

Market Focus

Toyota

    4          45          49      Luxury channel for Toyota brand vehicles

Toyopet

    4          48          52      Leading channel for the medium market

Corolla

    4          70          74      Volume retail channel centering on compact models

Netz

    3          102          105      Sales channel targeting customers with new values for the 21st century
              

Brand

    Sales
Outlets
    

Market Focus

Lexus

 

    168      Premium brand

 

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Outside Japan, Toyota vehicles are sold through approximately 170 distributors in approximately 190 countries and regions. Through these distributors, Toyota maintains networks of dealers. The chart below shows the number of Toyota distributors as of March 31, 2018 by country and region:

 

Country/Region

   Number of Countries      Number of Distributors  

North America

     3        5  

Europe

     53        30  

China

     1        4  

Asia (excluding China)

     19        13  

Oceania

     17        15  

Middle East

     16        14  

Africa

     55        49  

Central and South America

     30        40  

Improving Efficiency

Toyota is working on the following to create a corporate structure allowing for efficient development, production and sales that can respond flexibly to changes in the external environment:

 

    working with suppliers as one team to dramatically increase the efficiency of development;

 

    creating a production structure that can better withstand fluctuations in demand and currency exchange rates; and

 

    strengthening sales capabilities in line with local conditions.

Toyota also plans to improve profitability and enhance operating efficiency by continuing to pursue aggressive cost reduction programs, including:

 

    improving product development and production efficiencies through the re-integration and improvement of vehicle platforms and power trains as well as through the development of electronic platforms which organize electronic devices of vehicles as a package and standardize electronic structure and infrastructure;

 

    reinforcing and promoting Ryohin-Renka Cost Innovation (“RR-CI”) activity, which aims for the elimination of waste in all processes from design to production while ensuring the reliability and safety of each part;

 

    applying advanced information technologies to improve efficiency throughout the product development and production processes;

 

    globally reinforcing the supply base under an open and fair purchasing policy;

 

    streamlining production systems; and

 

    improving the efficiency of domestic and international distribution.

Toyota is further improving production efficiency by installing more versatile equipment and systems, modifying vehicle body designs to allow for a greater variety of models on each production line and sharing more parts among vehicles, not simply among different models but also among different platforms.

In April 2012, Toyota announced a new development framework, the TNGA, which reconciles sweeping advances in product appeal with cost reductions. The new framework sets forth an architecture that incorporates not only the three fundamental vehicle functions of moving, turning and stopping, but also ergonomics such as driving position as well as freedom of design. Toyota plans to efficiently develop cars with high basic-performance attributes by developing parts and modules based on this architecture. The TNGA provides for

 

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handling multiple models simultaneously in grouped development projects that will increase the sharing of parts and core vehicle components. This sharing, carried out in cooperation with suppliers, will result in lowered costs, thereby allowing developmental manpower and funds to be reinvested in R&D to meet consumer preferences and R&D to meet regional needs, resulting in further product improvement.

By April 2013, Toyota established systems to rapidly promote the TNGA and carried out product development under this new way of doing business. As a result, Toyota realized high basic performance and marketability in the Prius that was introduced in Japan in December 2015. Toyota subsequently launched the all-new Camry in 2017. Toyota has rolled out, and plans to continue to roll out, the results of such development to other vehicles as well.

Realizing a Smart Mobility Society that expands through connected car technologies

Toyota is moving forward with initiatives striving to realize a smart mobility society, in which people can enjoy freedom of movement and feel at ease and excited, by connecting vehicles, people and communities with its connected car technologies in order to meet the needs of rapidly changing societies, including the falling birth rate and aging populations in developed nations, an increasingly diverse range of energy sources and the evolution of IoT, among others. In particular, Toyota aims to contribute to an affluent lifestyle that offers peace of mind by enhancing vehicle functionality that will increase the attractiveness of vehicles and the excitement of driving, enhancing transport systems that make being in cars more comfortable and more environmentally friendly, and realizing Smart Communities that aim for optimization of local energy use and establishment of a low-carbon emission transportation system.

Enhancing Vehicle Functionality — Information Service Functions

To Toyota, enhancing vehicle functionality means advancing information service functions that integrate vehicles with telecommunication systems, and driving assistance functions that use communication technologies and sensor technologies to create vehicles with intelligent features. Information service functions can improve convenience and enrich the driving experience through information communication technologies that add new functions that are connected to the basic vehicle functions of “running, turning and stopping.” Examples include the following:

 

    Toyota is advancing enhancement of car navigation systems, such as car parking maps that display detailed information inside car parks, as well as the VICS system (Vehicle Information and Communication System) that provides real-time road traffic information such as congestion, accidents, traffic restrictions and parking. Car navigation systems play an increasingly important role in providing drivers with various types of information on safety, smooth traveling, comfort and convenience.

 

    T-Connect/G-BOOK is the latest information network service that merges the latest network technologies and car multimedia a step ahead of the arrival of the ubiquitous network society. T-Connect/G-BOOK provides various types of information useful for driving, as well as safety and security services that detect unusual conditions in the vehicle, thereby supporting a lifestyle with one’s vehicles anytime and anywhere through a network. In 2005, Toyota started G-BOOK ALPHA and G-Link for Lexus, each with additional various features including traffic congestion forecast service. In 2007, Toyota launched G-BOOK mX, which in addition to the well-received conventional safety and security services of G-BOOK, introduced even more useful car navigation services such as “Map-on-Demand” — the world’s first technology for automatically updating map data — and “Probe Communication Traffic Information” that provides drivers with highly precise information on traffic congestion. In 2014, Toyota launched T-Connect, which in addition to conventional telematics services, provides new services and functions through the distribution of applications to on-board device, as well as destination and other information searches through the adoption of a voice recognition system.

 

   

HELPNET is an emergency dial system that, in the event of a traffic accident or medical emergency, transmits information required for emergency rescue, such as present-location data and vehicle details,

 

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either automatically or with the touch of a button. It immediately contacts police and fire departments through the HELPNET Operation Center. This system is integrated into T-Connect/G-BOOK and G-Link to improve the quality of services. HELPNET shortens the time taken to report following an emergency situation, which contributes to decreasing the number of traffic accident fatalities and reducing the level of impact, while at the same time aiming to prevent secondary disasters and ease traffic congestion.

In addition to the above, Toyota also operates a Japanese-language web portal for automobile information, GAZOO.com. The name “GAZOO” originates from the Japanese word gazo, meaning images. GAZOO was established as an Internet membership service linking Toyota, its national dealer network and GAZOO members, and has provided information on new and used Toyota vehicles and related services, as well as online shopping services. GAZOO later expanded to include information on other automakers, as well as a rich blog feature as a social networking portal site on automobiles. In addition, GAZOO has exhanced its contents line-up through which Toyota aims to expand the fan base of car enthusiasts by promoting activities where customers can experience in real life the enjoyment that cars offer, such as TOYOTA GAZOO Racing. GAZOO is currently in charge of all Toyota motor sports activities (such as WRC, WEC and SuperGT). Toyota utilized its GAZOO technology that links the customers, distributors and Toyota to further expand its automobile information service by launching the G-BOOK telematics service in Japan in fall 2002 and G-Link, which is a service exclusive to Lexus, in August 2005. Toyota also offers a theft detection system, vehicle tracking service and operator support service as standard services to enhance services aiming to provide safety, security and comfort for T-Connect/G-BOOK and G-Link users in their lifestyle using vehicles. With G-BOOK mX announced in April 2007, Toyota started offering services that allow drivers to use more convenient navigation systems such as “Map-on-Demand” — the world’s first technology for automatically updating map data. In addition, Toyota has further strengthened its linkage between GAZOO and G-BOOK and has, for example, allowed map information searched on a blog on GAZOO.com to be used on G-BOOK, further maturing as a comprehensive telematics service. In Japan, Toyota is seeking to promote the use of the T-Connect/G-BOOK by equipping all Lexus models and certain Crown models with the T-Connect/G-BOOK as a standard feature. Toyota has also licensed its T-Connect/G-BOOK technology to certain other competitors in Japan. Toyota is applying the technology and experience which it has accumulated in Japan to regions outside Japan; G-BOOK services were introduced in China in March 2009, and unique telematics services in the United States were launched in August 2009. In addition, Toyota began offering telematics services for smartphones in December 2010 in Japan, and began to offer the same service in Thailand in March 2012 and the Middle East from January 2014 (UAE, Qatar and Lebanon in January 2014, Saudi Arabia in August 2014, Bahrain in October 2014 and Kuwait in January 2015).

In addition, in March 2004, Toyota launched its CRM (Customer Relationship Management) system called e-CRB (evolutionary Customer Relationship Building) in Thailand. e-CRB builds on a technology cultivated through the development of Gazoo and G-BOOK and offers its customers a variety of services such as providing information on new vehicles, accepting requests for brochures and estimates and notifying customers when it is time for maintenance by keeping track of the vehicle’s maintenance history and mileage. In addition, e-CRB offers an advanced operation system that can be utilized comprehensively at dealers including new and used cars and services. Toyota is promoting e-CRB in countries such as China, Thailand, Australia, India and Brazil where steady progress has been made as the service-in ratio has increased. In 2013, Toyota introduced the next-generation e-CRB that adopts tablet terminals (portable information processing terminals) in China. These tablet terminals are supporting the improvement of customer satisfaction at points of sale and in after-sale service.

Toyota also introduced a system called Sales Logistics Integrated Management (“SLIM”) in Guangzhou, China and India. By utilizing real sales information and linking with production and distribution, Toyota is able to realize the Just-in-Time production system of producing and delivering only the number of vehicles that have been sold. SLIM has been recognized to significantly increase the freshness of inventory and improve cash flow.

In September 2010, Toyota announced its smart-grid initiatives, which are intended to demonstrate efficient energy use toward the realization of a low-carbon and energy-saving society. By utilizing technology cultivated

 

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through the Internet and telematics services mentioned above, Toyota developed the Toyota Smart Center (“TSC”) that optimally controls electricity and links EVs and PHVs with homes, and conducted a demonstration project in Rokkasho Village in Aomori aimed at reducing overall CO2 emissions and users’ electricity costs. In addition, in order to develop a global platform of the TSC, Toyota announced a partnership with Microsoft Corp. in April 2011 and a partnership with Salesforce.com in May 2011. Toyota plans to utilize the cloud technology of these two companies in its Internet and telematics services to build a framework for TSC’s global implementation. In January 2012, Toyota began eConnect and “TOYOTA friend” services for PHV. In May 2013, Toyota utilized the latest version of Microsoft’s SharePoint to comprehensively redesign GAZOO, the automobile information portal site. Toyota aims to offer new services, achieve better vehicle quality and enhance product attractiveness as well as contribute further to society by utilizing the vehicle information, road conditions and other parameters collected via telematics services and stored at the TSC. With regard to contribution to society, Toyota began offering the Big Data Traffic Information Service in June 2013, through which traffic information, statistics and other related information are provided to local governments, universities and businesses to support traffic flow improvement and assist disaster prevention measures. In December 2016, Toyota launched the TC Smartphone Navigation free-of-charge to users, including those other than Toyota users, to provide readily usable route history maps. Toyota plans to continue to work with new information technologies and the IT industry to establish a framework for TSC’s global implementation and to realize a mobility society of the future.

In 2016, Toyota has been working actively on “connected car technology” and alliances with other companies for effective vehicle data utilization to “make ever-better cars” and for safer and securer “connected” service. In January 2016, Toyota announced a “connected vehicle framework” to increase installation of a Data Communication Module (DCM) into a broader range of its vehicles starting in the United States from 2017. In April 2016, Toyota established a new company, “Toyota Connected, Inc.,” in the United States to consolidate and analyze information collected from vehicles and to develop new products, and thereby promoting “making ever-better cars” through utilizing big data. In addition, Toyota is collaborating with insurance companies on developing insurance services as well as tying up with a sharing service company, thereby actively advancing research for new services and the realization of a mobility society utilizing big data.

As a further engagement in the insurance industry, Toyota established Toyota Insurance Management Solutions USA, LLC (“TIMS”), a new U.S. telematics car insurance services company, to promote analysis of big data and development of algorithms. TIMS provides telematics insurance services best suited to Toyota’s customers by consolidating Toyota’s data, financing and insurance knowhow.

In November 2016, based on the proliferation and popularity of mobility services such as car-sharing, Toyota started to establish the Mobility Services Platform (“MSPF”), which has various functions to support mobility services, leveraging the TSC, the Toyota Big Data Center, and financial services. MSPF is a platform that aggregates and covers individual business functions, such as vehicle management systems and leasing programs, that Toyota developed and offered to mobility service providers such as ridesharing operators when working together with them. As one example of the functions that MSPF offers, to enhance a MSPF-based car-sharing, Toyota developed the smart key box (“SKB”) that enables users to lock and unlock doors and to start the engine with their smartphone — thus providing a safer and more secure way of lending and renting cars. Using the MSPF and SKB, Toyota started a pilot program in collaboration with Getaround, a venture company providing car-sharing services targeted at individuals in the United States, in March 2017 in San Francisco, California. In addition, Toyota is working with Toyota Financial Services Corporation (“TFSC”) to make vehicles with expired leases available on Getaround, in order to effectively utilize TFSC’s assets. Toyota is also examining the viability of car sharing using SKBs. Furthermore, Servco Pacific Inc., a Toyota dealer in Hawaii, has begun an employee-only car-sharing services program.

Toyota and Uber Technologies, Inc. have entered into a memorandum of understanding to explore collaboration with respect to ridesharing. As part of the partnership, the companies created new leasing options in which car purchasers can lease vehicles with connected terminals from Toyota Financial Services and cover their

 

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payments through earnings generated as Uber drivers. In Southeast Asia, Toyota started to collaborate with Grab, Inc. (“Grab”) in August 2017, and commenced a pilot program in Singapore to collect driving data generated from vehicles owned by Grab. In June 2018, Toyota further expanded the collaboration and invested in Grab. Toyota is moving forward with providing various connected services that use MSPF to Grab, and will consider future collaboration with Grab in the area of Mobility as a Service (“MaaS”).

Toyota and Japan Federation of Hire-Taxi Associations have entered into a memorandum of understanding to explore areas for collaboration, so as to develop and introduce the “Japanese taxi of the future.” Through use of taxis to collect and analyze of information concerning the road traffic environment, and applying those results to the development of the Mobility Teammate Concept, which embodies Toyota’s vision of automated driving, Toyota and the Japan Federation of Hire-Taxi Associations will continue to be important partners in helping to develop Japanese taxis into the “world’s safest, most pleasant, world-class public transportation service” and to strengthen the Japanese transportation infrastructure.

With the background of expanding mobility services and the tightening of data regulations in Europe, Toyota has established Toyota Connected Europe, and plans to utilize MSPF in Europe as well to promote car-sharing businesses in coordination with local dealers.

In January 2018, Toyota announced the e-Palette Concept, a next generation EV designed exclusively for MaaS, leveraging electrification, connected vehicles and automated driving technologies. The e-Palette Concept can be adapted for various services, such as passenger transportation, logistics services or retail services, and is the embodiment of Toyota’s concept of “new mobility” that supports the lifestyles of its customers. Amazon.com, Inc., DiDi Chuxing, Pizza Hut, LLC, Uber Technologies, Inc. and Mazda Motor Corporation are collaborating with Toyota as initial launch partners in order to explore vehicle specifications that are even more practical and to ensure the realization of a new mobility service.

Enhancing Vehicle Functionality — Driving Assistance Functions

Toyota’s driving assistance functions offer functions that assist drivers with an aim to lessen the burden of driving, enhance safety and provide to everyone the pleasure of driving. Toyota has commercialized enhancements to various functions that assist the driver in sensing external information, avoiding danger and making appropriate maneuvers. Examples of driving assistance functions include the following:

 

    VDIM (Vehicle Dynamics Integrated Management) is a system that constantly monitors the driver’s operations and the vehicle’s situation and centrally manages the engine, steering mechanisms and brakes. By stabilizing the vehicle before the driver loses control of the vehicle, VDIM achieves a high level of ‘active safety’ and improves driving performance, consisting namely of running, turning and stopping.

 

    “Pre-collision System” is a system that perceives possibilities of a crash with obstacles, cars in front or crossing pedestrians through a sensor installed in a vehicle. If a collision seems likely, it proceeds to activate warnings as well as brake assistance, which aids the driver’s operation of the brake, or the automatic braking system, which aids in avoiding the collision altogether or mitigates any damage.

 

    “Radar Cruise Control (with all-speed tracking function)” allows the vehicle to keep a constant distance between itself and the preceding vehicle within a speed range from zero to a preset speed, automatically slowing down and stopping if necessary to avoid collision. When the car in front speeds up, it allows the driver to accelerate.

 

    “Lane Departure Alert” is a system that uses a camera to detect white or yellow lane markers while driving. The system warns the driver with a buzzer and displays if it detects possible deviation in order to assist in avoiding a collision accident resulting from deviation. In addition, “Lane Keeping Assist System,” a system that assists the driver’s operation of the steering wheel with electric power steering in order to help keep the vehicle traveling between lane markers, has been developed.

 

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    “Automatic High Beam” detects the headlights of oncoming vehicles or taillights of vehicles running in front and adjusts the headlight range, automatically switching to low beam or high beam, in order to avoid dazzling the visions of the drivers with bright lights, as well as to secure the drivers’ forward visions at night.

 

    “Blind Spot Monitor” is a system which aims to reduce accidents by alerting the driver to other vehicles in the driver’s blind spot diagonally behind the driver’s seat with sound and visual display in the side mirrors while changing lanes.

From these driving assistance functions, in 2015 Toyota commercialized the Toyota Safety Sense, a collision avoidance support package that includes the Pre-collision System, the Lane Departure Alert and the Automatic High Beam. By the end of 2017, Toyota had completed installation of this package on nearly all models sold in Japan, the United States and Europe at an affordable price aimed at widespread adaption.

Enhancing Transport Systems

Enhancing transport systems requires taking a general approach that addresses various factors across a wide scope that are pertinent not only to vehicles but also roads, people and public transport systems in order to ensure smooth and efficient movement of people and vehicles and to build a safe transportation environment. In addition to VICS and ETC (Electronic Toll Collection System), which are already standard in Japan, the “Cooperative ITS,” which combines cutting edge IT and vehicle technology, is in development and has begun to be partially implemented.

 

    The operation of “ETC2.0” commenced in 2009 and corresponding products are available for purchase. Mainly for use on highways, this service provides drivers with information related to road traffic and safe driving that is transmitted from road infrastructures to car navigation systems via video and voice.

 

    In the summer of 2011, Toyota introduced products corresponding to the driving safety support system, “DSSS,” which the National Police Agency has started operating. Mainly for use on general roads, this system supports safe driving, including by preventing the driver from overlooking red lights, by transmitting traffic control information (such as traffic lights and signs) and peripheral information from road infrastructures to automobiles.

