Global Economics

Japan Carmakers Ask: What Recession?


Subprime, a rising yen, shrinking sales at home, and high oil prices aren't hurting earnings at Honda, Nissan, and other Japanese auto companies

It has been a rough ride for Japan's economy of late. The government has trimmed its growth figure for the current financial year to 1.3%, from 2.1% a year ago; average monthly wages slipped 0.7% in 2007; and the country's economy minister, in a Jan. 18 speech calling for a greater focus on growth, even admitted "Japan is no longer in a situation in which the nation is a first-class economy."

Just imagine how dismal the national mood would be without Japan's carmakers. Sure, domestic auto demand is at a 25-year low and the U.S. economy—where Toyota Motor (TM), Honda Motor (HMC), and Nissan Motor (NSANY) make the lion's share of their profits—only grew 2.2% in 2007, the worst rate of expansion in five years. But halfway through the current earnings cycle, automakers' results—buoyed by rapid growth in emerging economies such as India, China, and the Middle East—for the three months ended Dec. 31 are better than expected.

This afternoon in Tokyo, Nissan was the latest automaker to post healthy results. At a press conference, the company announced quarterly operating profits of $1.18 billion, an increase of 15.8% compared to a year ago and the first quarterly rise in more than a year. Sales also increased, by 18%, to $23.6 billion as Nissan sold 898,000 vehicles during the quarter, a rise of 13%. Even in the U.S., where the overall market is shrinking, Nissan sales edged up 3.7%, helping it increase share.

"Although the market outlook remains volatile for the coming months, Nissan is focused and on track to deliver our full-year objectives," Chief Executive Carlos Ghosn noted in a statement. The statement added that Nissan maintains its full-year target for operating earnings of $5.8 billion for the financial year ending in March.

Honda's Record-Breaking Quarter

If Nissan's numbers are healthy, Honda's figures, released on Jan. 30, are radiant. The Tokyo-based automaker, boosted by stronger sales in Europe, the U.S., and China, posted a record-breaking quarter. Honda's operating income rose to $2.7 billion, a 34.7% increase over last year, while sales increased by 10%, to $26.7 billion. The company, benefiting from its reputation for fuel-sippers, also increased its full-year earnings projection by 7.8% to $6.5 billion. So much for the slowdown.

Not to be outdone, Suzuki Motor (7269.T), Japan's fourth-biggest automaker, also got into the act Jan. 31. The company, which controls about half of the Indian auto market (BusinessWeek.com, 1/7/08), posted operating earnings for the quarter of $360 million, a rise of 23%, as sales of its fuel-efficient small cars were helped by high gasoline prices as well.

Good News Coming From Toyota

"Japanese automakers so far have been immune to the increasing concerns over the slowing U.S. economy and the negative impact from the stronger yen," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo.

There could be more good news to come. Toyota doesn't release its figures until Feb. 5, but several Toyota-affiliated companies have already released solid numbers. Parts supplier Denso (6902.T), in which Toyota has a 23% stake, increased its operating earning by 16.9%, to $909.6 million. Meanwhile, the share price of minicar maker Daihatsu (7262.T), 51% owned by Toyota, surged 10% after it increased its full-year earnings forecast by 25%, to $329 million earlier this week. Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo reckons Toyota will post quarterly operating earnings of $5.8 billion from sales of $60 billion, increases of 7% and 4%, respectively.

Investors Are Underestimating Prospects

Of course, whether investors sit up and take notice remains to be seen. Despite Daihatsu's recent stock-price rebound, Japan's auto stocks have plunged on concerns over the yen and the fallout from subprime problems in the U.S. In the last three months, for example, Toyota's stock price has slipped by 14%. Nissan and Honda are down 24% and 27%, respectively, during the same period, despite strong sales in emerging markets such as China and Russia, which analysts say should offset weak sales (BusinessWeek.com, 1/18/08) in Japan, the U.S., and Western Europe.

Kurt Sanger, an analyst at Deutsche Bank (DB) in Tokyo, initiated coverage of Toyota, Honda, and Nissan with "buy" ratings for all three companies, arguing that investors are underestimating the automakers' growth prospects in fast-growing markets.

One reason for the lack of investor appetite is the mature markets may get worse before they get better. And for all the booming sales in the so-called BRIC countries, a wider economic slowdown could yet hurt global sales prospects. There are also worries about emerging carmakers from India and China, whose cheap autos will increase competition, particularly at the lower end of the market. For the time being, though, Japan's automakers, unlike the country's wider economy, look first-class.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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