Toyota has reported in its recently released annual financial report that it incurred losses in its leasing operations for the fiscal year 2003. The company reported similar losses in 2002.

"Toyota faces increasing competition in its financial services operations from financial institutions including banks, savings institutions and leasing companies," the report said. "These leasing companies include those affiliated with other automobile manufacturers, in particular those of major U.S. producers. As competition increases, spreads earned on financing transactions may decrease and market share may also decline as customers obtain financing for Toyota vehicles from alternative sources."

According to the annual report, the number of vehicles returned at the end of the leases has grown in recent years. In 1996, fewer than 20 percent of vehicles leased by Toyota Motor Credit Corp. were returned at the end of the lease period. In fiscal years 2002 and 2003, however, the company had a return rate of about 50 percent, two and a half times higher than 1996 levels.

In recent years, the resale values of returned vehicles have been low, largely because of an abundant supply of used vehicles in the market that has exerted downward pressure on market prices, according to the report.

To the extent that sales and financing incentives remain an integral part of sales promotion (reducing new-vehicle prices and cost of ownership), resale prices of used vehicles and, correspondingly, the carrying value of Toyota's leased vehicles could be subject to further downward pressure, according to the report.