 

    Aiming at further reducing accidents, “ITS Connect,” a driving safety support system that uses a dedicated ITS frequency of 760 MHz, was introduced in the fall of 2015. Through direct and continuous exchange of information between vehicles and the road and among vehicles, this system aims to mitigate accidents near intersections, which have been difficult to mitigate to date. The system also includes Communicating Radar Cruise Control features, which supports smooth acceleration and deceleration when following behind another vehicle. In addition, from August 2017, Toyota and Mazda started a partnership in the field of advanced safety technologies and a collaboration in Toyota’s vehicle-to-vehicle and vehicle-to-infrastructure technologies, and aims at the realization of automated driving in which all drivers can move safely, smoothly and freely by harmonizing ITS technology and vehicle control technology.

Toyota is committed to developing new ITS products. Toyota believes that intelligent transport systems will become an integral part of its overall automotive operations and enhance the competitiveness of its vehicles. As familiarity with and demand for ITS products grow, Toyota expects an increasing number of ITS products to become commercially available and achieve greater acceptance each year.

Smart Communities

In April 2010, Toyota City was selected as a “Model Region for Next-Generation Energy Systems” by the Ministry of Economy, Trade and Industry. Toyota since joined the “Toyota City Low-Carbon Society Verification Council” (established in August 2010), and carried out experiments relating to the “Optimization of

 

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Local Energy Use in Households and Destinations (commercial and public facilities)” and “Establishment of a System for Low-Carbon Emission Transportation” until March 2015. As a way of building on the results of such experiments, Toyota launched an experimental ultra-compact electric vehicle sharing program in Tokyo from April 2015. It also launched an experimental ultra-compact electric vehicle program for tourism using a Toyota developed car-sharing system in Okinawa from January 2016. An experimental car-sharing program was also implemented in Okayama City from October through December 2016, and from October 2017 through January 2018. Furthermore, in Toyota City and Okinawa, these experimental programs were commercialized, and management was transferred to local companies and organizations in April 2017.

Research and Development of, and Collaboration Regarding, Connected Platforms

With respect to research and development of platform technologies to make connected services a reality in the future, Toyota is moving forward with the following research and development activities related to in-vehicle system technologies as well as telecommunication and data processing system technologies by means of both open collaboration led by a nonprofit organization as well as collaboration with certain other companies.

For in-vehicle system technologies, a collaborative open source project is underway to develop an operating system for in-vehicle multimedia telematics systems based on the open source software Linux, but incorporating in-vehicle requirements. Named Automotive Grade Linux, the operating system is being developed in collaboration with other auto companies as well as companies that design a manufacture the hardware and software for devices that make up in-vehicle systems, under the initiative of Linux Foundation, an incorporated nonprofit organization. With respect to functions that link in-vehicle multimedia system to smartphones, Toyota established a nonprofit organization called Smart Device Link Consortium in November 2016, jointly with Ford and certain other auto companies, to develop specifications for in-vehicle multimedia systems and their related platform software.

For telecommunication and server system technologies, Toyota is developing a “global mobile communications platform,” which allows for globally integrated management of the telecommunication environment, in collaboration with KDDI Corporation. Toyota is also conducting research and development jointly with the NTT Group in the areas of data processing system technologies and mobile communications technologies that will enable the processing of big data obtained from vehicles in the future.

Financial Services

Toyota’s financial services include loan programs and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value-added service. In July 2000, Toyota established a wholly-owned subsidiary, TFSC, to oversee the management of Toyota’s finance companies worldwide, through which Toyota aims to strengthen the overall competitiveness of its financial business, improve risk management and streamline decision-making processes. Toyota has expanded its network of financial services, in accordance with its strategy of developing auto-related financing businesses in significant markets. Accordingly, Toyota currently operates financial services companies in 37 countries and regions, which support its automotive operations globally.

Toyota’s revenues from its financial services operations were ¥2,017.0 billion in fiscal 2018, ¥1,823.6 billion in fiscal 2017 and ¥1,896.2 billion in fiscal 2016. In fiscal 2017, although uncertainties related to political trends emerged primarily in Europe and North America, Toyota’s business remained solid in areas where Toyota’s financial services business is operated. In fiscal 2018, weak used vehicle prices in the United States resulted in increased disposal losses for vehicles with expired leases as well as losses on depreciation compared with the past. Interest rates also increased in the United States and some emerging countries. This market environment exerted downward pressure on revenue in the financing business. Under such circumstances, as a result of Toyota’s continued collaboration with dealers in various countries and regions and efforts to expand products and services that meet customer needs, Toyota’s share of financing provided for new car sales of Toyota

 

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and Lexus vehicles in regions where TFSC operates remained at a high level of approximately 35% and the balance of loan receivables continued to steadily increase globally, with the exception of some countries. Meanwhile, Toyota is making efforts to provide both its customers and dealers with stable financial services by diversifying its funding methods using such means as commercial paper, corporate bonds, bank borrowings, ABCP (Asset Backed Commercial Paper) and ABS (Asset Backed Securities). Toyota continued to perform detailed credit appraisals and serve customers by monitoring bad debt and loan payment extensions, and the percentage of credit losses remained low, at 0.30% and 0.37% in fiscal years 2018 and 2017, respectively. Toyota continues to work towards improving its risk management measures in connection with credit and residual value risks.

Toyota Motor Credit Corporation is Toyota’s principal financial services subsidiary in the United States. Toyota also provides financial services in 36 other countries and regions through various financial services subsidiaries, including:

 

    Toyota Finance Corporation in Japan;

 

    Toyota Credit Canada Inc. in Canada;

 

    Toyota Finance Australia Ltd. in Australia;

 

    Toyota Kreditbank GmbH in Germany;

 

    Toyota Financial Services (UK) PLC in the United Kingdom;

 

    Toyota Leasing (Thailand) Co., Ltd. in Thailand; and

 

    Toyota Motor Finance (China) Co., Ltd. in China.

Toyota Motor Credit Corporation provides a wide range of financial services, including retail financing, retail leasing, wholesale financing and insurance. Toyota Finance Corporation also provides a range of financial services, including retail financing, retail leasing and credit cards. Toyota’s other finance subsidiaries provide services including retail financing, retail leasing and wholesale financing.

In June 2017, Toyota established Toyota Financial Services (Ireland) DAC, as a subsidiary of Toyota Financial Services (UK) PLC, and started its operation in November 2017. This subsidiary is a joint venture with Killeen Group Holdings, the parent company of Toyota’s local distributor.

Net finance receivables for all of Toyota’s dealer and customer financing operations were ¥15,829.9 billion as of March 31, 2018, representing an increase of 4.1% as compared to the previous year. The majority of Toyota’s financial services are provided in North America. As of March 31, 2018, 55.7% of Toyota’s finance receivables were derived from financing operations in North America, 12.3% from Asia, 12.1% from Europe, 8.2% from Japan and 11.7% from other areas.

Approximately 50% of Toyota’s unit sales in the United States during fiscal 2018 included a finance or lease arrangement with Toyota. Because the majority of Toyota’s financial services operations are related to the sale of Toyota vehicles, a decrease in vehicle unit sales may lead to a contraction of Toyota’s financial services operations.

The worldwide financial services market is highly competitive. Toyota’s competitors in retail financing and retail leasing include commercial banks, credit unions and other finance companies. Commercial banks and other automobile finance subsidiary companies serving their parent automobile companies are competitors of Toyota’s wholesale financing activities. Competitors in Toyota’s insurance operations are primarily national and regional insurance companies.

For information on Toyota’s finance receivables and operating leases, please see “Operating and Financial Review and Prospects — Operating Results — Financial Services Operations.”

 

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Retail Financing

Toyota’s finance subsidiaries acquire new and used vehicle installment contracts primarily from Toyota dealers. Installment contracts acquired must first meet specified credit standards. Thereafter, the finance company retains responsibility for installment payment collections and administration. Toyota’s finance subsidiaries acquire security interests in the vehicles financed and can generally repossess vehicles if customers fail to meet their contractual obligations. Almost all retail financings are non-recourse, which relieves the dealers from financial responsibility in the event of repossession. In most cases, Toyota’s finance subsidiaries require their retail financing customers to carry automobile insurance on financed vehicles covering the interests of both the finance company and the customer.

Toyota has historically sponsored, and continues to sponsor, special lease and retail programs by subsidizing below market lease and retail contract rates.

Retail Leasing

In the area of retail leasing, Toyota’s finance subsidiaries acquire new vehicle lease contracts originated primarily through Toyota dealers. Lease contracts acquired must first meet specified credit standards after which the finance company assumes ownership of the leased vehicle. The finance company is generally permitted to take possession of the vehicle upon a default by the lessee. Toyota’s finance subsidiaries are responsible for contract collection and administration during the lease period. The residual value is normally estimated at the time the vehicle is first leased. Vehicles returned to the finance subsidiaries at the end of their leases are sold by auction. For example, in the United States, vehicles are sold through a network of auction sites as well as through the Internet. In most cases, Toyota’s finance subsidiaries require lessees to carry automobile insurance on leased vehicles covering the interests of both the finance company and the lessee.

Wholesale Financing

Toyota’s finance subsidiaries also provide wholesale financing primarily to qualified Toyota dealers to finance inventories of new Toyota vehicles and used vehicles of Toyota and others. The finance companies acquire security interests in vehicles financed at wholesale. In cases where additional security interests would be required, the finance companies take dealership assets or personal assets, or both, as additional security. If a dealer defaults, the finance companies have the right to liquidate any assets acquired and seek legal remedies.

Toyota’s finance subsidiaries also make term loans to dealers for business acquisitions, facilities refurbishment, real estate purchases and working capital requirements. These loans are typically secured with liens on real estate, other dealership assets and/or personal assets of the dealers.

Insurance

Toyota provides insurance services in the United States through Toyota Motor Credit Corporation’s wholly-owned subsidiary, Toyota Motor Insurance Services, Inc. (“TMIS”) and its wholly-owned insurance company subsidiaries. Their principal activities include marketing, underwriting and claims administration. TMIS also provides coverage related to vehicle service agreements through Toyota dealers to customers. In addition, TMIS also provides coverage and related administrative services to affiliated companies of Toyota Motor Credit Corporation. Toyota dealers in Japan and in other countries and regions also engage in vehicle insurance sales.

Other Financial Services

Toyota Finance Corporation launched its credit card business in April 2001 and began issuing Lexus credit cards in 2005 when the Lexus brand was introduced in Japan. As of March 31, 2018, Toyota Finance Corporation has 15.3 million card holders (including Lexus credit card holders).

 

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All Other Operations

In addition to its automotive operations and financial services operations, Toyota is involved in a number of other non-automotive business activities. Net sales for these activities totaled ¥1,646.1 billion in fiscal 2018, ¥1,321.0 billion in fiscal 2017 and ¥1,177.3 billion in fiscal 2016.

Housing

Toyota established its subsidiary Toyota Housing Corporation in April 2003 and has transferred to it product planning and sales operations related to the manufacture and sale of housing. Furthermore, in order to quickly and accurately grasp clients’ needs and to plan, develop and sell products on a timely basis, in April 2008, Toyota transferred the product development operation to Toyota Housing Corporation. In October 2010, Toyota spun-off its housing operations (project planning, technology development and manufacturing) through a statutory demerger and integrated them into Toyota Housing Corporation. Toyota believes that in the vastly changing housing market environment, the integration of the development, manufacture and sales functions will expedite decision making and lead to flexible business operations that will enable Toyota to better respond to the needs of even more customers. In March 2005, Toyota, together with institutional investors, agreed to jointly invest in Misawa Home Holdings, Inc. (“Misawa”; renamed Misawa Homes Co., Ltd.) pursuant to its request for assistance in its rehabilitation. In April 2010, determining that a stronger collaboration with Misawa would be desirable in order to achieve further growth in the difficult operating environment of the housing industry, Toyota Housing Corporation agreed to purchase Misawa shares from an institutional investor. In addition, Toyota transferred ownership of Misawa to Toyota Housing Corporation in October 2010. Through these activities, Toyota has strengthened the housing business of both companies.

Information Technology

See “— Enhancing Vehicle Functionality and Intelligent Transport Systems” for a description of Toyota’s information technology.

Governmental Regulation, Environmental and Safety Standards

Toyota is subject to laws in various jurisdictions regulating the levels of pollutants generated by its plants. In addition, Toyota is subject to regulations relating to the emission levels, fuel economy, noise and safety of its products. Toyota has incurred significant costs in complying with these laws and regulations and expects to incur significant compliance costs in the future. Toyota’s management views leadership in environmental protection as an important competitive factor in the marketplace.

Vehicle Emissions

Japanese Standards

The Air Pollution Control Act of Japan and the Road Transport Vehicle Act and the Act Concerning Special Measures for Total Emission Reduction of Nitrogen Oxides and Particulate Matter from Automobiles in Specified Areas regulate vehicle emissions in Japan. In addition, both the Noise Regulation Act and the Road Transport Vehicle Act provide for noise reduction standards on automobiles in Japan. Toyota’s vehicles manufactured for sale in Japan comply with all Japanese exhaust emission and noise level standards.

U.S. Federal Standards

The federal Clean Air Act directs the Environmental Protection Agency (“EPA”) to establish and enforce air quality standards, including emission control standards on passenger vehicles, light-duty trucks and heavy-duty vehicles. Manufacturers are not permitted to sell vehicles in the United States that do not meet the standards. In February 2000, the EPA adopted more stringent vehicle emission and fuel economy standards applicable to

 

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passenger vehicles and light-duty trucks produced in model years 2004 and beyond. In April 2007, EPA regulations that further restricted emissions from passenger vehicles and light-duty trucks operating at cold temperatures became effective. These emission standards were phased in between 2010 and 2013. Similar standards that further restricted emissions from heavy-duty vehicles operating at cold temperatures were phased in from 2012 to 2015. In March 2014, the EPA finalized new “Tier 3” tailpipe emission and evaporative emission standards for passenger vehicles, light-duty trucks, medium-duty passenger vehicles and some heavy-duty vehicles. Under the new rule, tailpipe emission standards for volatile organic compounds, nitrogen oxides, and particulate matter, as well as standards for evaporative emissions, will become increasingly stringent in phases from 2017 to 2025, bringing the federal emission standards in line with California’s emission standards. The harmonization of the federal and California emission standards is expected to lead to reductions in the burden on development, such as a reduction in the number of tests required for certification and standardization of emission reduction systems. The new Tier 3 rule also required reductions in gasoline’s sulfur content beginning in 2017.

In April 2007, the U.S. Supreme Court ruled that the EPA has the authority to regulate automobile emissions of greenhouse gases. In response to this ruling, on April 1, 2010 the EPA and the federal National Highway Traffic Safety Administration (“NHTSA”) issued a joint final rule to reduce the emission of greenhouse gases from passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2012 through 2016. These vehicles were required to meet an estimated combined average emissions level of 250 grams of carbon dioxide per mile, equivalent to 35.5 miles per gallon if the requirements were met through improvements in fuel economy standards. The NHTSA also set Corporate Average Fuel Economy (“CAFE”) standards for passenger vehicles and light-duty trucks that required manufacturers of those vehicles to meet an estimated combined average fuel economy level of 34.1 miles per gallon in model year 2016.

On August 28, 2012, the EPA and the NHTSA jointly issued the final rule to further reduce greenhouse gas emissions and improve fuel economy for passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2017 through 2025. In the final rule, these vehicles are required to meet an estimated combined average emission level of 163 grams of carbon dioxide per mile in model year 2025, equivalent to 54.5 miles per gallon if these requirements were met through improvements in fuel economy standards. The NHTSA also issued CAFE standards for passenger vehicles and light-duty trucks that would require manufacturers to meet an estimated combined average fuel economy level of 49.6 miles per gallon in model year 2025.

On January 12, 2017, the EPA, as part of a Midterm Evaluation of the rule, issued a final determination to maintain the final rule for model years 2022 through 2025. On March 13, 2017, however, the newly-appointed Administrator of the EPA and the newly-appointed Secretary of the Department of Transportation issued a notice that they were reconsidering the final determination.

The EPA announced that it and the NHTSA would issue a “new” final determination by April 1, 2018. On April 2, 2018, the EPA announced that the greenhouse gas emission standards for model years 2022 through 2025 would be repealed and replaced with new, presumably less-stringent, standards and that the EPA and NHTSA would jointly commence drafting a new rule that would set new and presumably less stringent CAFÉ standards for these model years. A draft of the rule setting forth new emission standards is expected to be published in 2018 and, after going through the rule-making process, including the solicitation and review of public comments, the rule could take effect as early as January 2019. On May 1, 2018, however, California, along with 16 other states and the District of Columbia filed suit in the U.S. Circuit Court of Appeals for the District of Columbia to oppose the EPA and NHTSA’s decision to repeal and replace the greenhouse gas emission standards.

In addition, in July 2015, the EPA adopted final rules to limit, in relation to greenhouse gas emissions, the use of various hydroflourocarbons (“HFCs”) and HFC-containing refrigerant blends used in motor vehicle air conditioning systems for new vehicles, among other applications. Toyota purchases air conditioning systems from third parties for use in its vehicles. The final rules list HFC-134a, the most widely-used refrigerant in light-duty vehicles worldwide, as unacceptable for use in motor vehicle air conditioning systems in new light-duty

 

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vehicles beginning in model year 2021. The final rules also list additional refrigerant blends as unacceptable for use in new light-duty vehicles beginning in model year 2017. Feasible alternatives to these refrigerants that will be prohibited by the rules may be costly or present other risks, such as flammability or other safety concerns.

The EPA has been granted the authority to set fuel standards in connection with the regulation of automobile emissions. In October 2010, the EPA approved the sale and use of fuel with a 15% ethanol blend (“E15”) for model years 2007 and later passenger vehicles and light-duty trucks. The use of E15 is not permitted for engines used in lawnmowers, small generators, motorbikes, boats and other vehicles and equipment. Subsequently, in February 2011, the EPA approved the use of E15 for certain 2001 model year or newer vehicles, such as light-duty passenger vehicles and small trucks. However, E15 is prohibited for use in other 2000 model year or older vehicles and general purpose engines. As a result, the EPA promulgated regulations in July 2011, effective August 2011, requiring businesses that sell E15 to put a warning label regarding E15 on gasoline fuel dispensers.

On January 12, 2017, pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, the EPA announced changes to penalties for violations on exhaust gas and greenhouse gas emissions.

