How Toyota Could Become the U.S. Sales Champ

It once seemed unthinkable, but Toyota is close to selling more cars in the U.S. than GM.

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There's little doubt that Toyota will displace General Motors as the world's biggest automaker when 2008 sales are finally tallied. GM edged out its Japanese rival in 2007, but the American giant continues to struggle with a drawn-out turnaround plan and billions in losses. Toyota, by contrast, has been growing virtually everywhere it does business, with record profits in 2007. Ascending to No. 1 worldwide seems inevitable.

Now, here's a startling new possibility: Toyota could overtake GM in its home market, the first time ever that a foreign company would be the No. 1 seller of cars in the United States. Only a few months ago, that seemed implausible. Toyota's market share had grown consistently, to about 16 percent of the U.S. market at the end of 2007. But GM still had a commanding lead, with 23 percent of the market. And share swings of more than a point or two in a given year are rare.

But car sales this year have flipped more dramatically than anybody anticipated, and suddenly Toyota is within striking distance of GM. In May, Toyota's market share surged to 18.4 percent, according to J.D. Power & Associates, as buyers flocked to small, efficient cars like the Corolla, Yaris, and Scion xB. Sales of GM pickups and SUVs plummeted, leaving GM with 19.3 percent of the market—less than a single point above Toyota. And GM recently announced it will close four plants and curtail production of light trucks by about 40 percent. Those developments could reorder the U.S. auto industry. Some possible scenarios:

Toyota bounces GM. Toyota's sales have actually declined by 3.5 percent so far in 2007—but that's a strong performance compared with GM's 16 percent decline, which is why Toyota's market share is rising sharply. In May alone, the sales gap was much bigger: GM's sales plunged by 28 percent, compared with a mere 4.3 percent drop for Toyota. Like GM, Toyota is suffering from a severe drop in sales of big vehicles like the Tundra pickup and the 4Runner SUV. But GM is far more dependent on big vehicles, and Toyota has a much stronger lineup of small cars and crossovers.

If the pronounced shift in buying patterns continues, Toyota's market share could eclipse GM's on a monthly basis through the summer or fall. But GM will probably retain more market share for '08 overall, given that it started the year much stronger than it is now. As for 2009—that could be a close race.

U.S. Market Share by Manufacturer

  May 2007 May 2008
GM 23.8% 19.3%
Toyota 17.2 18.4
Ford 16.5 15.4
Chrysler 12.8 10.7
Honda 9.3 12.0
Nissan 6.0 7.2
Hyundai 4.6 5.6
BMW (includes Mini) 2.0 2.3
Volkswagen (includes Audi) 2.0 2.2
Mercedes (includes Smart) 1.4 1.8

GM rebounds. May was a wild month for car sales, with several developments that stunned analysts. Sales of big pickup trucks, for instance, fell below 10 percent of the total for the first time in decades. Compact cars, which usually represent about 15 percent of the market, rose to more than 20 percent. And sales of large vehicles fell by a staggering 36 percent. "We rarely see swings like that," says Tom Libby of J.D. Power. "The question is whether May was the beginning of a trend or an aberration."

Libby tends to think it was an aberration, since research suggests gas prices would have to stay near $4 per gallon for a year before such abrupt changes in buying habits become permanent. So far, they've been near that level only for a couple of months. If Libby's right, car sales over the summer won't be weighted so heavily against larger vehicles, which would pad GM's market share. But others see it differently—most notably, GM CEO Rick Wagoner, who said in May that rising gas prices and changes in the U.S. car market are "more structural than cyclical."

Honda surges. Honda may be in an even better position that Toyota, because it has no full-size trucks or SUVs to weigh down sales. And its numbers prove it. Total industry sales are down about 8 percent so far this year. Honda's are up 5 percent. And for the first time ever, the thrifty Civic was the top-selling overall vehicle in May. Honda's market share has risen from 9.3 percent a year ago to 12 percent, surpassing Chrysler. It could even pass No. 3 Ford on a monthly basis by the end of the year.

Ford and Chrysler recede. This seems likely under any scenario, at least through the end of '08. Ford, heavily reliant on the F-150 pickup and SUVs like the Explorer, has the same big-truck problem as GM. Many analysts think Ford plans to ax its Mercury brand, which could cost a full percentage point of market share. Newer vehicles like the Edge, Fusion, and Focus will help, but Ford needs more of them, and it will take awhile. Chrysler—once one of the "Big Three"—is now the fifth-largest U.S. carmaker and drifting further. A $2.99 gas-price guarantee promotion was supposed to goose sales—but instead, they fell 25 percent in May. If discounted gas doesn't help sell cars, it's hard to know what will.