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By Chang-Ran Kim, Asia auto correspondent
TOKYO, April 27 (Reuters) - Hit by dismal domestic sales and a weaker dollar, Honda Motor reported a 17 percent drop in operating profit on Tuesday and forecast a worse than expected year ahead after being overtaken as Japan's second-ranked car maker.
A day earlier, rival Nissan Motor Co posted a 12 percent jump in annual operating profit as it sold more than three million vehicles to pass Honda and grab second place among Japanese car makers in terms of global sales.
Japan's top auto maker, Toyota Motor Corp , is also expected to rake in record profits when it reports next month, having attacked every major market with new products amid cut-throat competition.
While Honda expects the launch of high-margin cars such as the remodelled Odyssey minivan to spur sales at home this year, analysts said a slowdown in North American sales was a worry since the region accounts for four-fifths of operating profit.
Currency swings also hurt Toyota and Nissan, but with North America accounting for roughly 60 percent and 70 percent of their profits respectively, according to JP Morgan's estimates, Honda remains the most vulnerable to a softer dollar.
"They face a high hurdle in foreign exchange, which means that on paper their performance does not look as good," said Kurt Sanger, auto analyst at ING.
Sanger said that if Honda expected exchange rates to stay flat this year, it would have forecast a 17 percent rise in operating profit.
Assuming an eight-yen weakening in both the dollar and euro this year, Honda forecast a 6.7 percent fall in operating profit to 560 billion yen ($5.15 billion) for the current business year, far short of analysts' consensus estimate of 615 billion yen.
Unfavourable currency swings would lop off 139 billion yen from earnings, it said.
In the year that ended on March 31, operating profit was 600.14 billion yen ($5.52 billion), compared with analysts' average estimate of 630 billion yen, as the dollar's fall helped to shave 101 billion yen.
But net profit grew by 8.8 percent to a record 464.34 billion yen, thanks partly to robust earnings in China, which are not counted at the operating level.
Honda leads most auto makers in the red-hot Asian market, where it has expanded successfully on strong brand recognition cultivated through its motorcycle business.
Revenue grew 2.4 percent to a record 8.16 trillion yen as car sales rose 3.3 percent to 2.983 million units.
MORE LIGHT TRUCKS
After expanding its U.S. market share to 8.1 percent in 2003, Honda is expected to lag its Japanese rivals this year due to a lack of pickups and other light trucks -- a traditional strength of the U.S. Big Three, which Toyota and Nissan have been attacking aggressively.
Honda has responded by planning its own version of a pickup truck which it calls a sport utility truck (SUT), but that will only go into production in 2005. For this business year, it forecast North American sales to rise just 0.4 percent.
Executive Vice President Koichi Amemiya conceded that light trucks such as minivans and sport utility vehicles made up a relatively small portion of Honda's U.S. sales. But he added that the ratio would rise with the expansion of its Alabama plant.
"Last year, light trucks made up about 56 percent of the overall U.S. market, but only 39 percent of Honda's products," he told a news conference. "But this year, we expect a contribution of 41 to 42 percent."
With that, Amemiya said, Honda would aim to lift its operating profit margin in North America to double digits.
Last year, the margin skidded to 6.6 percent from 9.4 percent the year before as Honda booked huge recall and warranty extension costs.
Shares in Honda rose 20 percent during the 12-month period, underperforming a more than 40 percent rise in both the market's transport sector subindex and the Nikkei average . On Tuesday, its shares closed down 1.91 percent at 4,610 yen before the profit announcement. ($1=109.04 yen) (Additional reporting by Edwina Gibbs)