Analyst Scorecard Shows Japanese Automakers Humming Along
Favorable exchange rates, growing new-vehicle demand worldwide and some astute management moves play a role in the positive near-term outlook. Weaknesses? There are some, says CLSA’s Chris Richter.
May 1, 2015
TOKYO – Japanese automakers earn high marks from one analyst as they head into a new fiscal year, with their global production base seen as their biggest trump card over their key rivals.
“They play on a global stage,” Chris Richter, a senior analyst at CLSA here tells WardsAuto. “Their main market isn’t Japan. They learned early on that to succeed they had to succeed outside Japan.”
In fiscal 2014 (ended March 31), two out of every three Japanese cars were produced outside the country. And with the new fiscal year now under way, the overseas market is expected to fuel further earnings growth.
Like other forecasters, Richter is projecting vehicle demand in the U.S. will top 17 million units this year, up 4% from year-ago. In Europe, he estimates sales will grow to 13.6 million, up 8% from 2014, while in China and India he is forecasting light-vehicle growth of 3% and 8%, respectively, to new highs of 24.6 million and 2.8 million.
“Western Europe continues to recover slowly,” he says. “In Southeast Asia we’re beginning to see the first signs of the Thai market having bottomed out,” he says. CLSA is projecting sales in Thailand of 890,000 units, up marginally over fiscal 2014.
In Japan, Richter expects new-vehicle demand to be flat at about 5.4 million due to the lingering effects of the new consumption tax which was raised from 5% to 8% in April 2014 and triggered a falloff in demand.
Here’s how Richter grades each of the Japanese automakers as they head into the new fiscal year.
Toyota Riding High Again; Honda in Good Spot
“They’re back on Mount Olympus,” Richter says of Japan’s No.1 automaker. “In late 2011 and early 2012, people were saying that Toyota was the (General Motors) of the Far East. Their models were old. They were bureaucratically run. Honda, Nissan and Hyundai had much higher margins.
“All these comments are now reversed. People love a winner. And Toyota is a winner. They have successfully restructured and, with the dollar at ¥120 and production at 10 million units, they’re making money faster than they can count it. Their balance sheet is bulletproof.”
Concerning Toyota’s hybrid strategy, Richter says: “Nobody is close to them. And they’re spreading hybrids throughout their model lineup, in the process successfully differentiating their brand and bringing costs down.”
With the recent addition of a RAV4 Hybrid, Toyota offers 31 hybrids in its lineup, including nine sold under the Lexus brand. Moreover, hybrid sales now total nearly 1.3 million units including 242,000 Priuses in 2014.
“They used to add $6,000-$7,000 to make the car,” Richter says of the Prius. “These days, people tell me they’ve lowered the amount to $3,000, even less. They make a lot of money on the Prius.”
Toyota also is progressing with its TNGA (Toyota New Global Architecture) platform program, ultimately intended to support production of close to 4 million vehicles per year. Toyota says the architecture will reduce development costs 20% and cut tooling outlays 50%.
“It is still somewhat unclear what the program is intended to do,” Richter says. “Some people describe it as a cost-cutting program. Others see it as a way of enhancing quality. Still others see it as a way to introduce new safety systems into cars. The message is ambiguous.”
Honda, Richter says, is in a good position, because the U.S. market “is a cash cow for them.” A secret weapon, he adds, is its motorcycle business, “where they are the Goliath to everybody else’s David.”
Motorcycles account for 14.5% of Honda sales, compared with 77.0% for cars. Yet their share of earnings is 25.1%, compared with 47.3% for cars. And on an operating-margin basis, motorcycles realize a 10.4% return, compared with 3.6% for cars.
Looking at Honda’s foreign-exchange risk, Richter says, “It is about low as it can get. Honda already assembles more than 95% of North American sales in the region.
“Most of Honda’s forex exposure is shipping components from Japan,” he adds. “And they’re taking steps to reduce that exposure by expanding transmission production capacity (in North America).”
Construction of a new $470 million CVT plant has begun in Celaya, Mexico, adjacent to its new Fit/HR-V plant. Production is scheduled to get under way in the second half of this year with initial annual capacity set at 350,000 units. When the new plant comes on stream, Honda will boost North American capacity for 1.7 million transmissions.
Honda’s greatest weakness? “‘White goods’ kind of styling,” Richter says. “They’re caught in a classic catch-22, the same one Toyota was caught in several years ago. They’ve got a very loyal customer base who likes what they sell. They don’t want to risk alienating those people. At the same time it’s hard to draw in new or more youthful buyers.
“But bottom line, I don’t anticipate any Honda crisis. Yes, they could add a little sex appeal to their cars. They could improve the Acura brand and their hybrid strategy. But as far as some big crisis that’s going to blow them over, Honda is a rock.