California Standards

Under the federal Clean Air Act, the State of California is permitted to establish its own vehicle emission control standards if it receives a waiver from the EPA. As a result, the California Air Resources Board (“CARB”) established the Low Emission Vehicle Program and set emission standards for certain regulated pollutants that were phased in beginning in the 2004 model year. Under these standards, most light-duty trucks and passenger vehicles are required to meet the same emission standards, which were stricter than the federal standards. As part of the original Low Emission Vehicle Program, the CARB also required that a specified percentage of a manufacturer’s passenger vehicles and light-duty trucks sold in California for all model years 1998 and after be “zero-emission vehicles” (vehicles producing no emissions of regulated pollutants). This zero-emission vehicles requirement also permitted certain advanced technology vehicles such as PHVs, and alternative fuel vehicles that meet “partial zero-emission vehicles requirements” to be granted partial qualification as EVs or FCVs. The current zero-emission regulations mandate substantial annual increases in the production and sale of EVs, FCVs and PHVs such that, by 2025, the state of California has estimated that approximately 15% of the new vehicles sold in the state would be either zero-emission vehicles or partial zero-emission vehicles. Toyota’s MIRAI qualifies as a zero-emission vehicle. The current Prius PHV qualifies as a partial zero-emission vehicle. Toyota intends to continue to develop additional advanced technologies and alternative fuel technologies that will allow other vehicles to qualify as zero-emission vehicles or partial-zero-emission vehicles.

In January 2012, the CARB adopted the Advanced Clean Cars (“ACC”) program. The ACC program includes new Low-Emission Vehicle regulations that reduce smog-causing pollutants (including nitrogen oxides and particulate matter) and greenhouse gas emissions from cars and light-duty trucks for model years 2015 to 2025, and more stringent zero-emission vehicle regulations which will require increased production of zero-emission vehicles and partial zero-emission vehicles for model years 2018 to 2025. The ACC program also lowers allowable smog-forming particulate emissions to 1 mg/mile or lower, to be phased in beginning with model year 2015.

In February 2010, the CARB had enacted a “deemed to comply” rule that provided that compliance with federal greenhouse gas emission standards for model years 2012 through 2016 and 2017 through 2025 would also satisfy California’s greenhouse gas emissions standards. However on March 14, 2017, in reaction to the EPA Administrator’s and the Department of Transportation Secretary’s decision to reconsider the EPA’s prior final determination to maintain the final rule for greenhouse gas emissions for model years 2022 through 2025, California petitioned the U.S. Court of Appeals for the District of Columbia to protect its interests in the final rule. Moreover, in a March 24, 2017 ACC Midterm Review, the CARB affirmed the ACC program’s requirements, and suggested that its decision to follow the federal final rule might change if the federal standards “were substantially changed.”

 

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On April 2, 2018, upon the EPA and NHTSA’s announcement that it would repeal and replace the greenhouse gas emission standards for model years 2022 through 2025, the CARB stated that, regardless of this federal action, it would not change California’s more stringent standards. On May 1, 2018, California and 16 other states filed suit in the U.S. Circuit Court of Appeals for the District of Columbia to oppose the EPA and NHTSA’s decision to repeal and replace the greenhouse gas emission standards.

Other States’ Standards

The states of New York, Massachusetts, Connecticut, Maine, Maryland, New Jersey, Oregon, Rhode Island and Vermont have adopted regulations substantially similar to California’s zero-emission vehicles requirement. These states, along with Delaware, New Mexico, Pennsylvania, and Washington, have also adopted regulations substantially similar to California’s low emission vehicle and greenhouse gas emission regulations.

Canadian Standards

Canada has established vehicle emission standards equivalent to the federal standards in the United States, including the heightened requirements that became applicable to passenger vehicles and light-duty trucks in model years 2004 and beyond. In addition, in response to the strengthening of the federal greenhouse gas emission standards in the United States applicable to model years 2017 to 2025, Canada finalized equivalent standards in October 2014. Furthermore, certain Canadian provinces are currently considering enacting their own regulations on vehicle emissions of greenhouse gases. On January 11, 2018, the Ministry of Sustainable Development, Environment and the Fight against Climate Change of the Province of Quebec issued regulations on zero-emission vehicles including EVs, FCVs and PHVs, among others. Canada also adopted a more stringent fuel rule, which is based on the fuel rule in the United States, that reduces refineries’ annual average sulfur concentration of gasoline to 10 mg/kg from 2017 with a new addition of credit system to secure compliance.

European Standards

In 2007, the European Parliament adopted more stringent emission standards for passenger vehicles and light commercial vehicles. The effective dates for phasing in these stricter standards for passenger vehicles were September 2009 for Euro 5 and September 2014 for Euro 6. For light commercial vehicles, the effective dates are September 2010 for Euro 5 and September 2015 for Euro 6.

Euro 5 provides for lower emission levels for gasoline and diesel powered vehicles and also extends the manufacturers’ responsibility for emission performance to total vehicle miles of 160 thousand kilometers. The primary focus of Euro 6 is to limit further emissions of diesel powered vehicles and bring them down to a level equivalent to gasoline powered vehicles. In addition, Euro 6 is being implemented in two stages, and beginning with the second stage (September 2017 for passenger vehicles and September 2018 for commercial vehicles), the EU is implementing the Real Driving Emission (“RDE”) regulations, which requires manufactures to conduct on-road emissions tests using portable emissions testers. During the initial phase, which started in January 2016, the RDE tests were used for monitoring purposes. Beginning in September 2017, manufacturers have been required to reduce the divergence between the regulatory limit tested in laboratory conditions and the values of RDE tests. The EU has also decided to implement the Worldwide harmonized Light vehicles Test Procedure (WLTP), which were introduced on September 1, 2017 and will be phased in for all new cars between 2018 and 2019.

Chinese Standards

Emissions regulations are being implemented throughout China pursuant to the Chinese National Standards (GB) of the Ministry of Environmental Protection of the People’s Republic of China, and the manufacture and sale of models not meeting these regulations are prohibited.

 

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For passenger vehicles, pursuant to GB18352.3-2005, Level 3 Emissions Regulations (China 3) (corresponding to Euro 3 standards) apply to new models after July 2007 and Level 4 Emissions Regulations (China 4) (corresponding to Euro 4 standards) apply to new models after July 2010. Starting with new models after July 2008, on-board diagnostics must be equipped. Furthermore, pursuant to GB18352.5-2013, it has been decided that Level 5 Emissions Regulations (China 5) (corresponding to Euro 5 standards) are to be implemented throughout China for all models that are sold and registered after January 2018.

In an effort to improve the fuel quality in the market, stricter China 5 gasoline and diesel fuel standards have been stipulated in GB17930-2013 and GB19147-2013 to achieve the Level 5 Emissions Regulations, and it has been decided that these standards will be implemented from January 2018. Following that, however, given the accelerated improvement in fuel quality in the market, new China 5 fuel standards (corresponding to Euro 5) have been implemented in 11 provincial capitals in eastern China from January 2016 and nationwide in China from January 2017, as opposed to January 2018 as initially determined. In connection with this, the Ministry of Environmental Protection and the Ministry of Industry and Information Technology issued a directive on the implementation timing of the Level 5 Emissions Regulations, in accordance with which, the implementation started for gasoline-powered passenger vehicles in the 11 provincial capitals from April 2016 and nationwide in China from January 2017, as well as for diesel passenger vehicles nationwide in China pursuant to the regulations of GB18352.5-2013 from January 2018. The next-generation emissions regulations for passenger vehicles, or Level 6 Emissions Regulations (China 6), have been issued as GB18352.6-2016 at the end of 2016, pursuant to which tighter requirements will be implemented in two steps, depending on the regulated subjects and the implementation timing. Specifically, China 6a will apply to all models to be sold or registered in July 2020 and beyond, and China 6b will apply to all models to be sold or registered in July 2023 and beyond. With respect to fuels in the market, the quality standards and the implementation timing for China 6 gasoline fuel and China 6 diesel fuel have been provided in GB17930-2016 and GB19147-2016 so as to keep up with the implementation timing of China 6 emissions regulations.

For heavy-duty diesel-powered commercial vehicles, pursuant to GB17691-2005, Level III Emissions Regulations (China III) apply to models after January 2007. Although Level IV Emissions Regulations (China IV) were to apply to new models after January 2010, and Level V Staged Emissions Regulations (China V) were to apply to new models after January 2012, because the infrastructure to supply sufficient diesel fuel meeting the Level 4 fuel quality standards had yet to be put in place, the implementation of the China IV Emissions Regulations for all models was postponed to July 2013. In connection with such delay, the implementation of the China V Emissions Regulations has been postponed from the original plan and was implemented from July 2017. For heavy-duty gasoline-powered commercial vehicles, pursuant to GB14762-2008, Level III Emissions Regulations (China III) apply to new models after July 2009 and Level IV Emissions Regulations (China IV) apply to new models after July 2012. After the first day the regulation is implemented to a new model, all new models released during the following one-year period also become subject to the regulation. Tightening of the next-generation emissions regulations is currently considered for heavy-duty diesel-powered commercial vehicles and heavy-duty gasoline-powered commercial vehicles.

Compliance with new and more stringent emissions and fuel consumption standards will present significant technological challenges to automobile manufacturers and will likely require significant expenditures. Examples of these challenges include the development of advanced technologies, such as high performance batteries and catalytic converters, as well as the development of alternative fuel technologies. Manufacturers that are unable to develop commercially viable technologies within the time frames set by the new standards will lose their market share and will be forced to decrease the number of types of vehicles and engines in their principal markets.

Standards of Other Countries or Regions

Countries or regions other than Japan, the United States, Europe and China are also proactively introducing emissions regulations. Many countries or regions such as Australia, Mexico, the Middle East, Taiwan and Hong Kong, as well as countries in Eastern Europe and Asia, have considered or implemented emissions regulations.

 

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In particular, in India, given the worsening air pollution, in December 2015, the Supreme Court banned the registration of diesel cars with engines that are 2 liters or larger in the National Capital Region, including the Delhi metropolitan area. In August 2016, the ban on registration was lifted on the condition that a deposit equal to 1% of the vehicle’s retail price is to be paid to the Environment Pollution Control Authority. Furthermore, the government accelerated the implementations of BS-6 (equivalent to EURO6) to 2020.

Vehicle Fuel Economy

Japanese Standards

The Act on Rationalizing Energy Use requires automobile manufacturers to improve their vehicles to meet specified fuel economy standards. Fuel economy standards are established according to the types of vehicles specified below, and are required to be met by either fiscal 2011 (April 2010-March 2011), fiscal 2016 (April 2015-March 2016), fiscal 2021 (April 2020-March 2021) or fiscal 2023 (April 2022-March 2023).

Among qualifying passenger vehicles are:

 

    Vehicles which are designated in Article 75, Paragraph 1 of the Road Transport Vehicle Act as type-designated vehicles (“type-designated vehicles”) with 10 seats or less using LPG;

 

    Type-designated vehicles with 9 seats or less or that are 3.5 tons or less in vehicle weight using gasoline, or type-designated vehicles with 9 seats or less or 10 seats that are 3.5 tons or less in vehicle weight using gas oil;

 

    Type-designated vehicles with 11 seats or more that are 3.5 tons or less in vehicle weight using gasoline or gas oil; and

 

    Type-designated vehicles with 10 seats or more that are over 3.5 tons in vehicle weight using gas oil, or designated carbon monoxide emission control vehicles (“designated carbon monoxide emission control vehicles”) which are designated in Article 75-3 Paragraph 1 of the Road Transport Vehicle Act.

Among qualifying cargo vehicles are:

 

    Type-designated vehicles that are 3.5 tons or less in vehicle weight using gasoline, gas oil or LPG; and

 

    Type-designated vehicles that are over 3.5 tons in vehicle weight using gas oil or LPG, or designated carbon monoxide emission control vehicles.

Toyota is promoting the improvement of its vehicles in order to achieve compliance with these standards.

Japan is a signatory to the United Nations Framework Convention on Climate Change and has agreed to take measures to reduce its greenhouse gas emissions. Improved vehicle fuel economy is contributing to the reduction in carbon dioxide emissions.

U.S. Standards

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with CAFE standards. A manufacturer is subject to substantial civil penalties if, in any model year, its vehicles do not meet the CAFE standards. Manufacturers that exceed the CAFE standards earn credits determined by the difference between the average fuel economy performance of their vehicles and the CAFE standards. Credits earned for the five model years preceding the current model year, and credits projected to be earned for the next three model years, can be used to meet CAFE standards in a current model year.

In April 2006, the NHTSA established CAFE standards applicable to light-duty trucks for model year 2008 and beyond. These CAFE standards aimed at shifting the framework from one that used to be advantageous only

 

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to compact car manufacturers to one that is fair to full line manufacturers. The requirements were changed so that the CAFE standards are now determined by a sales rate based on vehicle size (measured by the footprint, defined as the size of each vehicle based on the product of wheelbase and tread width) for each manufacturer.

On April 1, 2010, the EPA and the NHTSA issued a joint final rule to reduce the emission of greenhouse gases from passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2012 through 2016. These vehicles were required to meet an estimated combined average emissions level of 250 grams of carbon dioxide per mile, equivalent to 35.5 miles per gallon if the requirements were met through fuel economy standards. The NHTSA also set CAFE standards for passenger vehicles and light-duty trucks that will require manufacturers of those vehicles to meet an estimated combined average fuel economy level of 34.1 miles per gallon in model year 2016. Furthermore, the EPA and the NHTSA joint final rule allows the two agencies and California standards to act in a unified way, and creates a regulatory framework that makes compliance less burdensome for the manufacturers. In addition, in December 2011, the EPA and the NHTSA issued a joint proposed rule to further reduce greenhouse gas emissions and improve fuel economy for passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2017 through 2025. In the rule, which was finalized in August 2012, these vehicles are required to meet an estimated combined average emission level of 163 grams of carbon dioxide per mile in model year 2025, equivalent to 54.5 miles per gallon if these requirements are met through improvements in fuel economy standards. At the same time, the NHTSA also issued CAFE standards for passenger vehicles and light-duty trucks that would require manufacturers to meet an estimated combined average fuel economy level of 49.6 miles per gallon in model year 2025. As discussed above, however, on April 2, 2018, the EPA announced that the greenhouse gas emission standards for model years 2022 through 2025 would be repealed and replaced with new, presumably less-stringent standards, and that the EPA and NHTSA would jointly commence drafting a new rule that would set new and presumably less stringent CAFÉ standards for these model years. On May 1, 2018, California and 16 other states filed suit in the U.S. Circuit Court of Appeals for the District of Columbia to oppose the EPA and NHTSA’s decision to repeal and replace the standards. Whatever the outcome of the EPA and NHTSA’s new rule making efforts or the related litigation, Toyota will continue to strive to meet applicable fuel economy standards by further developing fuel-efficient technology, alternative fuel technology and other advanced technology.

In April 2018, the NHTSA reviewed the penalties on nonconformity of CAFE standards and proposed to re-impose a fine of $5.5 for each inadequate fuel economy level of 0.1 mile per gallon and invited comments from the general public on the Federal Register.

In addition, the Energy Tax Act of 1978 imposes a “gas guzzler” tax on automobiles with a fuel economy rating below specified levels.

European Standards

In February 2014, the European Parliament and Council reduced the average carbon dioxide emissions target for light commercial vehicles to 147 grams per kilometer beginning in 2020. In March 2014, the European Parliament and Council reduced the average carbon dioxide emissions target for passenger vehicles to 95 grams per kilometer beginning in 2021. 95% of each manufacturer’s new cars must comply with this new standard by 2020. Penalties apply to those manufacturers who fail to meet their targets, in amounts corresponding to the degree of shortfall. Manufacturers failing to meet their targets incur penalties of between €5 and €95 per each gram of carbon dioxide per kilometer shortfall for each non-compliant vehicle, and such penalties will rise to €95 in 2019 and beyond. The relevant legislation requested the European Commission to conduct a review by 2015 and, if appropriate, propose new targets for the period beyond 2020, including possibly setting a 2025 target. In November 2017, the European Commission proposed new carbon dioxide standards for cars and light commercial vehicles for the period after 2020. Average emissions of the EU fleet of new cars and vans in 2025 are proposed to be 15% lower than in 2021, reduced further to 30% lower than in 2021 by 2030.

 

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An increasing number of EU member states are introducing vehicle tax laws based on carbon dioxide emission levels pursuant to the directive issued by the European Commission in 2005. This trend is expected to continue in accordance with the recent increases in environmental awareness.

An EU directive on motor vehicle air conditioning units required manufacturers to replace currently used refrigerants with refrigerants having a lower global warming impact for all newly registered vehicles starting in January 2017.

Chinese Standards

Fuel consumption regulations are being implemented pursuant to the Chinese National Standards (“GB”), and the manufacture and sale of vehicle models not meeting these regulations are prohibited. For light-duty passenger vehicles, pursuant to GB19578-2004, Level 1 Fuel Consumption Regulations apply to new models after July 2005 and Level 2 Fuel Consumption Regulations apply to new models after January 2008. These regulations determine the consumption standards that apply depending on the mass of the applicable vehicle and set forth a method for determining whether each model has met the regulation. GB27999-2011 was then issued to further strengthen fuel consumption regulations from 2012 and beyond. In these Level 3 Fuel Consumption Regulations for passenger vehicles, the regulation framework was substantially revised, such as the introduction of new regulations requiring automobile manufacturers to meet standards of corporate average fuel consumption across models in addition to existing regulations requiring each model to meet consumption standards. Furthermore, in order to achieve the national target for average fuel efficiency for 2020, the following more stringent fuel consumption regulations have been enacted and enforced. First, GB19578-2014, which has been enacted to strengthen regulations for each model, is being applied to new models after January 2016. Second, GB27999-2014, which has been enacted as Level 4 Fuel Consumption Regulations for passenger vehicles to strengthen corporate average regulations, has been in effect since 2016. In addition, Level 5 Fuel Consumption Regulations for passenger vehicles are being examined as more stringent next-generation fuel consumption regulations. For light-duty commercial vehicles, pursuant to GB20997-2007, Level 2 Fuel Consumption Regulations apply to new models after February 2008, Level 1 Fuel Consumption Regulations apply to all vehicles after January 2009, and Level 2 Fuel Consumption Regulations apply to all models after January 2011. In addition, in an effort to further strengthen fuel consumption regulations, GB20997-2015 was enacted, which further applied Level 3 Fuel Consumption Regulations to all new vehicles from January 2018 and is currently being enforced.

With respect to large commercial vehicles, pursuant to QC/T924-2011, Level 1 Fuel Consumption Regulations for large vehicles apply to new vehicles from July 2012, and pursuant to the subsequent enactment of GB30510-2014, Level 2 Fuel Consumption Regulations apply to new vehicles from July 2014 and are currently being enforced. In addition, in an effort to further strengthen fuel consumption regulations, GB30510-2018 was enacted, pursuant to which Level 3 Fuel Consumption Regulations are scheduled to be applied to new vehicles from July 2019.

