Toyota and Honda, two of the world’s biggest automakers, aren’t known for making flashy cars or high end exotics. Quite the opposite. More often, they’ve been called boring. Even Honda’s own designers have said so. Akio Toyoda, that company’s chairman and scion of its founding family, was so frustrated with this, he once demanded no more boring cars. The word boring and the word Lexus would never be used in the same sentence again. You know, we are always seeing a sort of pedestrian, right? Like you buy a Camry, but you know it’s not cool.
Despite the image. Toyota and Honda rule the used car lot. How do you feel about 500 bucks? Let’s do this. These two brands and their luxury divisions hold their values better than any other. It matters a lot. And it is not something that Honda has been able to achieve overnight. We want to make sure that they’ve maintained their value above the rest of the competition.
This relentless pursuit of making sure that we’re producing what customers want and that they’re durable, we stay hyper focused on that, and we don’t take that for granted. But their records aren’t perfect. And on top of it, it’s a chaotic time in automotive history – with EVs, software, upstart brands, and looming Chinese competition. So why do Toyota and Honda hold their value so well? And can they stay on top? Toyota has topped Kelley Blue Book’s best resale value list eight times since 2014, including the last four consecutive years. Lexus has won the group’s award five times. 2024 is its third consecutive. Lexus won the luxury category on J.D. Power’s residual awards list.
The market tends to have much greater demand than Toyota supplies up front, which keeps resale high, which keeps consumers happy, and the cycle continues on and on. Honda is another big winner. Among mainstream brands, it bested its Japanese rival in J.D. Power’s ranking. Edmunds data shows, overall, Toyota and Honda are neck and neck, as are their higher-end Acura and Lexus brands. Honda’s numbers are impressive, but Toyota’s stand apart. It’s the biggest automaker in the world, sells many
more cars than Honda and has a greater selection. For example, Honda doesn’t have a full line of pickup trucks. Those typically have lackluster resale values, as they tend to be heavily incentivized and get beat up by owners. In addition, the higher volume means more supply that should drive down prices. Not in Toyota’s case. Toyota is the number one selling nameplate in the United States automotive industry. Chevy, Ford kind of go back and forth between who’s number two. Toyota is 40% bigger than them.
Toyota, and in a slightly different way, rival Honda have managed to get to this position without relying on some of the strategies other automakers resort to in order to sell cars, which can hurt a brand and drive down resale value. Automakers do three things to push volume when times are tough: incentives, fleet sales, and leasing. Take incentives. If you’ve ever heard that a car loses 10% in value as soon as you drive it off the lot, it’s because most cars are sold with incentives and the market factors that determine what your car is worth.
When you do trade in your car at the dealership, the dealer is going to give you a price for it. That assumes you got some kind of incentive. Because chances are you have. Toyota offers very little in incentives. Honda says it spends about 23% less than rivals. From sales and production planning to manufacturing, we work very closely to make sure that we have enough inventory on dealer lots to sell, but not too much. We don’t spend a lot of incentive dollars relative to the industry.
Then you’re going to have higher resale value because the demand that drives the new car side, it’s going to drive the used car side. Fleet sales is essentially bulk sales, like to rental companies or the government . About 14% of Toyota’s sales are in the fleet. Honda’s are just 1.8. That’s far lower than Ford, Chevrolet and Chrysler. Bulk sales usually come with discounts. It’s kind of like the incentive, but not quite the same. It lowers the transaction price overall.
A lot of fleet cars tend to have fewer bells and whistles, and their presence in the used market drives the brand’s overall resale value down also. Your buyer could decide to unload its whole fleet at once. Well, that’s one of the reasons Tesla’s retention values are as low as they are. They can’t control that aspect of it because they’ve sold a big chunk of vehicles into the marketplace. And finally, leasing. Toyota is among the companies with the lowest level of it. That hasn’t always been the case. Honda, on the other hand, is among the highest.
Leases usually have lower payments than purchases. It’s another tool automakers use to sell more cars. But if you over-rely on it, you add more vehicles to the used market when the lease is up. It’s simple supply and demand. Interesting thing with Toyota is we perhaps don’t know how big Toyota could actually be, because they are not really doing the sorts of activities to stoke demand artificially in the form of unnatural levels of incentives, or pushing out production to the fleet channel. Toyota tends to avoid a lot of these brand destroying activities, even as they are number one.
