Despite the increasingly depressed economic indicators that have been emerging from Japan in recent months, the country’s automotive industry is setting the stage for  bumper earnings – the reporting season kicked off with Honda’s record profits last week.

Earnings figures for the 2001-02 fiscal year, which ended in March, and forward guidance, are expected to be increasingly bullish on the whole as the industry makes progress in restructuring and product development. 

Surprise upgrades in earnings forecasts have a lot to do with the weak yen, however, which averaged at 125 to the US dollar in the last fiscal year. This has boosted overseas earnings and revenues from exports, and has more than offset the effects of a very lacklustre domestic market.
 
Overseas sales volumes have also held up reasonably well, with the sharp decline in the US failing to materialise and Europe also proving to be more resilient than many had feared. Asia, too, where the Japanese dominate, is proving very resilient this time round despite the bleak global economic environment.

The rapidly improving earnings environment is not all about currency translation, though.

“The Japanese vehicle industry has made some very radical moves to reduce costs, both in the supply chain and in restructuring its own capacity. “

The Japanese vehicle industry has made some very radical moves to reduce costs, both in the supply chain and in restructuring its own capacity. Debt has also been brought down. Many of the companies that were rescued from bankruptcy by foreign carmakers a few years ago, such as Mazda and Nissan, are particularly upbeat about their prospects going forward. Mitsubishi Motors, on the other hand, has yet to set its blueprint for recovery, and the future shape of the truck industry is far from evident.

The two independent Japanese carmakers, Toyota and Honda, are very bullish. Honda in particularly sees no end to its outperformance, while Toyota is now looking at taking over global leadership from GM. With the domestic economy likely to hold back any significant strengthening of the yen in the short-term, vehicle manufacturers are looking for another record-breaking year in 2002/03, backed by recent restructuring and aggressive product campaigns.

Honda Motor’s outperformance compared with the rest of the Japanese vehicle industry shows no sign of letting up. Last week Honda Motor Company announced record fourth quarter fiscal year net income of 106.7 billion yen ($US801 million), up 69.4 percent over the corresponding period in 2001. This comes despite an almost 13% drop in export volumes in the 2001 calendar year 2001, as it ramped up production overseas – particularly at its loss-making UK unit. Domestic production increased by almost 5% to 1.22m units, with increased domestic market share and sales volumes in a declining market. Capacity utilisation in Japan remains extremely high. Its four-wheel operations account for roughly 80% of revenues.

“Honda Motor has continued to make one hit product after another”

Honda Motor has continued to make one hit product after another, unlike many of its Japanese competitors in recent years. It is currently riding on a substantial wave of new products which include the Stream compact MPV, Fit-Jazz sub-compact car, the HR-V and the new CR-V. Its new model launch pipeline thins out a bit over the next two years, but its product range is likely to remain very popular. The main threats to revenue and earnings growth going forward will be a significant strengthening of the yen, though this seems unlikely for the current fiscal year. Rising overseas capacity and production volumes should help reduce the effects of any strengthening of the yen further ahead.

Weakening demand in Japan and other key markets is also a major threat, though Honda continues to demonstrate its ability to generate volume growth in adverse market conditions. Whether this will continue remains to be seen, especially as key underperforming competitors start getting their act together and Hyundai-Kia steps up its overseas expansion programme. But Honda for one remains bullish on its short-term prospects, and is targeting 7% volume growth in Japan this year to 920,000 units and global sales of 2.81m – up 6%. Further efforts to improve manufacturing and logistical efficiency, combined with current efforts to reduce supply chain costs, should ensure ongoing earnings growth.

Nissan Motor is anticipating a record year for 2001/02 earnings thanks to deep cost cutting and the weak yen, and expects to generate even better results in the 2002/03 fiscal year. Global sales volumes remain weak, but this should change over the next two years as its focus shifts from cost cutting to product-based expansion. For the fiscal year just ended, net earnings are expected to be in excess of Y350bn, reflecting also exceptional gains from the sale as it continued to dismantle its exposure to component manufacturing and lower interest payments. The repayment of principle debt will continue to hold back short-term performance, but this will prove to be more earnings-positive in the medium-term.

Its domestic sales volumes were slightly ahead of the overall market in the 2001 calendar year, the effects of recent new product efforts, but returned to underperforming in the first two months of 2002. Nissan’s overall output in Japan fell in 2001, and sales remained sluggish elsewhere. The company’s new model programme has yet to gather momentum, but will intensify from 2003.

Nissan Motor’s three-year revival programme under Renault, from near bankruptcy, is ahead of schedule by a year, according to Carlos Ghosn – the president and CEO. This focus of this phase was mainly on cost-cutting and the development of a common business platform with Renault. Ghosn also said at a press conference that the second three-year phase, which is more focused on product and distribution expansion in co-ordination with Renault, is also ahead of schedule. While the company has demonstrated that it can be bold in overhauling its cost-structure under French management, its has yet to prove its ability to deliver products that will win back the market share it lost in the 1990s. This ability will be judged by the consumer.