Nissan’s One-Two Punch; Fuji’s Only Weakness Capacity
“Nissan is like a twin-engine jet: China and North America” Richter says. “Unlike Toyota and Honda, which have a bigger emerging-market footprint (elsewhere), Nissan is still struggling in those markets which, of course, is a legacy issue that precedes (Nissan Chairman and CEO) Carlos Ghosn’s arrival in Japan. They are in a perennial state of catchup.”
Richter is upbeat about the prospects for Nissan’s Titan pickup in North America, due later this year and marking the first full model change for the truck in a decade.
“Of course Nissan won’t take over the segment,” he says. “But all they need do is scrape a bit off, considering the Titan is a high-margin product coming off a low base.”
He says annual sales of 100,000 units are attainable.
In China, the auto maker is in the best position among Japanese brands with sales expected to approach 1.2 million in the fiscal year just ended, he says.
Nissan is “more international” than Toyota and Honda because of its ties to France’s Renault and AutoVAZ in Russia. Still, he sees potential problems moving forward.
“Their automotive margins are too low,” he says, at 5.2% through the first nine months of fiscal 2014. “There is room for improvement, and I would expect improvement.”
To critics of Nissan’s EV strategy and proponents of Toyota’s focus on fuel cells, Richter warns that costs associated with building a hydrogen-fuel infrastructure are considerable, apart from fuel-cell costs themselves.
“If we talk about a fueling infrastructure, the electric power grid is already there,” he says. “Even in most developing markets, the set of problems to solve is smaller.”
Fuji’s Subaru marque is a great franchise, sums up Richter. “In fact, one could argue that they’re the second-largest luxury brand in Japan. Even though we don’t think of them as a luxury brand, they earn profits as if they were a luxury brand.
“Even more than Honda, one could say Subaru is the America-centric brand. They are focused, (so they) don’t have to develop things in every product line under the sun.”
Potential issues of concern? “Limited overseas production capacity,” says Richter, who points out Subaru will boost its capacity at its U.S. plant in Lafayette, IN, to 400,000 units annually once production of the Toyota Camry ends there.
Mitsubishi Regional Player; Mazda Makes All Right Moves
“Mitsubishi Motors is now primarily a Southeast Asian automaker,” Richter says. “They dabble in Russia. They dabble in Japan. But most of their story is in Southeast Asia.”
In March, the automaker began construction of a second assembly plant in Indonesia. The plant, located east of Jakarta in Bekasi prefecture, will have capacity to produce 160,000 vehicles when it begins operation in 2017. Initially, it will produce the Pajero Sport SUV.
The new facility will join other Mitsubishi plants in Thailand, Taiwan and the Philippines.
On the financial front, Richter reports that Mitsubishi “is finally a real company,” having addressed the preferred-stock issue with other Mitsubishi group companies, which between 2004 and 2006 invested ¥806.2 billion ($6.8 billion) as part of a bailout package when Daimler withdrew its equity stake in the then-ailing auto maker.
In early 2014, Mitsubishi issued 238 million shares, raising a reported ¥266.8 billion ($2.2 billion), from which it bought back preferred stock held by other Mitsubishi Group companies, enabling it to pay its first dividend since 1997.
“They now pay a dividend, and they have an acceptable share price,” Richter says.
To go forward, the automaker “might look for opportunities in Latin America, the Middle East and Africa, markets where (Toyota, Honda and Nissan) aren’t so focused. Australia comes to mind. Mazda has a big share there.”
Its main limitation is scale, he adds, which leaves the automaker vulnerable if “circumstances turn the wrong way.”
Meanwhile, Mazda’s recent transformation “is nothing short of remarkable,” Richter says. “Always the company that earned no money and was heavily in debt, Mazda now has a clean balance sheet and earns higher margins than Nissan and Honda.
“Over the years,” he adds, “they’ve struggled mightily with forex, then last year finally added a plant in Mexico where they produce Mazda2s and Mazda3s. I expect they will go further in reducing their forex exposure. Just because the yen is 120 against the dollar today doesn’t mean the dollar will be that weak five years from now or even one year.”
“The bottom line,” concludes Richter, “is that Mazda is doing all the right things.”
Richter calls Suzuki “the Wal-mart of the auto industry,” adding, “And they’re good at it.
“They’re the dominant player in the Indian market. They’ve fended off some tough competitors in the last five years who wanted to muscle in on their turf. They’ve pushed back Volkswagen, Nissan and Toyota. That’s a very impressive accomplishment.”
In fiscal 2014, Suzuki produced nearly 3 million cars including 1.8 million in Asia excluding Japan. And in the Indian market, Suzuki holds an estimated 45% market share.
“The only thing they need to figure out is what to do with their motorcycle business, which hasn’t made money.”
About the Author
You May Also Like