This is a day’s supply, a way of measuring how much inventory a dealer has. You want that number to be low. Lower day supply means cars are selling faster. The three brands with the lowest numbers are Lexus, Toyota and Honda. Frankly, it’s probably lower than I’m comfortable with. I’d like to have a few more days supply in stock, but managing that, not overbuilding, also impacts the long term resale value of the products. Our target is to make sure that the dealers have enough supply on dealer lots to sell in one month, and they’re turning their inventory every month, and that will also go into how we’re able to maintain our residual values because we’re able to maintain the right mix of inventory, which is not an easy thing to do. And it’s a constant challenge that we work on.
Here’s days to turn – the number of days it takes to sell a car – for a handful of mainstream US brands. Toyota is by far the lowest. Honda is third, barely edged out by Subaru. In addition to all this, these companies, especially
Toyota, have strong reputations for quality, durability and reliability. These three words even form a slogan at Toyota, often abbreviated as QDR. The culture here is completely different at Toyota, and I think that’s a huge competitive advantage. QDR is the cornerstone. Customer satisfaction and focus is the cornerstone. And we just relentlessly kaizen…you know the term kaizen. It’s always trying to improve. Quality and reliability, helped it overcome early failures in the US market and win over a skeptical
public. When Toyota came to the US, they built cars that weren’t exactly what the US market wanted, and they had to go back and re-engineer vehicles to make sure that they appeal to consumer tastes here. Lexus and Toyota top Consumer Reports reliability ranking with Mini in third place and Honda and Acura in fourth and fifth. In 2024, the group began ranking 5 to 10 year old used cars, and Toyota and Lexus topped that list, too. The Honda brands don’t fare nearly as well in J.D. Power’s dependability study, but Toyota and Lexus top it.
A lot of consumers are willing to pay more, both for the perception and the reality that a Toyota vehicle is not going to break down. There’s examples of people driving their Lexuses and Toyotas well past a million miles. It is rare, but those vehicles can certainly go the distance. These automakers are also the number one and number two sellers of hybrids in a market that can’t get enough of them. It takes just 26 days for a dealer to sell a hybrid, compared with 58 days for the industry overall.
Same with resale. Three year old used EVs hold 44% of their value. Plain gas cars 65%. Hybrids 72. Automaker profits usually hover in the high single digits to low double digits range. Every automaker is tempted to build and sell just a few more units. But carmakers’ costs are high and mostly fixed. About 70% of the price of a vehicle goes to the direct cost of producing it, building the engine, stamping the sheet metal, and keeping the factory lights on.
Two thirds of what’s left is eaten up by marketing, product development and everything else, so about 10% profit. If a company makes a million cars, profits don’t flow until they’ve sold about 900,000. You want to build one more, you want to sell one more because that’s closer. You get to Nirvana, where the profits just start flowing in. But the challenge is if the demand isn’t there. That’s where the fleet comes in. Incentivizing comes in. All kinds of things come into play. What sets Toyota and Honda apart is they tend not to build cars they aren’t sure they can sell.
So it’s a tightrope walk in manufacturing and nobody walks that better than Toyota. The renowned Toyota Production System especially is credited with introducing revolutionary manufacturing principles, including, among other things, concepts sometimes called lean manufacturing or just in time production. The idea is to reduce waste of all kinds and improve efficiency as much as possible. Nothing is made until there is a need for it that holds true through the entire chain. The Toyota Production System is probably the closest thing in the auto industry.
It’s called a pull system because production is pulled by demand. The reputation for quality and durability also goes back to manufacturing on a Toyota factory floor. For example, any employee can stop the assembly line by pulling a cord if they notice a defect that allows the company to catch things early. They’re making big investments in training every worker or every maintenance worker, every engineer, and how to solve problems. They also standardize designs.
Even something as simple as the hood of a car will be designed similarly across models. And when you standardize, you’re making a larger volume, which reduces cost, but also you can fine tune and work out any quality issues over years of practice. They will work on testing and retesting and retesting and fine tuning the standards until it’s almost perfect. The company also moves slowly and thoroughly, even when it takes big leaps. It considered 80 different potential technologies for its hybrid powertrain on the original Prius.
It doesn’t stuff cars with features customers aren’t asking for, so there is less pressure to include the latest and greatest. This is also true of Honda. We’ve had a relentless focus on cost controls. Some brands may put a piece of equipment on a car because it’s more profitable. Right. And that just doesn’t enter our mentality. It’s what the customer wants and at what price. You do risk losing customers to the latest and greatest, but by going with tried and true technology, it’s really enabled them to say, look, you might miss out on a few gadgets here and there, but we’re going to build a vehicle that, you know, is going to go forever.
