Toyota To Raise Prices, Test Consumer Resilance

Toyota Motor (NYSE: TM) will raise prices on some of its cars and light trucks by 2.2% in May. It is a risk worth taking if  sales of all vehicles in the US will continue to rise as they have for the last six months.  Toyota also is betting that the damage done to its reputation by recalls has begun to recede.

Edmunds recently forecast that Toyota will be the only one of the large car companies which will have a drop in sales in March. A resurgent GM (NYSE: GM) and the popularity of Honda Motor (NYSE: HMC) and Hyundai models may be contributing factors. Toyota has picked a bad time to ask more of potential buyers, if that is so.

Automakers are at the point at which they will need to raise prices or live with lower margins. Component costs have been hit by supply constraints from Japanese suppliers, transportation costs, and the increase in metals prices. It is a classic squeeze. Some firms in the industry will live with low profits in the name of market share improvement. Others will assume that their products are desirable enough and that the market is hardy enough that small price increases will go unnoticed.

Toyota is not just up against its reputation and inflation. GM and Chrysler are in the early stages of proving that their recoveries are sustainable. They may hold or drop prices to boost sales figures. The debt that was stripped from their balance sheets in Chapter 11 and capital provided to them by the US government will make their ability to take this course more realistic.

Toyota may be the first of the large domestic companies to raise retail prices. Competition may be hungry enough that it will also be the last.

Douglas A. McIntyre