Last Updated: May 8, 2008: 1:27 PM EDT
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Toyota's so-called tumble

Don't confuse its weak earnings with poor performance. Toyota still looms over its competitors.

By Alex Taylor III, senior editor

NEW YORK (Fortune) -- Flag-waving American loyalists were heartened to see the announcement that Toyota's January-to-March profit sank 28%. It provided evidence that even mighty Toyota can't escape the Four Horsemen of the Apocalypse - the deadly combination of high fuel prices, surging raw material costs, the global credit crunch and a strong yen.

Indeed, in some quarters, Toyota (TM) is even more disliked than General Motors (GM, Fortune 500). So the results announced Thursday morning, along with President Katsuaki Watanabe's comment that "We are facing a severe business environment," must have produced a wonderful moment of schadenfreude.

But what came after that should have drained the smiles from their faces faster than a run-in with Tony Soprano. Toyota made a forecast for the next 12 months that is just as grim as its results over the last three. Toyota sees hard times. And if Toyota - the industry's biggest, strongest player - catches a cold, most of the rest will likely develop pneumonia.

Here's the picture: Toyota expects its revenues for the 2009 fiscal year, which ends next March, to fall nearly 5%. Its net income, meanwhile, is expected to plummet 27%. Foreign exchange losses are a big factor, but most of the rest of the damage will come from North America. While Toyota's vehicle sales in Toyota's other regions around the world are expected to rise, sales in North America could drop 6.4%.

That's a huge blow to optimists in the American industry who had expected sales to pick up in the second half of this year and continue to cruise in '09. And it could well delay plans to return to profitability next year, as Ford (F, Fortune 500) has promised, or to get back to break-even, as Chrysler hopes to do.

Everybody's biggest weakness continues to be the sales of large pickups and SUVs. Even Toyota struggles to move its Tundra pickups and Sequoia utility vehicles. Passenger cars, meanwhile, don't waste a minute on dealers' lots. In the U.S. last month, the Toyota Camry outsold the Chevy Silverado pickup to become the second most popular vehicle on the market.

Toyota is already preparing for the extended downturn. In attacking raw material prices, for instance, it is reducing variations of sheet steel by 20%. And weakness in North America aside, Toyota seems to be moving from strength to strength. In the world's largest developing markets - Brazil, India, Russia, and China - it is making impressive progress.

Meanwhile, the brave leap into hybrid gas-electric technology Toyota made 15 years ago continues to pay off. Having all but single-handedly popularized the first new powertrain technology in a century, it has seen cumulative sales of hybrid vehicles rise to 1.4 million. The Prius hybrid has been so popular that the company is expanding the original sedan into its own model lineup. Less adventurous competitors like Nissan (NSANY) and General Motors are being forced to pay catch up.

Toyota warns that it will be spending more on R&D in the future as it works to meet the 35 miles-per-gallon fuel economy standards for 2020 in the U.S. And if California should eventually win a waiver to impose its own far-stricter standards, the pressure to make smaller, lighter, more efficient cars will only ratchet up.

Again, however, Toyota has a lead over its competitors. Even in the field of plug-in hybrids, where GM has claimed a big advantage, Toyota says it plans to launch a model in 2010 - the same year as GM's target for the Chevy Volt

So consider Toyota the canary in the coal mine - a harbinger of what lies ahead for the rest of the industry. And view that headline - "Toyota profit drops 28% - with some perspective.

As a blogger on the Detroit Free Press Web site wrote Thursday morning, "It would be fantastic to have this same headline for GM, Ford, or Chrysler - you know, if they ever made a profit." To top of page