Standards of Other Countries or Regions

As momentum gathers to increase energy security and prevent global warming, other countries or regions in addition to Japan, the United States, Europe and China are moving to introduce fuel consumption regulations, and Korea, Mexico, Brazil, Taiwan, India, Saudi Arabia and Canada have already decided to introduce or implemented fuel consumption regulations. Australia is also considering the introduction of new regulations to reduce average carbon dioxide emissions by vehicles. Toyota predicts that this trend will spread to other countries, and in the future many nations will consider new regulations related to fuel consumption and carbon dioxide.

 

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Vehicle Safety

Japanese Standards

In Japan, efforts have been made since 1998 to bring Japanese standards in line with the regulations of the United Nations Economic Commission for Europe (“UN”).

With respect to standards that were previously brought in line with the UN regulations, under the Japanese standards regarding seat belts, the range of vehicles and seats requiring the fitting of seatbelt reminder devices that warn the driver when seat belts are not fastened has been expanded; such requirements will become applicable in stages, starting in September 2020. Standards for compressed natural gas vehicles and liquid natural gas vehicles will apply to new models beginning in March 2020 and to existing models still in production beginning in March 2021. Standards for approaching vehicle audible systems apply to new models beginning from March 2018 and to existing models still in production beginning in October 2020. With respect to standards that are scheduled to be newly brought in line with the UN regulations, the standards for accident emergency call devices will apply to new vehicles fitted with the devices from January 2020 and to existing models still in production from July 2021. Standards for ISOFIX attachment devices will be separated from the standards for seat belt attachment, and apply as new standards to new vehicles from July 2018.

Furthermore, unique to Japan, guidelines for emergency driving stop systems (evacuate to road shoulder type) were established. The enhancement of visibility standards for rearward and surrounding area, as well as the standardization of measures relating to brake override systems, the strengthening of anti-spinal injury measures and anti-drunk driving measures are currently under consideration.

U.S. Standards

The U.S. National Traffic and Motor Vehicle Safety Act of 1966, or Safety Act, requires vehicles and equipment sold in the United States to meet various safety standards issued by the NHTSA. The Safety Act also authorizes the NHTSA to investigate complaints relating to vehicle safety and to order manufacturers to recall and repair vehicles found to have safety-related defects. The cost of these recalls can be substantial depending on the nature of the repair and the number of vehicles affected.

The Transportation Recall Enhancement, Accountability and Documentation Act was enacted in the United States on November 1, 2000. This Act required the NHTSA to regulate the dynamic rollover standards and to upgrade federal motor vehicle safety standards relating to tires. It also required the NHTSA to enhance its authority to gather information potentially relating to motor vehicle defects. This Act substantially increases the maximum civil penalties for violation of regulatory requirements and specifies possible criminal penalties for violations of the federal Fraud and False Statements Act. In 2003, the NHTSA expanded its New Car Assessment Program (“NCAP”) to implement consumer information programs for vehicle rollover resistance and child restraints and, beginning in 2003, adopted extensive early warning defect reporting requirements. Regulations regarding tire-pressure monitoring systems were strengthened in 2005.

Legislation on a transportation budget plan promoting a safe and efficient vehicle safety program for drivers, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) was passed in August 2005. The legislation requires the NHTSA to propose and issue safety standards to reduce rollover accidents, to complete the creation of standards for the reduction of vehicle passengers released from cars at the time of rollover accidents, to upgrade door lock standards, to complete the upgrade of roof crash standards, to decide on the side impact protection standards for passengers in all seat locations, to review seat belt wearing technology and complete a study that includes a proposal for improving the rate of seat belt usage, to establish standards to display NCAP ratings on new car labels and to complete the upgrade of the standard for power windows that will require pulling up switches. Some actions have already been taken and completed in response to the above requirements.

 

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In February 2008, legislation to prevent non-traffic related injuries to young children caused by vehicles, the “Cameron Gulbransen Kids Transportation Safety Act,” was passed. Pursuant to this legislation, the NHTSA finalized standards requiring vehicles to be equipped with rearview camera systems in order to ensure rearward visibility to prevent children from being struck by backing vehicles and mandating the use of brake shift interlock systems.

In January 2011, legislation to improve the safety of the visually impaired and other pedestrians, the “Pedestrian Safety Enhancement Act of 2010,” was passed. Based on this standard, the NHTSA determined minimum sound standards for electric and hybrid vehicles.

In response to the unintended acceleration issue in 2010, the NHTSA has started to examine and implement measures to strengthen safety standards, such as mandating brake override systems, mandating Event Data Recorders, or EDR, and standardizing push-start switches.

In December 2015, the Fixing America’s Surface Transportation (“FAST”) Act was signed into law. The FAST Act increased the maximum civil penalty that NHTSA can collect for violations of applicable safety laws from $35 million to $105 million. In connection with recalls of defective vehicles, the FAST Act expanded the free remedy that manufacturers must provide car owners from applying to cars up to 10 years old to applying to cars up to 15 years old.

In 2016, the NHTSA and the Insurance Institute for Highway Safety announced that they have agreed with twenty major vehicle manufacturers to standardize equipment of automatic emergency brakes on almost all new models by 2022. In the same year, the NHTSA also announced a policy regarding automatic driving vehicles to promote such vehicles safely, as well as best practices to enhance cybersecurity for vehicles.

In 2017, the NHTSA proposed to establish a new safety standard to require passenger vehicles and light-duty commercial vehicles to have dedicated short-range communication units that enable Vehicle-to-Vehicle communication.

European Standards

In October 2010, CARS 21 was resumed in order to proceed with the realization of the “2020 Strategy” (CARS 2020) by the European Commission that aims for high-level, sustainable and comprehensive growth, and the CARS 21 final report was issued in June 2012. The final report addresses issues facing the widespread adoption of electrified vehicles, including charging infrastructure in the EU, establishing battery requirements, adopting seat belt reminder devices for all seats, connection of alcohol interlock devices to vehicles, adopting speed management devices, establishing safety requirements for micro urban mobility, strengthening safety regulation to protect the vulnerable from collisions and the possibility of regulation in connection with preventative safety technology. In November 2012, “CARS 2020: Action Plan for a competitive and sustainable automotive industry in Europe” was issued based on the final report. The action plan is built on four core concepts, and within these concepts it discusses enhancement of road safety, improving the market conditions within the EU and the implementation of smart regulations. Each item is given a target date and is to be monitored going forward.

Fitting of emergency call systems (“eCall”) became mandatory for new vehicles from the end of March 2018 for light-duty passenger vehicles and light-duty commercial vehicles using the framework of “Whole Vehicle Type Approval.” New regulations regarding eCall have also been enacted by the United Nations, and these are scheduled to come into effect in July 2018. These regulations will be enacted in conjunction with the building of infrastructure such as communication bases in the different member states of the EU for the receipt and handling of eCalls.

In March 2015, the European Commission published a final report on the benefit and feasibility of a range of new safety technologies. Currently, a process to revise the General Safety Regulation (EC) No 661/2009 and

 

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Regulation (EC) No 78/2009 with regards to pedestrian protection is ongoing. Amendments to certain UN regulations for individual matters that are to be strengthened through regulations are in progress at the United Nations, while other matters are likely to be considered within the EU. In most cases, the strengthened regulations will apply to new vehicle models from 2020-2021 and to registered vehicles from 2022-2023, although target date of the regulations vary for each matter. Matters to be strengthened include requirement for installation of AEB to small cars, LKAS to small cars, driver monitoring systems, ESS and EDR, as well as TPMS regulations, expansion of application of regulations on collision, strengthening of regulations on pedestrian protection and requirement for installation of camera monitoring system.

In 2016, the European Commission’s proposal regarding major amendments to the WVTA, including a strengthening of type approval process (e.g. enabling access to software algorithm) with the market surveillance requirements (addition of auditing authority by the European Commission), strengthening of auditing of technical service, clarification of recall requirements and increased surveillance of cars already in circulation, was submitted. In May 2018, the European Parliament and Council adopted this proposal.

In addition, GEAR2030 (the High Level Group on the Competitiveness and Sustainable Growth of the Automotive Industry in the European Union) was established in January 2016 as a successor body of the CARS2020, deliberations were conducted at the European Commission and each member state, as well as among high-level related stakeholders, for strengthening the competitiveness of the automobile value chain in Europe by 2030, and the final report was issued in October 2017. The final report discussed the importance of the simplification of the existing and future regulatory framework and its implementation, specific measures addressing automated and connected vehicles, the creation of a EU type-approval framework for the certification of automated driving vehicles and the implementation of the ITS Directive and its delegated regulations by each member state. Going forward, detailed strategies will be deliberated based on the final report.

United Nations Regulations

The 1958 Agreement (“Agreement Concerning the Adoption of Uniform Technical Prescriptions for Wheeled Vehicles, Equipment and Parts which can be Fitted and/or be Used on Wheeled Vehicles and the Conditions for Reciprocal Recognition of Approvals Granted on the Basis of These Prescriptions”) was originally based on the European regulations, but the UN Regulations are developing as an established international law, and Japan, Thailand, Malaysia and Egypt as well as other countries outside the EU have become members after the amendment in 1995, and many other countries are expected to join in the future. The countries bound by the 1958 Agreement have incorporated the UN Regulations into their own domestic policies (The EU and Japan have directly included the UN Regulations into their domestic legislations). While automotive parts and vehicle systems are regulated by the UN regulations, there are currently no regulations with respect to Whole Vehicle Type Approval (WVTA) such as those in Europe. Japan proposed legislation establishing International Whole Vehicle Type Approval (IWVTA) under the United Nations in 2016, and the proposal was adopted as UN Regulation No. 0 (“R0”) in November 2017. IWVTA is expected to take effect in July 2018 (although the mutual recognition of IWVTA will not take place) and to be implemented with the mutual recognition in April 2019. Although this IWVTA, which was created as a first step, is incomplete, it is significant because it creates a framework that enables the reciprocal recognition of whole vehicles. Work will continue to formulate a complete IWVTA system in the future. If a complete IWVTA is formulated, integration of global approval administrative regulations of each country and simplification of vehicle construction regulations are expected.

An amendment to the 1958 Agreement has been considered in order to establish R0 (IWVTA). The bill of such amendment to the 1958 Agreement was passed in June 2016 and came into effect in September 2017. Such amendment will increase the flexibility of the regulations, enabling approvals to be granted for the old series of regulations according to the needs of the signatory countries to the 1958 Agreement. The percentage of required votes for voting in connection with proposed UN regulations will also be considered and the 1958 Agreement is

 

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expected to become fairer. Such amendment to the 1958 Agreement is expected to make the 1958 Agreement more attractive to countries that are not currently party to the 1958 Agreement, and aims to increase the number of signatory countries.

With the United Nations currently debating the regulation of automated driving vehicles, a requirement relating to automatically commanded steering functions will be added to Regulation No. 79 (steering equipment); in addition, there will be consideration of horizontal regulation for advanced automated driving vehicles (as related initiatives, new fields including data storage, periodic inspections, cyber security and software updates are also being examined).

The 1998 Agreement (“Agreement Concerning the Establishing of Global Technical Regulations for Wheeled Vehicles, Equipment and Parts which can be Fitted and/or be Used on Wheeled Vehicles”) is a U.S.-led agreement that aims to harmonize technical regulations, and defines each regulation as a Global Technical Regulation (“GTR”). At present, there are around 20 regulations in total. Potential future proposals are being examined in order to include more regulations. Potential future proposals include advanced automated driving vehicles, cyber security, EDR, AEBS and LKAS. The countries bound by the 1998 agreement are required to incorporate the GTRs into their domestic laws. The parties to the 1998 agreement include the United States, Canada, China and India, which are not parties to the 1958 agreement, so GTRs will also influence those countries.

Chinese Standards

Vehicle safety regulations in China were drafted with reference to the UN regulations and cover almost the same matters as the UN regulations. However, recently, these regulations also include unique provisions which take into account the distinctive characteristics of the Chinese market environment and the progress of technological development in China and there are increasing number of legislations that differ from the latest UN regulations or other international standards. As for future safety regulations, standards related to batteries, motors, the charging of EVs and data communication are currently being planned.

Standards of Other Countries

Vehicle safety regulations in Canada are basically similar to those in the United States. In regions outside of North America, movements for adoption and conformity with the UN regulations have become active, including in those countries without automotive manufacturing industries. The list of signatories to the 1958 agreement of the United Nations continues to grow, and now includes Korea, Thailand and Malaysia in Asia, as well as Russia, South Africa, Egypt and Morocco. In addition, ASEAN, pursuant to its economic community mission, has decided to adopt the UN regulations as its regional agreement. Latin America, India and countries in the Middle East that are not signatories to the 1958 agreement of the United Nations are also moving forward to conform their respective regulations to the UN regulations or to adopt new regulations consistent with the UN regulations.

Environmental Matters

Japanese Standards

Toyota’s automotive operations in Japan are subject to substantial environmental regulation under laws such as the Air Pollution Control Act the Water Pollution Prevention Act, the Noise Regulation Act and the Vibration Control Act. Under these laws, if a business entity establishes or alters any facility that is regulated by these laws, the business entity is required to give prior notice to regulators, and if a business entity discharges, uses or stores substances that are environmental burdens or causes noise or vibration from such facility, the business entity is also required to comply with the applicable standards. Toyota is also subject to local regulations, which in some cases impose more stringent obligations than the Japanese central government requirements. Toyota has complied with these regulations. Under the Waste Management and Public Cleansing Act, producers of industrial waste must dispose of industrial waste in the manner prescribed in the same act. Toyota has also complied with the same act.

 

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The Soil Contamination Countermeasures Act of Japan requires that land owners conduct contamination testing and submit a report at the time they cease to use hazardous substances, such as in connection with the sale of a former factory, or if there is a possibility of health hazards due to land contamination. If it is found that land contamination exceeds a certain level, the relevant prefectural authority designates the area considered to be contaminated and orders the land owner to take necessary measures. Toyota is suitably managing its land in accordance with the same law. In addition, under the Act on Recycling, etc. of End-of-Life Vehicles, vehicle manufacturers are required to take back and recycle specified materials (automotive shredder residues, air bags and fluorocarbons) of end-of-life vehicles and the provisions concerning such obligations of vehicle manufacturers became effective in January 2005. Toyota has coordinated with relevant parties to establish a vehicle take-back and recycle system throughout Japan. As a result, in fiscal 2018, Toyota achieved a recycling/recovery rate of 98% for automobile shredder residue (the legal requirement being 70%) and 94% for air bags (the legal requirement being 85%) and reached the targets set forth in this law.

U.S. Standards

Toyota’s assembly, manufacturing and other operations in the United States are subject to a wide range of environmental regulation under the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Pollution Prevention Act of 1990 and the Toxic Substances Control Act. Toyota is also subject to a variety of state legislation that parallels, and in some cases imposes more stringent obligations than, federal requirements. These federal and state regulations impose severe restrictions on air- and water-borne discharges of pollution from Toyota facilities, the handling of hazardous materials at Toyota facilities and the disposal of wastes from Toyota operations. Toyota is subject to many similar requirements in its operations in Europe, Canada and other countries.

Pursuant to the Clean Air Act, the EPA has promulgated National Ambient Air Quality Standards (“NAAQS”) for six “criteria” pollutants, including for ozone and particulate matter. The Clean Air Act requires that the EPA review and possibly revise these NAAQS every five years. On December 14, 2012, the EPA made the annual health-based particulate matter NAAQS more stringent. On October 1, 2015, the EPA made the annual health-based and welfare-based ozone NAAQS more stringent. The revised annual health-based particulate matter NAAQS and the revised annual health-based and welfare-based ozone NAAQS, as well as any future NAAQS revisions, could lead to additional pollution control requirements on the industry, including on Toyota’s manufacturing operations.

Toyota expects growing pressure in the next several years to further reduce emissions from motor vehicles and manufacturing facilities.

European Standards

In October 2000, the European Union brought into effect a directive that requires member states to promulgate regulations implementing the following:

 

    automotive manufacturers shall bear all or a significant part of the costs for taking back end-of-life vehicles sold after July 1, 2002 and dismantling and recycling those vehicles. Beginning January 1, 2007, this requirement became applicable to vehicles put on the market before July 1, 2002 as well;

 

    automotive manufacturers may not use certain hazardous materials in vehicles sold after July 1, 2003;

 

    type-approved vehicle models put on the market after December 15, 2008 shall be re-usable and/or recyclable to a minimum of 85% by weight per vehicle and shall be re-usable and/or re-use as material or energy to a minimum of 95% by weight per vehicle; and

 

    end-of-life vehicles must meet actual re-use and/or recycling of 80% and re-use and/or recovery of 85%, respectively, of vehicle weight by 2006, and must meet respectively to 85% and 95% by 2015.

 

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Laws to implement this directive have come into effect in each of the EU member states. Even now, there are uncertainties surrounding the implementation of the applicable regulations in different EU member states, particularly regarding automotive manufacturer responsibilities and resultant expenses that may be incurred.

In addition, under this directive, the member states must take measures to ensure that car manufacturers, distributors and other auto-related economic operators establish adequate used vehicle collection and treatment facilities and to ensure that hazardous materials and recyclable parts are removed from vehicles prior to shredding. This directive impacts Toyota’s vehicles sold in the EU. Toyota accommodated, in offering its products, any measures the EU member states chose to implement in order to comply with this directive.

The EU has also issued directives and made proposals relating to the following subjects on environmental matters:

 

    emission standards that include a framework permitting member states to introduce fiscal incentives to promote early compliance; and

 

    reform of rules governing automotive distribution and service. The block exemption on distribution has been amended so that dealers may engage in cross-border sales actively within the EU and open additional facilities for sales and services. Additionally, dealers may no longer be required by manufacturers to operate both sales and service facilities side by side.

In December 2011, the European Commission proposed to reduce noise produced by cars, vans, buses, coaches and light and heavy trucks. As proposed, noise limit values would ultimately be lowered by four A-weighted decibels for vehicles other than trucks, and three A-weighted decibels for trucks. Compliance would be achieved in three steps over a 10 to 12 year period. In May 2014, a regulation adopting the proposal was published in final form in the EU Official Journal.

Toyota believes that its operations are materially in compliance with environmental regulatory requirements concerning its facilities and products in each of the markets in which it operates. Toyota continuously monitors these requirements and takes necessary operational measures to ensure that it remains in material compliance with all of these requirements.

Toyota believes that environmental regulatory requirements have not had a material adverse effect on its operations. However, compliance with environmental regulations and standards has increased costs and is expected to lead to higher costs in the future. Therefore, Toyota recognizes that effective environmental cost management will become increasingly important. Moreover, innovation and leadership in the area of environmental protection are becoming increasingly important to remain competitive in the market. As a result, Toyota has proceeded with the development and production of environmentally friendly technologies, such as hybrid vehicles, FCVs and high fuel efficiency, low emission engines.