Mitsubishi Motors has had a rough time of late, and has some catching up to do under its new management led by Rolf Eckrodt. The uphill struggle to turn around its quality image after the recall scandal is being hampered by a weak product pipeline. Depressed market conditions at home, the intense competition from its peers and weak truck demand worldwide means that a significant turnaround is some way off. Mitsubishi Motor’s quest to break even this year will have been boosted by the weak yen, but there is little else to cheer about. Any significant increase in the strength of the yen could tip the balance for the 2002/03 fiscal year, however. Also, weak demand at home and in other key markets leaves it more exposed than most to the potential for volume decline.

Like with Chrysler, the development of a common strategy with Mercedes-Benz has been slow in coming and somewhat lacking in focus. The plan now appears to be platform sharing with Chrysler, with South Korea’s Hyundai-Kia also playing a part. Chrysler has its own image quality problems, however. Spinning off its truck division would help reduce its massive debt – a factor underlying DaimlerChrysler’s reluctance to take a larger stake in the company. The truck division will then have the freedom to develop its own partnerships, whichever company it chooses, leaving management to focus on the light vehicle business.

Mazda Motor surprised the market by revising its 2001/02 net earnings forecast by a massive 550% this month, albeit to a modest Y8.5bn. Revenue is expected to be flat, at just under Y2.1trn, when it reports in May. While the figures obviously have been flattered by the weak yen, the company will inevitably hail 2001/02 as the major turnaround year for the company under Ford management. While Mazda still has a lot to do to build up its distribution business in some regions, its product strategy is beginning to take shape and the pipeline looks encouraging. Platform integration and capacity sharing with Ford in Europe and Asia will help in a number of ways, such as reducing its dependence on exports and thus hedging against currency swings and in bringing product to market more efficiently. Ford has significant overcapacity in most regions, particularly in places where Mazda has none or very little.

While volumes have yet to recover significantly, the company has been re-working its image in preparation of a new product onslaught. Mazda is at a similar juncture to Nissan, in that it has laid the foundations for a product-led recovery, with R&D expenditure having been boosted by 30% per year over a three-year period. Lewis Booth will take over the reigns of a company with more solid underpinnings than his predecessor Mark Fields, with a more defined global strategy and a blueprint for industrial collaboration with Ford. With the focus shifting on product, it will soon become apparent whether the product strategy is appropriate.

Toyota Motor’s target to challenge GM and Ford for global market leadership in the long term appears somewhat ambitious, given the strengthening of its key competitors that is likely to take place over the coming years. Unless, of course, it is planning to expansion non-organically. Little has been done so far to co-produce and cross-sell products with Daihatsu, its small car subsidiary. More progress has been made with Hino, in the light truck segment. But nobody doubts that

“Toyota is a major standard-setting force in the automotive industry”

Toyota is a major standard-setting force in the automotive industry. It has stuck by its traditional keiretsu ways, and has the business volumes to make it work.

Toyota Motor is likely to produce a full-year result in line with the improving Japanese industry-wide trend, though clearly it is a much more globalised business and hedged better than any against currency sways. Nevertheless, it does export a lot of cars, and the yen weakness will be flattering to its yen-denominated bottom line. Net earnings are likely to come in at around Y700bn, a new record high. Growth is likely to be held back by contributions from its Daihatsu Motor subsidiary, which is suffering from falling mini-vehicle sales in Japan, and by depressed demand facing its truck unit Hino Motors.

Fuji Heavy Industries and Isuzu Motors are moving steadily towards integration with GM, and both are likely to have benefited from greater access to overseas markets through this partnership. Fuji, which makes the Subaru branded cars, has been held back by weakness in the minicar market, but its overseas performance is improving. New products such as an all-new Forrester should underpin its domestic performance, as should its new Baja SUV in the US. Capacity utilisation will be helped, though marginally, through OE partnerships with GM. But little overall volume growth is expected in the year to come, after a lack of growth last year. Subaru remains a niche player with global volumes struggling to exceed 600,000 units, and is vulnerable to pricing competition.

Isuzu Motors is also a niche player, with volumes struggling to move above 500,000 units. With 49% of its equity owned by GM, compared with 20% in the case of Fuji Heavy, it collaboration with GM is much more deep-seated. While significant efforts have been made to extend its vehicle sourcing partnership, most of its growth is likely to come from its diesel engine operations and from its operations in emerging Asia, where it is becoming a key OE supplier in GM’s regional expansion drive. After years of making losses, Isuzu Motor’s bottom line performance is likely to be become more dependent on GM than any swings in currency valuations.

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