Global Economics

Japanese Carmakers Set to Rebound


Stocks such as Honda's and Mazda's have been rising, probably because global demand remains solid and woes are exchange-rate linked

At first glance, the current crop of earnings forecasts by Japanese car companies make for depressing reading. Blaming the stronger yen, a slowing U.S. economy slowdown, and rising materials costs, Honda HMC, Mazda (MZDAF), and Mitsubishi Motors on Apr. 26 all slashed their earnings forecasts, reducing operating profits targets for the year ending March, 2009, by 32%, 29%, and 45%, respectively.

On Apr. 28, Fuji Heavy Industries, owner of Subaru, projected net earnings will slip 44%. "Tough currency and commodities conditions are unfortunately going to erase the effects of a sales volume expansion," Chief Executive Ikuo Mori told reporters in Tokyo. Toyota (TM) and Nissan (NSANY) will also project lower earnings when they announce annual results in May.

Despite the grim headlines, investors don't seem to think the outlook is really so bad. In Tokyo trading on Apr. 28, the first session since Honda, Mitsubishi, and Mazda announced their annual forecasts, the stock prices of all nine listed Japanese automakers actually increased. Mazda surged 7.9%, while Honda and Mitsubishi rose 3% and 2.5%, respectively. That compares favorably with the Nikkei 225 benchmark, which increased only marginally. (The market was closed Apr. 29 for a holiday.)

Forecasts in Line With Expectations

By contrast, for much of this year, shares have slumped. Fearing the impact of the strong yen and a U.S. slowdown on Japanese car companies that have long relied on North American sales for their high earnings, investors have sold off auto stocks. Shares in Honda, for example, which generated over half its revenues in North America in the financial year that just ended, fell 39% between April and mid-March. This month, though, the stock has rebounded 20%. "Perhaps the tide is changing," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo.

What explains the change of mood? One reason is that the forecasts, so far, are roughly in line with or better than what many analysts expected. Honda, for example, is projecting operating earnings of $6.25 billion in the year ending March, 2009. That's almost $3 billion less than this year but around $290 million above the analyst consensus. "Given Honda's penchant for conservative guidance, that's actually quite a bullish number," says Kurt Sanger, an analyst at Deutsche Bank (DB) in Tokyo.

Another factor is that it's the rising yen, rather than stumbling business plans, that explain the weak forecasts. "The headline numbers look pretty awful but other than the foreign exchange impact I don't think things are in too bad shape," says Andrew Phillips, an analyst at KBC Securities in Tokyo.

Strong Sales in Russia for Honda

Phillips points out that all $3 billion of the projected decline in Honda's operating profitability is explained by the yen's sudden rise against the dollar and other currencies. Against the greenback, for example, Honda is projecting a dollar-yen rate of 100, compared to an average of 114 in the previous year. That alone is enough to wipe off $2.4 billion from profits when sales made in dollars are translated back into yen.

Yet when it comes to selling vehicles Honda shows few signs of slowing down, despite weak market sales in the U.S. and Japan, its two biggest markets. For the financial year, the company says growth will increase 5.5% to 4.14 million. In Europe, spurred by strong sales in Russia, the company plans to increase sales by 20%. In Asia outside Japan, sales will rise even faster, to 22%. And even in the U.S., Honda expects sales of its gas-sippers to hold up in an otherwise shrinking market.

It's a similar story at Mazda. Executives at the Hiroshima company are confident that sales will grow in every region except the North America, where the launch of the Mazda6 sedan this summer should help offset expected sales declines. Globally, Mazda projects its sales will rise 9% to 1.48 million. "The plan for building the company is on track," says Chief Executive Hisakazu Imaki.

Boosting Production Capacity in India

But perhaps the best reason for confidence in Japanese automakers is their continued investment in new production facilities at home and overseas. In India, for example, Toyota this month announced plans to build a second plant on the outskirts of Bangalore. Earlier this year Nissan-Renault confirmed it is building a large new plant in Chennai. And Honda doubled its India capacity last year and is opening a new plant in 2009. Suzuki, meanwhile, plants to increase its Indian production to 1 million by the fall.

Just as impressive, about every major Japanese automaker is adding new factories or renovating old ones in Japan, despite the high cost of labor compared to emerging markets and a shrinking domestic auto market (BusinessWeek, 12/12/07). This month Toyota said it will build a new engine plant in Japan's Miyagi prefecture and, on Apr. 10, said it would raise its stake in Fuji Heavy to 16.5%.

Fuji Heavy will use the cash injection to build a new plant in Japan (BusinessWeek, 4/11/08). Honda started work last September on its first new plant in 30 years in Saitama, just north of Tokyo. Suzuki is building a new $1.7 billion, 260,000-unit plant in Shizuoka. And Nissan has revamped its 530,000-annual-capacity Kyushu plant and plans, through its Nissan Shatai unit, to add 120,000 more vehicles at the site. That production in Kyushu is one reason why the island in western Japan, with a population of around 10 million, produces more cars each year than Italy and almost as many as India.

The reason for all the investment? Global demand for Japan's exports remains solid despite the U.S slowdown. In markets including China, India, and the Middle East "there is no major change in their trend toward higher ownership levels and the Japanese majors are well placed to benefit from this trend," says Deutsche Bank's Sanger. After a tough 2008, look for an earnings recovery at Japan's carmakers.


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