In addressing environmental issues, based on an assessment of the environmental impact of its products through their entire life cycles, from production through sales, disposal and recycling, Toyota, as a manufacturer, strives to take all possible measures from development stage and continues to work toward technological innovations to make efficient use of resources and to reduce the burden on the environment.

Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions, or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Pursuant to Section 13(r), Toyota is disclosing the following information.

 

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During the fiscal year ended March 31, 2018:

 

    Toyota Kirloskar Motor Private Limited, a majority-owned subsidiary of Toyota, sold one Toyota vehicle to the Iranian Embassy in India.

This activity contributed approximately ¥5 million in gross revenues and an insignificant amount in net profit to Toyota. Toyota believes that this transaction would not subject it or its affiliates to U.S. sanctions. As this time, Toyota Kirloskar Motor Private Limited intends to cease conducting the activity described above.

Research and Development

The overriding goals of Toyota’s technology and product development activities are to minimize the negative aspects of cars, such as traffic accidents and impact on the environment, and maximize the positive aspects, such as driving pleasure, comfort and convenience. By achieving these sometimes conflicting goals to a high degree, Toyota seeks to open the door to the automobile society of the future. To ensure efficient progress in research and development activities, Toyota coordinates and integrates all research and development phases, from basic research and advanced research to forward-looking technology and product development. With respect to long-term basic research in areas such as energy, the environment, information technology, telecommunications and materials, projects are regularly reviewed and evaluated in consultation with outside experts to achieve research and development cost control. With respect to forward-looking, leading-edge technology and product development, Toyota establishes cost-performance benchmarks on a project-by-project basis to ensure efficient development investment.

The chart below provides an overview of Toyota’s R&D at each phase.

 

Basic research   

Phase to discover development theme

 

Research on basic vehicle-related technology

Forward-looking and leading-edge technology development   

Phase requiring technological breakthroughs such as components and systems

 

Development of leading-edge components and systems that are more advanced than those of competitors

Product development   

Phase mainly for development of new models

 

Development of all-new models and existing-model upgrades

Toyota is promoting research and development into the early commercialization of next generation environmentally friendly, energy-efficient and safe-vehicle technology. Toyota is also moving forward with the development of innovative technologies such as electrification, connected vehicles and automated driving so as to realize a mobility society of the future that enables everyone to enjoy freedom of movement beyond the conventional concept of vehicles. To this end, Toyota is focusing on the following areas:

 

    further improvements in hybrid technologies, including in functions and cost, and contributions to the environment through advancements;

 

    improvement in internal combustion engine fuel economy technology as well as improvement in technology in connection with more stringent emission standards;

 

    development of EVs, FCVs and other alternative fuel vehicles;

 

    development of advanced safety technology designed to promote driving and vehicle safety;

 

    automated driving technologies; and

 

    connected car technologies.

 

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For a detailed discussion of the company’s research and development infrastructure, see “Operating and Financial Review and Prospects — Research and Development, Patents and Licenses.”

Components and Parts, Raw Materials and Sources of Supply

Toyota purchases parts, components, raw materials, equipment and other supplies from multiple competing suppliers located around the world. Toyota works closely with its suppliers to pursue optimal procurement. Toyota believes that this policy encourages technological innovation, cost reduction and other measures to strengthen its vehicle competitiveness. Toyota plans to continue purchases based on the same principle and does not anticipate any difficulty in obtaining stable supplies in the foreseeable future.

Because Toyota had more than 50 overseas operations in 26 countries and regions as of March 31, 2018, procurement of parts and components is being carried out not only locally in the country of the production site but also from third countries. As a result, the distribution network has become increasingly complex. In order to realize timely and efficient distribution while minimizing costs, Toyota is promoting efforts to optimize each stage of the supply-chain. To this end, Toyota has developed a standardized system of global distribution and is supporting the operation of the system at each production base. The use of the global distribution system aims at implementing parts procurement that meets changes in vehicle production in a timely manner. These varying efforts, combined together, have led to maximized customer satisfaction, as well as to building a good working relationship with Toyota’s suppliers.

Toyota aims to share information and collaborate among the procurement divisions in each of the regions throughout the world in order to procure parts and materials from the most competitive suppliers among Toyota factories located in various areas worldwide. At the same time, Toyota carries out streamlining efforts together with suppliers in each country in order to achieve sustainable growth. Toyota has been working on cost reduction measure, referred to as RR-CI and VA activities. Through RR-CI activities, which are conducted in conjunction with TNGA, Toyota aims to ensure cost competitiveness through such means as thorough localization, sharing parts and components and manufacturing reforms, together with producing products matching customers’ needs in each region and vehicle category, and reinforcing activities from a medium- to long-term perspective as the third phase of RR-CI. Toyota has been continuously working on VA (value analysis) activities for the various types of vehicles already on sale in collaboration with in-house vehicle companies. In addition, Toyota has been working on the TNGA to achieve sweeping advances in basic performance and product appeal of parts and units as well as seeking cost reductions by sharing more parts and implementing manufacturing reforms.

In 2017, market prices of raw materials generally increased; the impact of OPEC’s coordinated production cut, for example, resulted in higher prices for crude oil and naptha-related products, and the impact of environmental regulations enacted by the government of China resulted in higher prices for aluminum. The direction of prices is still unforeseeable and Toyota is continually promoting cost reduction efforts, such as reducing the amount of raw materials it uses.

Toyota’s ability to continue to obtain supplies in an efficient manner is subject to a number of factors, some of which are not in Toyota’s control. These factors include the ability of its suppliers to provide a continued source of supplies and the effect on Toyota of competition by other users in obtaining the supplies.

Intellectual Property

Toyota holds numerous Japanese and foreign patents, trademarks, design patents and some utility model registrations. It also has a number of applications pending for Japanese and foreign patents. While Toyota considers all of its intellectual property to be important, it does not consider any specific subset of its patents, trademarks, design patents or utility model registrations to be so important that their expiration or termination would materially affect Toyota’s business.

 

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Capital Expenditures and Divestitures

Set forth below is a chart of Toyota’s principal capital expenditures between April 1, 2015 and March 31, 2018, the approximate total costs of such activity, as well as the location and method of financing of such activity, presented on a “by subsidiary” basis and as reported in Toyota’s annual Japanese securities report filed with the director of the Kanto Local Finance Bureau.

 

Description of Activity

   Total Cost
(Yen in billions)
    

Location

  

Primary
Method of
Financing

Japan

        

Investment primarily in technology and products by
Toyota Motor Corporation  

  

 

 

 

1,011.6

 

 

  

 

Japan

  

 

Internal funds,

financing

from issuance
of bonds, etc.

Investment primarily in technology and products by
Hino Motors, Ltd.  

     129.3      Japan    Internal funds

Investment primarily in technology and products by
Toyota Motor Kyushu, Inc.  

     101.0      Japan    Internal funds

Investment primarily in technology and products by
Toyota Auto Body Co., Ltd.  

     73.0      Japan    Internal funds

Investment primarily in technology and products by
Daihatsu Motor Co., Ltd.  

     53.0      Japan    Internal funds

Outside of Japan  

        

Investment primarily to promote localization by
Toyota Motor Manufacturing, Kentucky, Inc.  

     267.7      United States    Internal funds

Investment primarily to promote localization by
Toyota Motor Thailand Co., Ltd.  

     134.9      Thailand    Internal funds

Investment primarily to establish office facilities by
Toyota Motor North America, Inc.  

     113.2      United States    Internal funds

Investment primarily to promote localization by
Toyota Motor Manufacturing Canada Inc.  

     93.1      Canada    Internal funds

Investment primarily to promote localization by
PT. Toyota Motor Manufacturing Indonesia  

     86.5      Indonesia    Borrowings

Investment primarily to promote localization by
Toyota do Brazil Ltda.  

     75.5      Brazil    Internal funds

Investment primarily to promote localization by
Toyota Motor Manufacturing, Indiana, Inc.  

     59.7      United States    Internal funds

Investment primarily to promote localization by
Toyota Argentina S.A.  

     50.5      Argentina    Borrowings

Investment primarily to promote localization by
Toyota Motor Europe NV/SA  

     42.7      Belgium    Internal funds

Investment primarily in leased automobiles by
Toyota Motor Credit Corporation  

  

 

 

 

6,619.0

 

 

  

 

United States

  

 

Internal funds,

financing
from issuance
of bonds, etc.

 

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Set forth below is information with respect to Toyota’s material plans to construct, expand or improve its facilities between April 2018 and March 2019, presented on a “by subsidiary” basis and as reported in Toyota’s annual Japanese securities report filed with the director of the Kanto Local Finance Bureau.

 

Description of Activity

   Total Cost
(Yen in billions)
    

Location

  

Primary
Method of

Financing

Japan

        

Investment primarily in manufacturing facilities by
Toyota Motor Corporation

  

 

 

 

396.4

 

 

  

 

Japan

  

 

Internal funds

Outside of Japan

        

Investment primarily in manufacturing facilities by
Toyota Motor Manufacturing Canada Inc.

     83.1      Canada    Internal funds

Investment primarily in manufacturing facilities by
Toyota Motor Manufacturing, Indiana, Inc.

     54.3      United States    Internal funds

Investment primarily in manufacturing facilities by
Toyota Motor Europe NV/SA

     53.4      Belgium    Internal funds

Investment primarily in manufacturing facilities by
Toyota do Brazil Ltda.

     42.2      Brazil    Internal funds

Investment primarily in manufacturing facilities by
Toyota Motor Manufacturing, Mississippi, Inc.

     39.5      United States    Internal funds

Set forth below is additional information with respect to Toyota’s material plans to construct, expand or improve its facilities.

In Mexico, Toyota plans to increase production capacity at its Baja California factory from 100 thousand units to 160 thousand units in 2018 and to build a new plant in 2019. In the U.S., Toyota plans to construct a new joint-manufacturing plant with Mazda in 2021. In China, Toyota launched a third plant in Guangzhou in 2018. Tianjin FAW Toyota Motor Co., Ltd. also constructed a new production line to replace an aging existing line in June 2018. At the beginning of 2019, Toyota plans to launch a new plant in Malaysia dedicated to passenger vehicles with annual production capacity of 50,000 cars.

Toyota does not collect information on the amount of expenditures already paid for each plant under construction because Toyota believes that it is difficult and it would require unreasonable effort or expense to identify and categorize each expenditure item with reasonable accuracy as past and future expenditures. Toyota’s construction projects consist of numerous expenditures, each of which is continually being adjusted and incurred in variable and constantly changing amounts as part of the overall work-in-progress.

Seasonality

Toyota does not consider its seasonality material in the sense of significantly higher sales during any certain period of the year as compared to other periods of the year.

Legal Proceedings

From time-to-time, Toyota issues vehicle recalls and takes other safety measures including safety campaigns relating to its vehicles. Since 2009, Toyota issued safety campaigns related to the risk of floor mat entrapment of accelerator pedals and vehicle recalls related to slow-to-return or sticky accelerator pedals. In March 2014, Toyota entered into a Deferred Prosecution Agreement (“DPA”) to resolve an investigation by the U.S. Attorney for the Southern District of New York (“SDNY”) related to unintended acceleration in certain of its vehicles. The DPA provided for an independent monitor to review and assess policies and procedures relating to Toyota’s

 

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safety communications process, its process for sharing vehicle accident information internally and its process for preparing and sharing certain technical reports. In August 2017, the DPA and the monitorship terminated, and in October 2017, the criminal charge that had been filed in connection with the DPA was dismissed.

Personal injury and wrongful death claims involving allegations of unintended acceleration are pending in several consolidated proceedings in federal and state courts, as well as in individual cases in various other states. The judges in the consolidated federal action and the consolidated California state action have approved an Intensive Settlement Process (“ISP”) for such claims in those actions. Under the ISP, all individual claims within the consolidated actions are stayed pending completion of a process to assess whether they can be resolved on terms acceptable to the parties. Cases not resolved after completion of the ISP will then proceed to discovery and toward trial. Toyota has offered the ISP process to plaintiffs in other consolidated actions and in individual cases, as well.

Toyota has been named as a defendant in 33 economic loss class action lawsuits in the United States, which, together with similar lawsuits against Takata and other automakers, have been made part of a multi-district litigation proceeding in the United States District Court for the Southern District of Florida, arising out of allegations that airbag inflators manufactured by Takata are defective. Toyota has reached a settlement with the plaintiffs in the United States economic loss class actions. While the court approved the settlement on October 31, 2017, objectors have filed appeals, which have not yet been resolved. Toyota and other automakers have also been named in certain class actions filed in Mexico, Canada, Australia and Israel, as well as some other actions by states or territories of the United States. Those actions have not been settled and are being litigated.

Toyota self-reported a process gap in fulfilling certain emissions defect information reporting requirements of the U.S. Environmental Protection Agency (“EPA”) and California Air Resources Board, including updates on its repair completion rates for recalled emissions components and certain other reports concerning emissions related defects. Toyota is involved in discussions with the EPA and the SDNY’s Civil Division on this reporting issue. These agencies have requested certain follow-up information regarding this reporting issue, and Toyota is cooperating with the request.

Toyota also has various other pending legal actions and claims, including without limitation personal injury and wrongful death lawsuits and claims in the United States, and is subject to government investigations from-time-to-time.

Beyond the amounts accrued with respect to all aforementioned matters, Toyota is unable to estimate a range of reasonably possible loss, if any, for the pending legal matters because (i) many of the proceedings are in evidence gathering stages, (ii) significant factual issues need to be resolved, (iii) the legal theory or nature of the claims is unclear, (iv) the outcome of future motions or appeals is unknown and/or (v) the outcomes of other matters of these types vary widely and do not appear sufficiently similar to offer meaningful guidance. Based upon information currently available to Toyota, however, Toyota believes that its losses from these matters, if any, beyond the amounts accrued, would not have a material adverse effect on Toyota’s financial position, results of operations or cash flows.

 

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4.C ORGANIZATIONAL STRUCTURE

As of March 31, 2018, Toyota Motor Corporation had 299 Japanese subsidiaries and 307 overseas subsidiaries. The following table sets forth for each of Toyota Motor Corporation’s principal subsidiaries, the country of incorporation and the percentage ownership interest and the voting interest held by Toyota Motor Corporation.

 

Name of Subsidiary

       

Country of
Incorporation

  Percentage
Ownership
Interest
    Percentage
Voting
Interest
 

Toyota Financial Services Corporation  

    Japan     100.00       100.00  

Hino Motors, Ltd.  

    Japan     50.21       50.30  

Toyota Motor Kyushu, Inc.  

    Japan     100.00       100.00  

Daihatsu Motor Co., Ltd.  

    Japan     100.00       100.00  

Toyota Finance Corporation  

    Japan     100.00       100.00  

Misawa Homes Co., Ltd.  

    Japan     51.00       51.23  

Toyota Auto Body Co., Ltd.  

    Japan     100.00       100.00  

Toyota Motor East Japan, Inc.  

    Japan     100.00       100.00  

Daihatsu Motor Kyushu Co., Ltd.  

    Japan     100.00       100.00  

Toyota Motor Engineering & Manufacturing North America, Inc.  

    United States     100.00       100.00  

Toyota Motor Manufacturing, Kentucky, Inc.  

    United States     100.00       100.00  

Toyota Motor North America, Inc.  

    United States     100.00       100.00  

Toyota Motor Credit Corporation  

    United States     100.00       100.00  

Toyota Motor Manufacturing, Indiana, Inc.  

    United States     100.00       100.00  

Toyota Motor Manufacturing, Texas, Inc.  

    United States     100.00       100.00  

Toyota Motor Sales, U.S.A., Inc.  

    United States     100.00       100.00  

Toyota Motor Manufacturing de Baja California, S. de R.L. de C.V.  

    Mexico     100.00       100.00  

Toyota Motor Manufacturing Canada Inc.  

    Canada     100.00       100.00  

Toyota Credit Canada Inc.  

    Canada     100.00       100.00  

Toyota Canada Inc.  

    Canada     51.00       51.00  

Toyota Motor Europe NV/SA  

    Belgium     100.00       100.00  

Toyota Motor Manufacturing France S.A.S.  

    France     100.00       100.00  

Toyota Motor Finance (Netherlands) B.V.  

    Netherlands     100.00       100.00  

Toyota Motor Manufacturing (UK) Ltd.  

    United Kingdom     100.00       100.00  

Toyota Financial Services (UK) PLC  

    United Kingdom     100.00       100.00  

Toyota Motor Manufacturing Turkey Inc.  

    Turkey     90.00       90.00  

OOO “TOYOTA MOTOR”  

    Russia     100.00       100.00  

Toyota Motor (China) Investment Co., Ltd.  

    China     90.00       90.00  

Toyota Motor Finance (China) Co., Ltd.  

    China     100.00       100.00  

Toyota Kirloskar Motor Pvt. Ltd.  

    India     89.00       89.00  

P.T. Astra Daihatsu Motor  

    Indonesia     61.75       61.75  

P.T. Toyota Motor Manufacturing Indonesia  

    Indonesia     95.00       95.00  

Toyota Motor Asia Pacific Pte Ltd.  

    Singapore     100.00       100.00  

Toyota Leasing (Thailand) Co., Ltd.  

    Thailand     86.84       86.84  

Toyota Motor Thailand Co., Ltd.  

    Thailand     86.43       86.43  

Toyota Daihatsu Engineering & Manufacturing Co., Ltd.  

    Thailand     100.00       100.00  

Toyota Motor Corporation Australia Ltd.  

    Australia     100.00       100.00  

Toyota Finance Australia Ltd.  

    Australia     100.00       100.00  

Toyota Argentina S.A.  

    Argentina     100.00       100.00  

Toyota do Brasil Ltda.  

    Brazil     100.00       100.00  

Toyota South Africa Motors (Pty) Ltd.  

    South Africa     100.00       100.00  

 

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4.D PROPERTY, PLANTS AND EQUIPMENT

As of March 31, 2018, Toyota and its affiliated companies produced automobiles and related components through more than 50 overseas manufacturing organizations in 26 countries and regions besides Japan. The facilities are located principally in Japan, the United States, Canada, the United Kingdom, France, Turkey, Thailand, China, Taiwan, India, Indonesia, South Africa, Argentina and Brazil.

In addition to its manufacturing facilities, Toyota’s properties include sales offices and other sales facilities in major cities, repair service facilities and research and development facilities.

The following table sets forth information, as of March 31, 2018, with respect to Toyota’s principal facilities and organizations, all of which are owned by Toyota Motor Corporation or its subsidiaries. However, small portions, all under approximately 20%, of some facilities are on leased premises.

