Toyota Motor (TM)

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 68 million units in 2008.

Automobile sales are affected by a number of factors including:

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

The disruption in the financial markets stemming from the subprime mortgage crisis deepened in the latter half of fiscal 2009. The disruption extended beyond the U.S. and Europe and spread worldwide, including resource-rich countries and emerging countries, resulting in a global financial crisis. The real economy has suffered as a result and the world economy faces a serious recession.

The automotive industry has also been affected, experiencing a rapid contraction in the worldwide market. In particular, in Japan, the U.S. and Europe, the markets contracted significantly in the latter half of fiscal 2009. Furthermore, the growth in resource-rich markets and emerging markets stalled abruptly.

While Toyota expects the automotive market to grow in the medium- to long-term driven principally by the growth in resource-rich markets and the emerging markets, the automotive market is rapidly contracting

8

Table of Contents

currently. Furthermore, global competition is severe, as competition in compact and low-price vehicles intensifies, and as technological development and development of new products become more frequent with an increased global awareness in the environment.

In 2008, Europe, North America, China, Asia, and Japan were the world’s largest automotive markets. Worldwide market share, based on total automobile sales on a retail basis in each market, was 32% for Europe, 23% for North America (22% excluding Mexico and Puerto Rico), 13% for China, 8% for Asia, and 7% for Japan. In Europe, new vehicle sales decreased from the previous year to approximately 21.9 million units. In North America, new vehicle sales decreased to approximately 16.2 million units. In China, new vehicle sales increased to approximately 9.1 million units. In Asia (including India but excluding Japan and China), new vehicle unit sales remained at the same level at approximately 5.5 million units. In Japan, total new vehicle unit sales (including mini-vehicles) decreased to approximately 5.0 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 and 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 an automaker’s operations. These 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.

Since 2000, the global automotive industry has experienced various transactions which have promoted consolidation within the industry. There are various reasons behind these transactions including the need to respond to the global overcapacity in the production of automobiles, the need to reduce costs and improve efficiencies 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. In recent years, however, there has been a trend towards reviewing and reconsidering some of the business consolidations.

Toyota believes that it has the resources, strategies and technologies in place to compete effectively in the industry on its own. In addition, 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.

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 72 million units in 2007.

Automobile sales are affected by a number of factors including:

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

In 2007, Europe, North America, China, Asia, and Japan were the world’s largest automotive markets. Worldwide market share, based on total automobile sales on a retail basis in each market, was 32% for Europe, 27% for North America (25% excluding Mexico and Puerto Rico), 12% for China, 8% for Asia, and 7% for Japan. In Europe, new vehicle sales increased from the previous year to approximately 23.1 million units. In North America, new vehicle sales decreased slightly to approximately 19.4 million units. In China, new vehicle sales expanded at a high growth rate to approximately 8.5 million units. In Asia (including India but excluding Japan and China), new vehicle unit sales increased to approximately 5.5 million units. In Japan, total new vehicle unit sales (including mini-vehicles) decreased to approximately 5.4 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 and 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 an automaker’s operations. These 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.

Since 2000, the global automotive industry has experienced various transactions which have promoted consolidation within the industry. There are various reasons behind these transactions including the need to respond to the global overcapacity in the production of automobiles, the need to reduce costs and improve efficiencies 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. In recent years, however, there has been a trend towards reviewing and reconsidering some of the business consolidations.

Toyota believes that it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company. In addition, Toyota believes that its research and development initiatives,

8

Table of Contents

particularly the development of environmentally friendly new vehicle technologies, vehicle safety and information technology, provide it with a strategic advantage as a global competitor.

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.

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 69 million units in 2006.

Automobile sales are affected by a number of factors including:

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

In 2006, North America, Europe, China and Japan were the world’s largest automotive markets. Worldwide market share, based on total automobile sales on a retail basis in each market, was 29% for North America (27% excluding Mexico and Puerto Rico), 32% for Europe, 11% for China and 8% for Japan. In North America, new vehicle sales maintained a high level of approximately 20.0 million units. In Europe, new vehicle sales increased slightly from the previous year to approximately 21.8 million units. In China, new vehicle sales expanded at a high growth rate to approximately 7.5 million units, and in Japan, total new vehicle unit sales (including mini-vehicles) decreased slightly to approximately 5.7 million units. In Asia (including India but excluding Japan and China), new vehicle unit sales remained at approximately the same level as the previous year at approximately 5.1 million units.

