In two recent reports, veteran analysts at Goldman Sachs Japan express no doubts about the current and future health of the world’s automotive industry.
Although global vehicle demand has grown only 2.3% annually over the past 30 years, they foresee more robust growth in the next three years, from 72.6 million units in 2010 to 77.6 million in 2011, 83.5 million in 2012, 88.3 million in 2013 and 107 million in 2020.
The main drivers to better sales identified in the reports are no surprise, namely extremely rapid motorization in China and other emerging markets and recovery in the U.S. market after two years of weakness.
The main focus of the GSJ reports is on North America, where sales are expected to increase from an estimated 13 million units in 2011 to 14.5 million in 2012 and 15.5 million in 2013, before declining to 15 million in 2020.
GSJ analysts believe the Big Seven auto makers in the U.S. – Toyota, Honda, Nissan, General Motors, Ford, Chrysler and Hyundai – “have built cost structures that allow them to secure profits even in a poor sales environment.”
Because restructuring has eliminated more than 2 million units of surplus production capacity in North America, capacity utilization is expected to rise sharply to 78% this year from 50% in 2009, while a return to “demand-pull” management from “production-push” will enhance profitability.
Whatever the lure of China, the North American market continues to provide critical underpinnings for Japanese auto makers.
Examples: North America accounts for 48% of the sales and 67% of the operating profits of Fuji Heavy Industries, maker of Subaru cars, and 43% of the sales and 37% of the operating profits of Honda.
Nissan relies on the market for 33% of its sales and 30% of operating profits, while North America accounts for 25% of sales and 20% of profits for Toyota.
Even though the Japanese yen has strengthened a remarkable 25% from ¥110/$1 in April 2007 to ¥82/$1 in January 2011, the reports note most Japanese auto makers have been able to offset the profit-sapping effects of yen appreciation (about a ¥3 trillion/$36.8 billion drain on their profits) through roughly about ¥3 trillion in cost savings and other internal measures.
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|Note: In millions of units. *Eastern Europe excludes Russia and Asia excludes China, Japan and India. Source: Goldman Sachs Japan|
“It is no exaggeration to say the stronger yen has bolstered the earnings power of Japanese auto makers,” the GSJ analysts say, estimating that they “can achieve 10%-20% year-on-year profit growth in the fiscal year ending March 31, 2012, on a conservative yen/dollar assumption of ¥80/$1.”
They report operating profits for six Japanese auto makers in North America – Fuji, Nissan, Honda, Toyota, Mazda and Suzuki – peaked at ¥2.1 trillion ($25.6 billion) in the fiscal year ending March 31, 2008, plunged to a loss of ¥700 billion ($8.5 billion) in the next fiscal year and recovered to break-even in the fiscal year ending March 31, 2010.
And they project aggregate operating profits for these six companies of ¥500 billion ($6.1 billion), ¥700 billion and ¥1 trillion ($12.2 billion) in the current and following two fiscal years.
The Big Three Japanese auto makers’ captive financing businesses in the U.S. are expected to provide a significant boost to consolidated earnings, generating operating profits of ¥600 billion ($7.3 billion) in the current fiscal year ending March 31.
Behind this return to profitability, say the analysts, is not only better capacity utilization but also improvement in both sales and product mixes and a leveling off of incentives. They do not think conditions in the U.S. market as a whole are likely to trigger an incentives battle, nor do they expect any major changes this year in market share.
But they concede “Japanese auto makers are expected to struggle, especially in the first half of the year, against the U.S. Big Three, with their extensive product lineups, and the Korean auto makers.”
China understandably will remain the center of attention for auto makers in Japan and other advanced industrial nations.
Sales there almost doubled from 8.6 million units in 2008 to 16.9 million in 2010, making that emerging automotive market the biggest in the world in 2009.
China’s hectic pace is expected to slow somewhat, but the GSJ reports foresee the sales surge continuing to an estimated 18.7 million units in 2011, 20.7 million in 2012, 22.4 million in 2013 and 30.2 million in 2020, double the U.S. total forecast for that year.
However, the U.S. is expected to remain firmly in second place and the two markets, a world apart in many ways, will combine to satisfy 40.8% of estimated global automotive demand in 2011 and 42.2% in 2020.