 

Facility or Subsidiary Name

 

Location

  Land Area
(thousand
square
meters)
    Number of
Employees
   

Principal
Products or
Functions

Japan (Toyota Motor Corporation)

       

Tahara Plant

  Tahara City, Aichi Pref.     4,029         7,237        Automobiles

Toyota Head Office and Technical Center

  Toyota City, Aichi Pref.     3,569         24,051       

Research and
Development

Higashi-Fuji Technical Center

  Susono City, Shizuoka Pref.     2,037         3,144        Research and
Development

Motomachi Plant

  Toyota City, Aichi Pref.     1,593         7,578        Automobiles

Takaoka Plant

  Toyota City, Aichi Pref.     1,312         4,199        Automobiles

Tsutsumi Plant

  Toyota City, Aichi Pref.     937         5,111        Automobiles

Kamigo Plant

  Toyota City, Aichi Pref.     868         2,996        Automobile parts

Kinu-ura Plant

  Hekinan City, Aichi Pref.     836         3,030        Automobile parts

Honsha Plant

  Toyota City, Aichi Pref.     551         2,028        Automobile parts

Nagoya Office

  Nagoya City, Aichi Pref.     3         2,333        Office

Japan (Subsidiaries)

       

Hino Motors, Ltd.

  Hino City, Tokyo, etc.     6,256         12,705        Automobiles

Daihatsu Motor Co., Ltd.

  Ikeda City, Osaka, etc.     7,820         11,446        Automobiles

Toyota Motor Kyushu, Inc.

  Miyawaka City, Fukuoka Pref., etc.     1,940         7,807        Automobiles

Toyota Auto Body Co., Ltd.

  Kariya City, Aichi Pref., etc.     2,261         11,191        Automobiles

Toyota Motor East Japan, Inc.

  Kurokawa-gun, Miyagi Pref., etc.     2,576         7,192        Automobiles

Outside Japan (Subsidiaries)

       

Toyota Motor Manufacturing, Kentucky, Inc.

  Kentucky, U.S.A.     5,161         8,162        Automobiles

Toyota Motor Thailand Co., Ltd.

  Samutprakan, Thailand     4,414         10,182        Automobiles

Toyota Motor Sales, U.S.A., Inc.

  California, U.S.A.     3,276         5,510        Sales facilities

Toyota Motor Manufacturing Canada, Inc.

  Ontario, Canada     4,752         7,589        Automobiles

Toyota Motor North America, Inc.

  Texas, U.S.A.     724         1,812        Office

Toyota is constantly engaged in upgrading, modernizing and revamping the operations of its manufacturing facilities based on its assessment of market needs and prospects. To respond flexibly to fluctuations in demand in each of its production operations throughout the world, Toyota continually reviews and implements appropriate

 

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production measures such as revising takt time and adjusting days of operation. As a result, Toyota believes it would require unreasonable effort to track the exact productive capacity and the extent of utilization of each of its manufacturing facilities with a reasonable degree of accuracy.

As of March 31, 2018, property, plant and equipment having a net book value of approximately ¥658.7 billion was pledged as collateral securing indebtedness incurred by Toyota Motor Corporation’s consolidated subsidiaries. Toyota believes that there does not exist any material environmental issues that may affect the company’s utilization of its assets.

Toyota considers all its principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of its operations.

See “— Business Overview — Capital Expenditures and Divestitures” for a description of Toyota’s material plans to construct, expand or improve facilities.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A OPERATING RESULTS

Financial information discussed in this section is derived from Toyota’s consolidated financial statements that appear elsewhere in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

Overview

The business segments of Toyota include automotive operations, financial services operations and all other operations. Automotive operations are Toyota’s most significant business segment, accounting for 88% of Toyota’s total revenues before the elimination of intersegment revenues for fiscal 2018. Toyota’s primary markets based on vehicle unit sales for fiscal 2018 were: Japan (25.2%), North America (31.3%), Europe (10.8%) and Asia (17.2%).

Automotive Market Environment

The worldwide automotive market is highly competitive and volatile. The demand for automobiles is affected by a number of factors including social, political and general economic conditions; introduction of new vehicles and technologies; and costs incurred by customers to purchase or operate vehicles. These factors can cause consumer demand to vary substantially in different geographic markets and for different types of automobiles.

During fiscal 2018, for the automotive industry, markets have remained stable in the developed countries and expanded in China, but have slowed down in some resource-rich countries. Meanwhile, there have been movements in different countries and regions to tighten existing regulations or introduce new regulations for the reduction of greenhouse gases, including compulsory quotas for the sale of electrified vehicles.

 

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The following table sets forth Toyota’s consolidated vehicle unit sales by geographic market based on location of customers for the past three fiscal years.

 

     Thousands of units  
     Year Ended March 31,  
     2016      2017      2018  

Japan

     2,059        2,274        2,255  

North America

     2,839        2,837        2,806  

Europe

     844        925        968  

Asia

     1,345        1,588        1,543  

Other*

     1,594        1,347        1,392  
  

 

 

    

 

 

    

 

 

 

Overseas total

     6,622        6,697        6,709  
  

 

 

    

 

 

    

 

 

 

Total

     8,681        8,971        8,964  
  

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East, etc.

During fiscal 2017, Toyota’s consolidated vehicle unit sales in Japan increased primarily as a result of the active introduction of new products and the efforts of dealers nationwide. During fiscal 2018, although vehicle unit sales in Japan decreased compared to the previous fiscal year, for fiscal 2017 and fiscal 2018, the Toyota and Lexus brands’ market share excluding mini-vehicles in Japan was 47.8% and 46.9%, and the market share (including Daihatsu and Hino brands) including mini-vehicles was a record high of 45.0% and 44.4%, each remaining at a high level as a result of the efforts of dealers nationwide, consistent with fiscal 2016. Overseas consolidated vehicle unit sales increased as a whole during fiscal 2017, due mainly to increases in Asia and Europe, despite a decrease in the Middle East, and vehicle unit sales increased as a whole during fiscal 2018, due mainly to increases in Europe and Other.

Toyota’s share of total vehicle unit sales in each market is influenced by the quality, safety, reliability, price, design, performance, economy and utility of Toyota’s vehicles compared with those offered by other manufacturers. The timely introduction of new or redesigned vehicles is also an important factor in satisfying customer needs. Toyota’s ability to satisfy changing customer preferences can affect its revenues and earnings significantly.

The profitability of Toyota’s automotive operations is affected by many factors. These factors include:

 

    vehicle unit sales volumes,

 

    the mix of vehicle models and options sold,

 

    the level of parts and service sales,

 

    the levels of price discounts and other sales incentives and marketing costs,

 

    the cost of customer warranty claims and other customer satisfaction actions,

 

    the cost of research and development and other fixed costs,

 

    the prices of raw materials,

 

    the ability to control costs,

 

    the efficient use of production capacity,

 

    the adverse effect on production due to the reliance on various suppliers for the provision of supplies,

 

    the adverse effect on market, sales and productions of natural calamities and interruptions of social infrastructure, and

 

    changes in the value of the Japanese yen and other currencies in which Toyota conducts business.

 

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Changes in laws, regulations, policies and other governmental actions can also materially impact the profitability of Toyota’s automotive operations. These laws, regulations and policies include those attributed to environmental matters, vehicle safety, fuel economy and emissions that can add significantly to the cost of vehicles.

Many governments also impose local content requirements, impose tariffs and other trade barriers, and enact price or exchange controls that can limit an automaker’s operations and can make the repatriation of profits unpredictable. Changes in these laws, regulations, policies and other governmental actions may affect the production, licensing, distribution or sale of Toyota’s products, cost of products or applicable tax rates. From time-to-time when potential safety problems arise, Toyota issues vehicle recalls and takes other safety measures including safety campaigns relating to its vehicles. Since 2009, Toyota issued safety campaigns related to the risk of floor mat entrapment of accelerator pedals and vehicle recalls related to slow-to-return or sticky accelerator pedals. The recalls and other safety measures described above have led to a number of claims and lawsuits against Toyota. For a more detailed description of these claims and lawsuits, see “Information on the Company — Business Overview — Legal Proceedings” and note 24 to the consolidated financial statements.

The worldwide automotive industry is in a period of global competition which may continue for the foreseeable future, and in general the competitive environment in which Toyota operates is likely to intensify. Toyota believes it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company for the foreseeable future.

Financial Services Operations

The competition in the worldwide automobile financial services industry is intensifying. As competition increases, margins on financing transactions may decrease and market share may also decline as customers obtain financing for Toyota vehicles from alternative sources.

Toyota’s financial services operations mainly include loans and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value added service. Therefore, Toyota has expanded its network of finance subsidiaries in order to offer financial services in many countries.

Toyota’s competitors for retail financing and retail leasing include commercial banks, credit unions and other finance companies. Meanwhile, commercial banks and other captive automobile finance companies also compete against Toyota’s wholesale financing activities.

Toyota’s total finance receivables increased during fiscal 2018 mainly due to an increase in retail receivables. Also, vehicles and equipment on operating leases, net decreased during fiscal 2018 mainly due to the unfavorable impact of fluctuations in foreign currency translation rates.

 

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The following table provides information regarding Toyota’s finance receivables and operating leases in the past two fiscal years.

 

     Yen in millions  
     March 31,  
     2017     2018  

Finance Receivables

    

Retail

     11,453,352       11,995,174  

Finance leases

     1,265,882       1,460,600  

Wholesale and other dealer loans

     3,281,142       3,281,427  
  

 

 

   

 

 

 
     16,000,376       16,737,201  

Deferred origination costs

     172,298       181,764  

Unearned income

     (804,591     (919,967

Allowance for credit losses

    

Retail

     (104,354     (103,457

Finance leases

     (23,962     (28,817

Wholesale and other dealer loans

     (30,896     (36,800
  

 

 

   

 

 

 
     (159,212     (169,074
  

 

 

   

 

 

 

Total finance receivables, net

     15,208,871       15,829,924  

Less – Current portion

     (6,196,649     (6,348,306
  

 

 

   

 

 

 

Noncurrent finance receivables, net

     9,012,222       9,481,618  
  

 

 

   

 

 

 

Operating Leases

    

Vehicles

     6,105,527       6,124,699  

Equipment

     13,096       13,373  

Less – Deferred income and other

     (152,044     (203,679
  

 

 

   

 

 

 
     5,966,579       5,934,393  

Less – Accumulated depreciation

     (1,263,774     (1,352,840

Less – Allowance for credit losses

     (18,889     (15,013
  

 

 

   

 

 

 

Vehicles and equipment on operating leases, net

     4,683,916       4,566,540  
  

 

 

   

 

 

 

Toyota’s finance receivables are subject to collectability risks. These risks include consumer and dealer insolvencies and insufficient collateral values (less costs to sell) to realize the full carrying values of these receivables. See discussion in “Critical Accounting Estimates — Allowance for Doubtful Accounts and Credit Losses” and note 10 to the consolidated financial statements.

Toyota continues to originate leases to finance new Toyota vehicles. These leasing activities are subject to residual value risk. Residual value losses could be incurred when the lessee of a vehicle does not exercise the option to purchase the vehicle at the end of the lease term. See discussion in “Critical Accounting Estimates — Investment in Operating Leases” and note 2 to the consolidated financial statements.

Toyota enters into interest rate swap agreements and cross currency interest rate swap agreements to convert its fixed-rate debt to variable-rate functional currency debt. A portion of the derivative instruments are entered into to hedge interest rate risk from an economic perspective and are not designated as a hedge of specific assets or liabilities on Toyota’s consolidated balance sheet and accordingly, unrealized gains or losses related to derivatives that are not designated as a hedge are recognized currently in operations. See discussion in “Critical Accounting Estimates — Derivatives and Other Contracts at Fair Value” and “Quantitative and Qualitative Disclosures about Market Risk” and notes 21 and 27 to the consolidated financial statements.

The fluctuations in funding costs can affect the profitability of Toyota’s financial services operations. Funding costs are affected by a number of factors, some of which are not in Toyota’s control. These factors

 

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include general economic conditions, prevailing interest rates and Toyota’s financial strength. Funding costs increased during fiscal 2017 and fiscal 2018, mainly as a result of higher interest rates.

Toyota launched its credit card business in Japan in April 2001. As of March 31, 2017, Toyota had 14.9 million cardholders, an increase of 0.6 million cardholders compared with March 31, 2016. As of March 31, 2018, Toyota had 15.3 million cardholders, an increase of 0.4 million cardholders compared with March 31, 2017. Credit card receivables as of March 31, 2017 increased by ¥26.0 billion from March 31, 2016 to ¥409.6 billion, and that as of March 31, 2018 increased by ¥23.1 billion from March 31, 2017 to ¥432.7 billion.

Other Business Operations

Toyota’s other business operations consist of housing (including the manufacture and sale of prefabricated homes), information technology related businesses (including information technology and telecommunications, intelligent transport systems and GAZOO) and other businesses.

Toyota does not expect its other business operations to materially contribute to Toyota’s consolidated results of operations.

Currency Fluctuations

Toyota is affected by fluctuations in foreign currency exchange rates. Toyota is exposed to fluctuations in the value of the Japanese yen against the U.S. dollar and the euro as well as the Australian dollar, the Russian ruble, the Canadian dollar, the British pound, and others. Toyota’s consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.

Translation risk is the risk that Toyota’s consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in those countries in which Toyota does business compared with the Japanese yen. Even though the fluctuations of currency exchange rates to the Japanese yen can be substantial, and, therefore, significantly impact comparisons with prior periods and among the various geographic markets, the translation risk is a reporting consideration and does not reflect Toyota’s underlying results of operations. Toyota does not hedge against translation risk.

Transaction risk is the risk that the currency structure of Toyota’s costs and liabilities will deviate from the currency structure of sales proceeds and assets. Transaction risk relates primarily to sales proceeds from Toyota’s non-domestic operations from vehicles produced in Japan.

Toyota believes that the location of its production facilities in different parts of the world has significantly reduced the level of transaction risk. As part of its globalization strategy, Toyota has continued to localize production by constructing production facilities in the major markets in which it sells its vehicles. In calendar 2016 and 2017, Toyota produced 76.5% and 75.9%, respectively, of its non-domestic sales outside Japan. In North America, 75.9% and 71.1% of vehicles sold in calendar 2016 and 2017, respectively, were produced locally. In Europe, 75.2% and 81.5% of vehicles sold in calendar 2016 and 2017, respectively, were produced locally. Localizing production enables Toyota to locally purchase many of the supplies and resources used in the production process, which allows for a better match of local currency revenues with local currency expenses.

Toyota also enters into foreign currency transactions and other hedging instruments to address a portion of its transaction risk. This has reduced, but not eliminated, the effects of foreign currency exchange rate fluctuations, which in some years can be significant. See notes 21 and 27 to the consolidated financial statements for additional information.

Generally, a weakening of the Japanese yen against other currencies has a positive effect on Toyota’s revenues, operating income and net income attributable to Toyota Motor Corporation. A strengthening of the

 

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Japanese yen against other currencies has the opposite effect. In fiscal 2017, the Japanese yen was on average stronger against the U.S. dollar in comparison to the previous fiscal year, but in fiscal 2018, was on average weaker against the U.S. dollar in comparison to the previous fiscal year. At the end of each of fiscal 2017 and 2018, the Japanese yen was stronger against the U.S. dollar in comparison to the end of fiscal 2016 and 2017, respectively. In fiscal 2017, the Japanese yen was on average stronger against the euro in comparison to the previous fiscal year, but in fiscal 2018, was on average weaker against the euro in comparison to the previous fiscal year. The Japanese yen was at the end of fiscal 2017 stronger against the euro in comparison to the end of fiscal 2016, but was at the end of fiscal 2018 weaker against the euro in comparison to the end of fiscal 2017. See further discussion in “Quantitative and Qualitative Disclosures about Market Risk — Market Risk Disclosures — Foreign Currency Exchange Rate Risk”.

Segmentation

Toyota’s most significant business segment is its automotive operations. Toyota carries out its automotive operations as a global competitor in the worldwide automotive market. Management allocates resources to, and assesses the performance of, its automotive operations as a single business segment on a worldwide basis and assesses financial and non-financial data such as vehicle unit sales, production volume, market share information, vehicle model plans and plant location costs to allocate resources within the automotive operations. Toyota does not manage any subset of its automotive operations, such as domestic or overseas operations or parts, as separate management units.

Geographic Breakdown

The following table sets forth Toyota’s net revenues in each geographic market based on the country location of the parent company or the subsidiaries that transacted the sale with the external customer for the past three fiscal years.

 

     Yen in millions  
     Year ended March 31,  
     2016      2017      2018  

Japan

     8,588,437        8,798,903        9,273,672  

North America

     10,822,772        10,033,419        10,347,266  

Europe

     2,507,292        2,517,601        2,940,243  

Asia

     4,475,623        4,279,617        4,497,374  

Other*

     2,008,994        1,967,653        2,320,955  

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

 

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Results of Operations — Fiscal 2018 Compared with Fiscal 2017

 

     Yen in millions  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Net revenues:

        

Japan

     14,830,868       16,024,844       1,193,976       8.1

North America

     10,239,091       10,574,410       335,319       3.3  

Europe

     2,681,039       3,185,224       504,185       18.8  

Asia

     4,819,821       5,148,139       328,318       6.8  

Other*

     2,161,074       2,453,299       292,225       13.5  

Intersegment elimination/unallocated amount

     (7,134,700     (8,006,406     (871,706     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     27,597,193       29,379,510       1,782,317       6.5  

Operating income (loss):

        

Japan

     1,202,245       1,659,918       457,673       38.1  

North America

     311,194       138,899       (172,295     (55.4

Europe

     (12,244     75,026       87,270       —    

Asia

     435,179       433,199       (1,980     (0.5

Other*

     58,694       112,663       53,969       91.9  

Intersegment elimination/unallocated amount

     (696     (19,843     (19,147     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,994,372       2,399,862       405,490       20.3  

Operating margin

     7.2     8.2     1.0  

Income before income taxes and equity in earnings of affiliated companies

     2,193,825       2,620,429       426,604       19.4  

Net margin from income before income taxes and equity in earnings of affiliated companies

     7.9     8.9     1.0  

Equity in earnings of affiliated companies

     362,060       470,083       108,023       29.8  

Net income attributable to Toyota Motor Corporation

     1,831,109       2,493,983       662,874       36.2  

Net margin attributable to Toyota Motor Corporation

     6.6     8.5     1.9  

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

Net Revenues

Toyota had net revenues for fiscal 2018 of ¥29,379.5 billion, an increase of ¥1,782.3 billion, or 6.5%, compared with the prior fiscal year. The increase resulted mainly from the ¥770.0 billion favorable impact of fluctuations in foreign currency translation rates and the ¥670.0 billion impact of changes in vehicle unit sales and sales mix.

 

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The table below shows Toyota’s net revenues from external customers by product category and by business.