7

Table of Contents

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 components and impose tariffs and other trade barriers and 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 an automaker’s operations. These 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 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.

Since 2000, the global automotive industry has experienced various transactions which have promoted consolidation within the industry. There are various reasons behind these transactions including the need to respond to the global overcapacity in the production of automobiles, the need to reduce costs and create efficiencies 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. In recent years, however, there has been a trend towards reviewing and reconsidering some of the business consolidations.

Toyota believes that it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company. In addition, 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 as a global competitor.

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.

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 66 million units in 2005.

Automobile sales are affected by a number of factors including:

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

In 2005, North America, Europe, China and Japan were the world’s largest automotive markets. Worldwide market share, based on total automobile unit sales on a retail basis in each market, was 31% for North America, 32% for Europe and 9% each for China and Japan. In North America, new vehicle sales maintained a high level of 20.4 million units. In Europe, new vehicle sales increased slightly from the previous year to 21.2 million units. In China, while the growth of the market slowed slightly, sales expanded by 0.7 million units to 5.95 million units in 2005. In Japan, total vehicle unit sales (including mini-vehicles) in 2005 remained at approximately the same level as the previous year at 5.85 million units. In East and Southeast Asia (excluding Japan and China) in 2005, unit sales increased by 9% to 3.75 million units.

The worldwide automotive industry is affected significantly by government regulation aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of vehicles. Many governments also regulate local content and impose tariffs and other trade barriers and 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 an automaker’s operations. These 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 manufacturing of automobiles and their 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 and lessen their exposure to trade restrictions and tariffs.

8

Table of Contents

Transactions since 2000 have resulted in consolidation within the worldwide automotive industry. There are various reasons for these transactions. They include responses to global overcapacity in the production of automobiles, the need to reduce costs and create efficiencies 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. In recent years, however, there has been a trend towards reviewing and reconsidering some of the business consolidations.

Toyota believes that it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company. In addition, Toyota believes that its research and development initiatives, particularly the development of environmentally friendly new vehicle technologies and intelligent transport systems, provide it with a strategic advantage as a global competitor.

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.

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 63 million units in 2004.

Automobile sales are affected by a number of factors including:

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

In 2004, North America, Europe and Japan represented the world’s top three automotive markets. Worldwide market share, based on total automobile unit sales on a retail basis in each market, was 32% for North America, 33% for Europe and 9% for Japan. In North America, new vehicle sales maintained a high level of 20.1 million units primarily attributable to the continuation of sales promotion incentives. In Europe, new vehicle sales increased slightly from the previous year to 20.8 million units due to the economic recovery. In Japan, consumer demand for passenger cars remain at a low level due to weak consumer spending. Commercial vehicles sales in Japan decreased slightly following a rise in replacement demand due to stricter gas emissions regulations in 2003. As a result, total vehicle unit sales (including mini-vehicles) in Japan in 2004 remained at approximately the same level as the previous year at 5.85 million units. In East and Southeast Asia, the economic recovery is resulting in growing demand for new vehicles in many countries. As a result, unit sales in East and Southeast Asian markets (excluding Japan, China and Hong Kong) in 2004 increased by 5% to 3.46 million units. In China (including Hong Kong), while the growth of the market is not as precipitous as before, sales expanded by nearly 0.7 million units to 5.27 million units in 2004.

The worldwide automotive industry is affected significantly by government regulation aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of vehicles. Many governments also regulate local content and impose tariffs and other trade barriers and 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 an automaker’s operations. These regulations can also make the repatriation of profits to an automaker’s home country difficult.

8

Table of Contents

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 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 and lessen their exposure to trade restrictions and tariffs.

Recent transactions have resulted in consolidation within the worldwide automotive industry. These transactions include:

The reasons for these consolidation transactions vary, but include responses to global overcapacity in the production of automobiles, the need to reduce costs and create efficiencies 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 it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company. In addition, Toyota believes that its research and development initiatives, particularly the development of environmentally friendly new vehicle technologies and intelligent transport systems, provide it with a strategic advantage as a global competitor.

Toyota’s ability to compete in the consolidating 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.

9

Table of Contents