 

     Yen in millions  
     Year ended March 31,      2018 v. 2017 Change  
     2017      2018      Amount      Percentage  

Vehicles

     21,540,563        22,631,201        1,090,638        5.1

Parts and components for overseas production

     468,214        498,802        30,588        6.5  

Parts and components for after service

     1,955,781        2,044,104        88,323        4.5  

Other

     1,067,671        1,173,122        105,451        9.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Automotive

     25,032,229        26,347,229        1,315,000        5.3  

All Other

     781,267        1,073,047        291,780        37.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total sales of products

     25,813,496        27,420,276        1,606,780        6.2  

Financial Services

     1,783,697        1,959,234        175,537        9.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     27,597,193        29,379,510        1,782,317        6.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Toyota’s net revenues include net revenues from sales of products, consisting of net revenues from automotive operations and all other operations, which increased by 6.2% during fiscal 2018 compared with the prior fiscal year to ¥27,420.2 billion, and net revenues from financial services operations which increased by 9.8% during fiscal 2018 compared with the prior fiscal year to ¥1,959.2 billion. The increase in net revenues from sales of products is mainly due to the favorable impact of fluctuations in foreign currency translation rates and the impact of changes in vehicle unit sales and sales mix.

The following table shows the number of financing contracts by geographic region at the end of fiscal 2018 and 2017, respectively.

 

     Number of financing contracts in thousands  
     Year ended March 31,      2018 v. 2017 Change  
     2017      2018      Amount      Percentage  

Japan

     1,977        2,103        126        6.4

North America

     5,394        5,465        71        1.3  

Europe

     1,019        1,112        93        9.1  

Asia

     1,575        1,672        97        6.2  

Other*

     786        846        60        7.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,751        11,198        447        4.2
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania and Africa.

Geographically, net revenues (before the elimination of intersegment revenues) for fiscal 2018 increased by 8.1% in Japan, 3.3% in North America, 18.8% in Europe, 6.8% in Asia, and 13.5% in Other compared with the prior fiscal year. Excluding the impact of changes in the Japanese yen values used for translation purposes of ¥770.0 billion, net revenues in fiscal 2018 would have increased by 8.1% in Japan, 0.7% in North America, 8.0% in Europe, 2.5% in Asia, and 10.4% in Other compared with the prior fiscal year.

 

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The following is a discussion of net revenues in each geographic market (before the elimination of intersegment revenues).

Japan

 

                                                               
     Thousands of units  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Toyota’s consolidated vehicle unit sales*

     4,000           4,137           137            3.4

 

*  including number of exported vehicle unit sales

        
     Yen in millions  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Net revenues:

        

Sales of products

     14,705,518       15,893,465       1,187,947       8.1

Financial services

     125,350       131,379       6,029       4.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     14,830,868       16,024,844       1,193,976       8.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Toyota’s domestic and exported vehicle unit sales increased by 137 thousand vehicles compared with the prior fiscal year and net revenues in Japan increased. For fiscal 2017 and 2018, exported vehicle unit sales were 1,726 thousand units and 1,882 thousand units, respectively.

North America

 

                                                               
     Thousands of units  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     2,837           2,806           (31 )        (1.1 )% 
     Yen in millions  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Net revenues:

        

Sales of products

     8,951,333       9,173,277       221,944           2.5

Financial services

     1,287,758       1,401,133       113,375       8.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     10,239,091       10,574,410       335,319       3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues in North America increased due primarily to the favorable impact of fluctuations in foreign currency translation rates despite vehicle unit sales decreasing by 31 thousand vehicles compared with the prior fiscal year.

 

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Europe

 

                                                               
     Thousands of units  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     925           968           43            4.7
     Yen in millions  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Net revenues:

        

Sales of products

     2,588,968       3,074,396       485,428       18.7

Financial services

     92,071       110,828       18,757       20.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     2,681,039       3,185,224       504,185       18.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues in Europe increased due primarily to the favorable impact of fluctuations in foreign currency translation rates and the 43 thousand vehicle increase in vehicle unit sales compared with the prior fiscal year. The vehicle unit sales increased due mainly to strong sales of C-HR and hybrid vehicles.

Asia

 

                                                               
     Thousands of units  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     1,588       1,543       (45 )        (2.8 )% 
     Yen in millions  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Net revenues:

        

Sales of products

     4,689,774           4,996,339           306,565       6.5

Financial services

     130,047       151,800       21,753       16.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     4,819,821       5,148,139       328,318       6.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues in Asia increased due primarily to the favorable impact of fluctuations in foreign currency translation rates despite vehicle unit sales decreasing by 45 thousand compared with the prior fiscal year.

 

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Other

 

     Thousands of units  
     Year ended March 31,      2018 v. 2017 Change  
     2017      2018      Amount      Percentage  

Toyota’s consolidated vehicle unit sales

     1,347        1,392        45        3.3
     Yen in millions  
     Year ended March 31,      2018 v. 2017 Change  
     2017      2018      Amount      Percentage  

Net revenues:

           

Sales of products

     1,996,087        2,270,150        274,063        13.7

Financial services

     164,987        183,149        18,162        11.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,161,074        2,453,299        292,225        13.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues in Other increased due primarily to the 45 thousand vehicle increase in vehicle unit sales compared with the prior fiscal year. The increase in vehicle unit sales was due mainly to strong sales of Hilux and Etios in Central and South America.

Operating Costs and Expenses

 

     Yen in millions  
     Year ended March 31,      2018 v. 2017 Change  
     2017      2018      Amount      Percentage  

Operating costs and expenses

           

Cost of products sold

     21,543,035        22,600,474        1,057,439        4.9

Cost of financing operations

     1,191,301        1,288,679        97,378        8.2  

Selling, general and administrative

     2,868,485        3,090,495        222,010        7.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25,602,821        26,979,648        1,376,827        5.4
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating costs and expenses:

  

Effect of changes in vehicle unit sales and sales mix

     600,000  

Effect of fluctuation in foreign currency translation rates

     505,000  

Effect of increase of cost of financing operations

     61,300  

Effect of cost reduction efforts

     (165,000

Effect of decrease of miscellaneous costs and others

     (60,000

Other

     435,527  
  

 

 

 

Total

     1,376,827  
  

 

 

 

Operating costs and expenses increased by ¥1,376.8 billion, or 5.4%, to ¥26,979.6 billion during fiscal 2018 compared with the prior fiscal year. This increase resulted from the ¥600.0 billion impact of changes in vehicle unit sales and sales mix, the ¥505.0 billion unfavorable impact of fluctuations in foreign currency translation rates, the ¥61.3 billion increase in cost of financing operations (excluding the effect of fluctuation in foreign currency translation rates), and the ¥435.5 billion increase in other, partially offset by the ¥165.0 billion impact of cost reduction efforts, and the ¥60.0 billion decrease of miscellaneous costs and others.

The decrease in miscellaneous costs and others was due mainly to the ¥300.0 billion decrease in product quality related expenses, partially offset by the ¥75.0 billion increase in labor costs, the ¥50.0 billion increase in

 

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depreciation expenses and the ¥90.0 billion increase in other various costs. “Other” includes the impact of consolidation and deconsolidation of certain entities due to changes in ownership interest.

The decrease in product quality related expenses was due mainly to a decrease in provisions for recalls and other safety measures resulting from a decrease in actual payments during fiscal 2018. See note 13 to the consolidated financial statements for further discussion.

Cost Reduction Efforts

During fiscal 2018, continued cost reduction efforts together with suppliers contributed to a reduction of operating costs and expenses by ¥165.0 billion. This was due to ¥120.0 billion in cost reduction efforts concerning design related costs due mainly to ongoing value engineering activities, and ¥45.0 billion in cost reduction efforts at plants and logistics departments.

These cost reduction efforts related to ongoing value engineering and value analysis activities, the use of common parts resulting in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production. The amount of the effect of cost reduction efforts includes the impact of fluctuation in the price of steel, precious metals, non-ferrous alloys including aluminum, plastic parts and other production materials and parts.

Cost of Products Sold

Cost of products sold increased by ¥1,057.4 billion, or 4.9%, to ¥22,600.4 billion during fiscal 2018 compared with the prior fiscal year. The increase resulted mainly from the impact of changes in vehicle unit sales and sales mix, as well as the unfavorable impact of fluctuations in foreign currency translation rates, the impact of consolidation and deconsolidation of certain entities due to changes in ownership interest, and the increase in depreciation expenses and labor costs, partially offset by the decrease in product quality related expenses and the impact of cost reduction efforts.

Cost of Financing Operations

Cost of financing operations increased by ¥97.3 billion, or 8.2%, to ¥1,288.6 billion during fiscal 2018 compared with the prior fiscal year. The increase resulted mainly from the unfavorable impact of fluctuations in foreign currency translation rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by ¥222.0 billion, or 7.7%, to ¥3,090.4 billion during fiscal 2018 compared with the prior fiscal year. This increase mainly reflected the impact of changes in vehicle unit sales and sales mix, the unfavorable impact of fluctuations in foreign currency translation rates, and the impact of consolidation and deconsolidation of certain entities due to changes in ownership interest.

Operating Income

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     265,000  

Effect of cost reduction efforts

     165,000  

Effect of decrease of miscellaneous costs and others

     60,000  

Effect of marketing activities

     (100,000

Other

     15,490  
  

 

 

 

Total

     405,490  
  

 

 

 

 

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Toyota’s operating income increased by ¥405.4 billion, or 20.3%, to ¥2,399.8 billion during fiscal 2018 compared with the prior fiscal year. This increase was due mainly to the ¥265.0 billion favorable impact of changes in foreign currency exchange rates, the ¥165.0 billion impact of cost reduction efforts, and the ¥60.0 billion decrease in miscellaneous costs and others, partially offset by the ¥100.0 billion impact of marketing activities. The decrease in miscellaneous costs and others was due to the ¥300.0 billion decrease in product quality related expenses, partially offset by the ¥75.0 billion increase in labor costs, the ¥50.0 billion increase in depreciation expenses and the ¥90.0 billion increase in other various costs.

Marketing efforts and marketing activities include changes in vehicle unit sales and sales mix, sales expenses and other. “Other” includes valuation gains and losses from interest rate swaps etc.

From fiscal 2017, the effect of changes in exchange rates includes translational impacts concerning operating income of overseas subsidiaries and concerning provisions in foreign currencies at the end of the fiscal year. During fiscal 2018, the positive effect of changes in exchange rates includes ¥25.0 billion in translational impacts concerning operating income of overseas subsidiaries (North America ¥5.0 billion and Asia ¥20.0 billion) and ¥25.0 billion in translational impacts concerning provisions in foreign currencies at the end of the fiscal year.

During fiscal 2018, operating income (before elimination of intersegment profits) compared with the prior fiscal year increased by ¥457.6 billion, or 38.1%, in Japan, ¥87.2 billion in Europe, ¥53.9 billion, or 91.9%, in Other, and decreased by ¥172.2 billion, or 55.4%, in North America, and ¥1.9 billion, or 0.5%, in Asia.

The following is a description of operating income in each geographic market.

Japan

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     260,000  

Effect of cost reduction efforts

     140,000  

Effect of increase of miscellaneous costs and others

     (35,000

Effect of marketing efforts

     85,000  

Other

     7,673  
  

 

 

 

Total

     457,673  
  

 

 

 

North America

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     20,000  

Effect of decrease of miscellaneous costs and others

     30,000  

Effect of marketing activities

     (245,000

Other

     22,705  
  

 

 

 

Total

     (172,295
  

 

 

 

 

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Europe

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     (5,000

Effect of cost reduction efforts

     20,000  

Effect of decrease of miscellaneous costs and others

     85,000  

Effect of marketing activities

     (5,000

Other

     (7,730
  

 

 

 

Total

     87,270  
  

 

 

 

Asia

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     (25,000

Effect of cost reduction efforts

     15,000  

Effect of marketing efforts

     15,000  

Other

     (6,980
  

 

 

 

Total

     (1,980
  

 

 

 

Other

 

     Yen in millions  
     2018 v. 2017 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     15,000  

Effect of cost reduction efforts

     (10,000

Effect of marketing efforts

     50,000  

Other

     (1,031
  

 

 

 

Total

     53,969  
  

 

 

 

Other Income and Expenses

Interest and dividend income increased by ¥20.5 billion, or 12.9%, to ¥179.5 billion during fiscal 2018 compared with the prior fiscal year.

Interest expense decreased by ¥1.7 billion, or 6.0%, to ¥27.5 billion during fiscal 2018 compared with the prior fiscal year.

Foreign exchange gain (loss), net decreased by ¥10.9 billion, or 32.5%, to ¥22.6 billion during fiscal 2018 compared with the prior fiscal year. Foreign exchange gains and losses include the differences between the value of foreign currency denominated assets and liabilities recognized through transactions in foreign currencies translated at prevailing exchange rates and the value at the date the transaction settled during the fiscal year, including those settled using forward foreign currency exchange contracts, or the value translated by appropriate year-end exchange rates. The ¥10.9 billion decrease in foreign exchange gain (loss), net was due mainly to the losses recorded in fiscal 2018 resulting from the Japanese yen being stronger against foreign currencies at the dates of settlement of the foreign currency trade accounts receivable than at the dates of the transactions.

 

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Other income, net increased by ¥9.7 billion, or 26.9%, to ¥45.9 billion during fiscal 2018 compared with the prior fiscal year.

Income Taxes

The provision for income taxes decreased by ¥124.4 billion, or 19.8%, to ¥504.4 billion during fiscal 2018 compared with the prior fiscal year. This decrease was due mainly to revaluation of deferred tax assets and liabilities resulting from the Tax Cuts and Jobs Act of 2017 of the United States. The effective tax rate for fiscal 2018 was 19.2%.

Net Income Attributable to Noncontrolling Interests and Equity in Earnings of Affiliated Companies

Net income attributable to noncontrolling interests decreased by ¥3.7 billion, or 3.9%, to ¥92.1 billion during fiscal 2018 compared with the prior fiscal year. This decrease was due mainly to a decrease during fiscal 2018 in net income attributable to the shareholders of consolidated subsidiaries.

Equity in earnings of affiliated companies during fiscal 2018 increased by ¥108.0 billion, or 29.8%, to ¥470.0 billion compared with the prior fiscal year. This increase was due mainly to an increase during fiscal 2018 in net income attributable to the shareholders of affiliated companies accounted for by the equity method.

Net Income Attributable to Toyota Motor Corporation

Net income attributable to the shareholders of Toyota Motor Corporation increased by ¥662.8 billion, or 36.2%, to ¥2,493.9 billion during fiscal 2018 compared with the prior fiscal year.

Net income attributable to common shareholders during fiscal 2018 is ¥2,481.6 billion, which is derived by deducting dividends and accretion to Model AA Class Shares of ¥12.2 billion from net income attributable to Toyota Motor Corporation.

Other Comprehensive Income and Loss

Other comprehensive income and loss decreased by ¥235.3 billion to losses of ¥205.2 billion for fiscal 2018 compared with the prior fiscal year. This decrease resulted from unfavorable foreign currency translation adjustment losses of ¥118.9 billion in fiscal 2018 compared with losses of ¥52.4 billion in the prior fiscal year due mainly to appreciation of the yen against the U.S. dollar, from unrealized holding losses on securities in fiscal 2018 of ¥96.5 billion compared with losses of ¥8.0 billion in the prior fiscal year due mainly to changes in prices of marketable securities in stock exchange markets, and from pension liability adjustment gains in fiscal 2018 of ¥21.7 billion compared with gains of ¥92.8 billion in the prior fiscal year due mainly to changes in fair value of plan assets.

 

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Segment Information

The following is a discussion of the results of operations for each of Toyota’s operating segments. The amounts presented are prior to intersegment elimination.

 

     Yen in millions  
     Year ended March 31,     2018 v. 2017 Change  
     2017     2018     Amount     Percentage  

Automotive:

        

Net revenues

     25,081,847       26,397,940       1,316,093       5.2

Operating income

     1,692,973       2,011,135       318,162       18.8  

Financial Services:

        

Net revenues

     1,823,600       2,017,008       193,408       10.6  

Operating income

     222,428       285,546       63,118       28.4  

All Other:

        

Net revenues

     1,321,052       1,646,118       325,066       24.6  

Operating income

     81,327       100,812       19,485       24.0  

Intersegment elimination/unallocated amount:

        

Net revenues

     (629,306     (681,556     (52,250     —    

Operating income

     (2,356     2,369       4,725       —    

Automotive Operations Segment

The automotive operations segment is Toyota’s largest operating segment by net revenues. Net revenues for the automotive segment increased during fiscal 2018 by ¥1,316.0 billion, or 5.2%, to ¥26,397.9 billion compared with the prior fiscal year. The increase mainly reflects the ¥710.0 billion favorable impact of fluctuations in foreign currency translation rates and the ¥670.0 billion favorable impact of changes in vehicle unit sales and sales mix.

Operating income from the automotive operations increased by ¥318.1 billion, or 18.8%, to ¥2,011.1 billion during fiscal 2018 compared with the prior fiscal year. This increase in operating income was due mainly to the ¥265.0 billion favorable impact of changes in foreign currency exchange rates, ¥165.0 billion impact of cost reduction efforts, and the ¥60.0 billion decrease in miscellaneous costs and others, partially offset by the ¥150.0 billion impact of marketing activities.

The decrease in miscellaneous costs and others was due mainly to the ¥300.0 billion decrease in product quality related expenses, partially offset by the ¥75.0 billion increase in labor costs, the ¥50.0 billion increase in depreciation expenses and the ¥90.0 billion increase in other various costs. The impact of marketing activities was due primarily to the increase in sales incentives in North America.

Financial Services Operations Segment

Net revenues for the financial services operations increased during fiscal 2018 by ¥193.4 billion, or 10.6%, to ¥2,017.0 billion compared with the prior fiscal year. This increase was primarily due to the ¥60.0 billion favorable impact of fluctuations in foreign currency translation rates.

Operating income from financial services operations increased by ¥63.1 billion, or 28.4%, to ¥285.5 billion during fiscal 2018 compared with the prior fiscal year. This increase was due primarily to the increase in financing volume and the decrease in expenses related to credit losses and residual value losses, in sales finance subsidiaries.

All Other Operations Segment

Net revenues for Toyota’s other operations segments increased by ¥325.0 billion, or 24.6%, to ¥1,646.1 billion during fiscal 2018 compared with the prior fiscal year.

 

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Operating income from Toyota’s other operations segments increased by ¥19.4 billion, or 24.0%, to ¥100.8 billion during fiscal 2018 compared with the prior fiscal year.

Results of Operations — Fiscal 2017 Compared with Fiscal 2016

 

     Yen in millions  
     Year ended March 31,     2017 v. 2016 Change  
     2016     2017     Amount     Percentage  

Net revenues:

        

Japan

     14,759,488       14,830,868       71,380       0.5

North America

     11,051,970       10,239,091       (812,879     (7.4

Europe

     2,661,331       2,681,039       19,708       0.7  

Asia

     5,003,859       4,819,821       (184,038     (3.7

Other*

     2,210,214       2,161,074       (49,140     (2.2

Intersegment elimination/unallocated amount

     (7,283,744     (7,134,700     149,044       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     28,403,118       27,597,193       (805,925     (2.8

Operating income (loss):

        

Japan

     1,677,522       1,202,245       (475,277     (28.3

North America

     528,819       311,194       (217,625     (41.2

Europe

     72,416       (12,244     (84,660     —    

Asia

     449,189       435,179       (14,010     (3.1

Other*

     108,909       58,694       (50,215     (46.1

Intersegment elimination/unallocated amount

     17,116       (696     (17,812     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     2,853,971       1,994,372       (859,599     (30.1

Operating margin

     10.0     7.2     (2.8 )%   

Income before income taxes and equity in earnings of affiliated companies

     2,983,381       2,193,825       (789,556     (26.5

Net margin from income before income taxes and equity in earnings of affiliated companies

     10.5     7.9     (2.6 )%   

Equity in earnings of affiliated companies

     329,099       362,060       32,961       10.0  

Net income attributable to Toyota Motor Corporation

     2,312,694       1,831,109       (481,585     (20.8

Net margin attributable to Toyota Motor Corporation

     8.1     6.6     (1.5 )%   

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

Net Revenues

Toyota had net revenues for fiscal 2017 of ¥27,597.1 billion, a decrease of ¥805.9 billion, or 2.8%, compared with the prior fiscal year. This decrease mainly reflected the unfavorable impact of fluctuations in foreign currency translation rates of ¥2,380.0 billion, partially offset by the changes in vehicle unit sales and sales mix of ¥1,250.0 billion. For fiscal 2017 automotive market, Europe and Japan progressed in a steady manner and the market in Europe increased by 8.1% in calendar 2016 compared with the prior calendar year and the market in Japan increased by 7.5% compared with the prior fiscal year. Under these automotive market conditions, Toyota’s consolidated vehicle unit sales increased by 3.3% compared with the prior fiscal year to 8,971 thousand vehicles.

 

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The table below shows Toyota’s net revenues from external customers by product category and by business.

 

     Yen in millions  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Vehicles

     22,267,136        21,540,563        (726,573     (3.3 )% 

Parts and components for overseas production

     493,499        468,214        (25,285     (5.1

Parts and components for after service

     2,042,623        1,955,781        (86,842     (4.3

Other

     1,120,555        1,067,671        (52,884     (4.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Automotive

     25,923,813        25,032,229        (891,584     (3.4

All Other

     625,298        781,267        155,969       24.9  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales of products

     26,549,111        25,813,496        (735,615     (2.8

Financial Services

     1,854,007        1,783,697        (70,310     (3.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     28,403,118        27,597,193        (805,925     (2.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Toyota’s net revenues include net revenues from sales of products, consisting of net revenues from automotive operations and all other operations, which decreased by 2.8% during fiscal 2017 compared with the prior fiscal year to ¥25,813.4 billion, and net revenues from financial services operations which decreased by 3.8% during fiscal 2017 compared with the prior fiscal year to ¥1,783.6 billion. The decrease in net revenues from sales of products is mainly due to the unfavorable impact of fluctuations in foreign currency translation rates.

The following table shows the number of financing contracts by geographic region at the end of fiscal 2017 and 2016, respectively.

 

     Number of financing contracts in thousands  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount      Percentage  

Japan

     1,961        1,977        16        0.8

North America

     5,252        5,394        142        2.7  

Europe

     954        1,019        65        6.8  

Asia

     1,531        1,575        44        2.9  

Other*

     767        786        19        2.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,465        10,751        286        2.7
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania and Africa.

Geographically, net revenues (before the elimination of intersegment revenues) for fiscal 2017 increased by 0.5% in Japan and 0.7% in Europe, while they decreased by 7.4% in North America, 3.7% in Asia, and 2.2% in Other compared with the prior fiscal year. Excluding the impact of changes in the Japanese yen values used for translation purposes of ¥2,380.0 billion, net revenues in fiscal 2017 would have increased by 0.5% in Japan, 3.1% in North America, 17.1% in Europe, 8.0% in Asia and 12.8% in Other compared with the prior fiscal year.

 

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The following is a discussion of net revenues in each geographic market (before the elimination of intersegment revenues).

Japan

 

     Thousands of units  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Toyota’s consolidated vehicle unit sales*

             3,818                4,000               182         4.8  % 

 

* including number of exported vehicle unit sales

 

     Yen in millions  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Net revenues:

          

Sales of products

     14,638,709        14,705,518        66,809       0.5  % 

Financial services

     120,779        125,350        4,571        3.8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     14,759,488        14,830,868           71,380        0.5  % 
  

 

 

    

 

 

    

 

 

   

 

 

 

Toyota’s domestic and exported vehicle unit sales increased by 182 thousand vehicles compared with the prior fiscal year and net revenues in Japan increased. For fiscal 2016 and 2017, exported vehicle unit sales were 1,759 thousand units and 1,726 thousand units, respectively.

North America

 

     Thousands of units  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     2,839        2,837        (2     (0.1 )% 
     Yen in millions  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Net revenues:

          

Sales of products

     9,741,529        8,951,333        (790,196     (8.1 )% 

Financial services

     1,310,441        1,287,758        (22,683     (1.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     11,051,970        10,239,091        (812,879     (7.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues in North America decreased due primarily to the unfavorable impact of fluctuations in foreign currency translation rates despite vehicle unit sales being nearly equal to those of the prior fiscal year.

 

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Europe

 

                                                               
     Thousands of units  
     Year ended March 31,     2017 v. 2016 Change  
     2016     2017     Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     844       925       81       9.5
     Yen in millions  
     Year ended March 31,     2017 v. 2016 Change  
     2016     2017     Amount     Percentage  

Net revenues:

        

Sales of products

     2,562,788       2,588,968       26,180       1.0

Financial services

     98,543       92,071       (6,472     (6.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     2,661,331       2,681,039          19,708          0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Despite the unfavorable impact of fluctuations in foreign currency translation rates, net revenues in Europe increased due primarily to the 81 thousand vehicle increase in vehicle unit sales compared with the prior fiscal year. The vehicle unit sales increased due mainly to strong sales of new models such as C-HR and RAV4.

Asia

 

                                                               
     Thousands of units  
     Year ended March 31,     2017 v. 2016 Change  
     2016     2017     Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     1,345       1,588       243       18.1
     Yen in millions  
     Year ended March 31,     2017 v. 2016 Change  
     2016     2017     Amount     Percentage  

Net revenues:

        

Sales of products

     4,850,563       4,689,774       (160,789     (3.3 )% 

Financial services

     153,296       130,047       (23,249     (15.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     5,003,859       4,819,821       (184,038     (3.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues in Asia decreased due primarily to the unfavorable impact of fluctuations in foreign currency translation rates despite vehicle unit sales increasing by 243 thousand compared with the prior fiscal year. The increase in vehicle unit sales was due mainly to increased sales of new models such as Calya, Sienta and IMV in Indonesia and the Philippines.

 

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Other

 

     Thousands of units  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     1,594        1,347        (247     (15.5 )% 
     Yen in millions  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Net revenues:

          

Sales of products

     2,023,206        1,996,087        (27,119     (1.3 )% 

Financial services

     187,008        164,987        (22,021     (11.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2,210,214        2,161,074        (49,140     (2.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues in Other decreased due primarily to the 247 thousand vehicles decrease in vehicle unit sales compared with the prior fiscal year. The decrease in vehicle unit sales was due mainly to decreased sales in the Middle East and Africa.

Operating Costs and Expenses

 

     Yen in millions  
     Year ended March 31,      2017 v. 2016 Change  
     2016      2017      Amount     Percentage  

Operating costs and expenses

          

Cost of products sold

     21,456,086        21,543,035        86,949       0.4

Cost of financing operations

     1,149,379        1,191,301        41,922       3.6  

Selling, general and administrative

     2,943,682        2,868,485        (75,197     (2.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     25,549,147        25,602,821        53,674       0.2
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating costs and expenses:

  

Effect of changes in vehicle unit sales and sales mix

     1,060,000  

Effect of fluctuation in foreign currency translation rates

     (1,470,000

Effect of increase of cost of financing operations

     174,000  

Effect of cost reduction efforts

     (440,000

Effect of increase of miscellaneous costs and others

     729,674  
  

 

 

 

Total

     53,674  
  

 

 

 

Operating costs and expenses increased by ¥53.6 billion, or 0.2%, to ¥25,602.8 billion during fiscal 2017 compared with the prior fiscal year. This increase resulted from the ¥1,060.0 billion impact of changes in vehicle unit sales and sales mix, the ¥174.0 billion increase in cost of financing operations (excluding the effect of fluctuation in foreign currency translation rates) and the ¥729.6 billion increase of miscellaneous costs and others, partially offset by the ¥1,470.0 billion favorable impact of fluctuations in foreign currency translation rates, and the ¥440.0 billion impact of cost reduction efforts.

The increase in miscellaneous costs and others was due mainly to the ¥310.0 billion increase in product quality related expenses, the ¥80.0 billion increase in labor costs, the ¥50.0 billion increase in depreciation expenses and the ¥105.0 billion increase in other various costs.

 

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The increase in product quality related expenses was due mainly to an increase in provisions for recalls and other safety measures resulting from an increase in actual payments during fiscal 2017. See note 13 to the consolidated financial statements for further discussion.

During fiscal 2017 and beyond, Toyota announced recalls and other safety measures including the following:

In June 2016, Toyota announced in Japan and other regions recalls on certain Toyota and Lexus vehicles in relation to the fuel suction plate assembled to the fuel tank. In June 2016, Toyota announced in Japan and other regions recalls on certain Toyota and Lexus vehicles in relation to the curtain shield air bags in the driver and passenger side roof rails. In May, June and October 2016 and in January and March 2017, Toyota announced in Japan and other regions recalls on certain Toyota and Lexus vehicles in relation to the driver/front passenger airbag inflators.

Cost Reduction Efforts

During fiscal 2017, continued cost reduction efforts together with suppliers contributed to a reduction of operating costs and expenses by ¥440.0 billion. This was due to ¥370.0 billion in cost reduction efforts concerning design related costs due mainly to ongoing value engineering activities, and ¥70.0 billion in cost reduction efforts at plants and logistics departments.

These cost reduction efforts related to ongoing value engineering and value analysis activities, the use of common parts resulting in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production. The amount of the effect of cost reduction efforts includes the impact of fluctuation in the price of steel, precious metals, non-ferrous alloys including aluminum, plastic parts and other production materials and parts.

Cost of Products Sold

Cost of products sold increased by ¥86.9 billion, or 0.4%, to ¥21,543.0 billion during fiscal 2017 compared with the prior fiscal year. The increase resulted mainly from the impact of changes in vehicle unit sales and sales mix, as well as the increase in product quality related expenses, depreciation expenses and labor costs, partially offset by the favorable impact of fluctuations in foreign currency translation rates and the impact of cost reduction efforts.

Cost of Financing Operations

Cost of financing operations increased by ¥41.9 billion, or 3.6%, to ¥1,191.3 billion during fiscal 2017 compared with the prior fiscal year. The increase resulted mainly from the increase in expenses related to residual value losses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by ¥75.1 billion, or 2.6%, to ¥2,868.4 billion during fiscal 2017 compared with the prior fiscal year. This decrease mainly reflected the favorable impact of fluctuations in foreign currency translation rates, partially offset by the impact of changes in vehicle unit sales and sales mix.

 

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Operating Income

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating income and loss:

  

Effect of cost reduction efforts

     440,000  

Effect of marketing efforts

     210,000  

Effect of increase of miscellaneous costs and others

     (530,000

Effect of changes in exchange rates

     (940,000

Other

     (39,599
  

 

 

 

Total

     (859,599
  

 

 

 

Toyota’s operating income decreased by ¥859.5 billion, or 30.1%, to ¥1,994.3 billion during fiscal 2017 compared with the prior fiscal year. This decrease was due mainly to the ¥940.0 billion unfavorable impact of changes in foreign currency exchange rates and the ¥530.0 billion increase in miscellaneous costs and others, partially offset by the ¥440.0 billion impact of cost reduction efforts and the ¥210.0 billion impact of marketing efforts. The increase in miscellaneous costs and others was due to the ¥310.0 billion increase in product quality related expenses, ¥80.0 billion increase in labor costs, the ¥50.0 billion increase in depreciation expenses and the ¥105.0 billion increase in other various costs.

Marketing efforts and marketing activities include changes in vehicle unit sales and sales mix, sales expenses and other. “Other” includes valuation gains and losses from interest rate swaps etc.

From fiscal 2017, the effect of changes in exchange rates includes translational impacts concerning operating income of overseas subsidiaries and concerning provisions in foreign currencies at the end of the fiscal year. During fiscal 2017, the negative effect of changes in exchange rates includes ¥130.0 billion in translational impacts concerning operating income of overseas subsidiaries (North America ¥40.0 billion, Europe ¥15.0 billion, Asia ¥50.0 billion and Other ¥25.0 billion) and ¥30.0 billion in translational impacts concerning provisions in foreign currencies at the end of the fiscal year.

During fiscal 2017, operating income (before elimination of intersegment profits) compared with the prior fiscal year decreased by ¥475.2 billion, or 28.3%, in Japan, ¥217.6 billion, or 41.2%, in North America, ¥84.6 billion in Europe, ¥14.0 billion, or 3.1%, in Asia, and ¥50.2 billion, or 46.1%, in Other.

The following is a description of operating income in each geographic market.

Japan

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating income and loss:

  

Effect of cost reduction efforts

     320,000  

Effect of marketing efforts

     85,000  

Effect of increase of miscellaneous costs and others

     (185,000

Effect of changes in exchange rates

     (690,000

Other

     (5,277
  

 

 

 

Total

     (475,277
  

 

 

 

 

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North America

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating income and loss:

  

Effect of cost reduction efforts

     110,000  

Effect of marketing activities

     (125,000

Effect of increase of miscellaneous costs and others

     (115,000

Effect of changes in exchange rates

     (45,000

Other

     (42,625
  

 

 

 

Total

     (217,625
  

 

 

 

Europe

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating income and loss:

  

Effect of cost reduction efforts

     25,000  

Effect of marketing efforts

     25,000  

Effect of increase of miscellaneous costs and others

     (100,000

Effect of changes in exchange rates

     (40,000

Other

     5,340  
  

 

 

 

Total

     (84,660
  

 

 

 

Asia

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating income and loss:

  

Effect of cost reduction efforts

     25,000  

Effect of marketing efforts

     75,000  

Effect of increase of miscellaneous costs and others

     (20,000

Effect of changes in exchange rates

     (115,000

Other

     20,990  
  

 

 

 

Total

     (14,010
  

 

 

 

Other

 

     Yen in millions  
     2017 v. 2016 Change  

Changes in operating income and loss:

  

Effect of cost reduction efforts

     (40,000

Effect of marketing efforts

     150,000  

Effect of increase of miscellaneous costs and others

     (95,000

Effect of changes in exchange rates

     (50,000

Other

     (15,215
  

 

 

 

Total

     (50,215
  

 

 

 

 

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Other Income and Expenses

Interest and dividend income increased by ¥1.1 billion, or 0.7%, to ¥158.9 billion during fiscal 2017 compared with the prior fiscal year.

Interest expense decreased by ¥6.0 billion, or 17.1%, to ¥29.3 billion during fiscal 2017 compared with the prior fiscal year.

Foreign exchange gain (loss), net increased by ¥39.1 billion to ¥33.6 billion during fiscal 2017 compared with the prior fiscal year. Foreign exchange gains and losses include the differences between the value of foreign currency denominated assets and liabilities recognized through transactions in foreign currencies translated at prevailing exchange rates and the value at the date the transaction settled during the fiscal year, including those settled using forward foreign currency exchange contracts, or the value translated by appropriate year-end exchange rates. The ¥39.1 billion increase in foreign exchange gain (loss), net was due mainly to the losses recorded in fiscal 2016 resulting from the Japanese yen being stronger against foreign currencies at the dates of settlement of the foreign currency trade accounts receivable than at the dates of the transactions.

Other income, net increased by ¥23.6 billion to ¥36.2 billion during fiscal 2017 compared with the prior fiscal year.

Income Taxes

The provision for income taxes decreased by ¥249.3 billion, or 28.4%, to ¥628.9 billion during fiscal 2017 compared with the prior fiscal year due mainly to the decrease in income before income taxes and equity in earnings of affiliated companies. The effective tax rate for fiscal 2017 was 28.7%, which was lower than the statutory tax rate in Japan. This was due mainly to the increase in tax credits and the effect of foreign subsidiaries where statutory tax rates are lower than that of Japan.

Net Income Attributable to Noncontrolling Interests and Equity in Earnings of Affiliated Companies

Net income attributable to noncontrolling interests decreased by ¥25.6 billion, or 21.1%, to ¥95.8 billion during fiscal 2017 compared with the prior fiscal year. This was due mainly to a decrease during fiscal 2017 in net income attributable to the shareholders of consolidated subsidiaries.

Equity in earnings of affiliated companies during fiscal 2017 increased by ¥32.9 billion, or 10.0%, to ¥362.0 billion compared with the prior fiscal year. This increase was due mainly to an increase during fiscal 2017 in net income attributable to the shareholders of affiliated companies accounted for by the equity method.

Net Income Attributable to Toyota Motor Corporation

Net income attributable to the shareholders of Toyota Motor Corporation decreased by ¥481.5 billion, or 20.8%, to ¥1,831.1 billion during fiscal 2017 compared with the prior fiscal year.

Net income attributable to common shareholders during fiscal 2017 is ¥1,821.3 billion, which is derived by deducting dividends and accretion to Model AA Class Shares of ¥9.7 billion from net income attributable to Toyota Motor Corporation.

Other Comprehensive Income and Loss

Other comprehensive income and loss increased by ¥896.9 billion to ¥30.1 billion for fiscal 2017 compared with the prior fiscal year. This increase resulted from unfavorable foreign currency translation adjustment losses of ¥52.4 billion in fiscal 2017 compared with losses of ¥362.9 billion in the prior fiscal year due mainly to

 

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appreciation of the yen against the U.S. dollar, from unrealized holding losses on securities in fiscal 2017 of ¥8.0 billion compared with losses of ¥302.6 billion in the prior fiscal year due mainly to an increase in prices of marketable securities in stock exchange markets in Japan, and from pension liability adjustment gains in fiscal 2017 of ¥92.8 billion compared with losses of ¥201.1 billion in the prior fiscal year due mainly to an increase in fair value of plan assets.

Segment Information

The following is a discussion of the results of operations for each of Toyota’s operating segments. The amounts presented are prior to intersegment elimination.

 

     Yen in millions  
     Year ended March 31,     2017 v. 20