(Recasts, adds Honda executive, analysts comments)
By Chang-Ran Kim, Asia auto correspondent
TOKYO, Oct 28 (Reuters) - Japan's Honda Motor Co posted a surprise dip in quarterly operating profit on Tuesday despite snappy car sales in the key U.S. market and cut its full-year projection due to the dollar's slide against the yen.
The 3.3 percent cut in projected full-year operating profit comes just three months after Japan's No. 2 auto maker raised its forecasts for the year to next March, and could signal similar warnings by its Japanese rivals over the next few weeks.
Honda blamed the profit fall on a 20 percent plunge in domestic sales, which forced it to lower its full-year global sales target to a level that would knock its ranking to third place in Japan by volume, below Nissan Motor Co .
"Our domestic sales in the first six months were much worse than we had envisaged as our products lost competitiveness," Executive Vice President Koichi Amemiya told a news conference.
"But we are looking at much better sales in the second half with the launch of new models like the Life minicar, the Step Wgn and Odyssey minivans," he added.
Honda cut its full-year Japanese sales target for the second time in three months to 765,000 units from the previous 815,000, and its global sales target by 30,000 cars to 3.035 million units -- just short of Nissan's target of 3.04 million.
As a result, Honda now expects operating profit of 623 billion yen ($5.75 billion) for 2003/04, compared with its previous forecast of 644 billion yen and an actual 689.4 billion booked last year.
In contrast, Nissan left its full-year forecasts unchanged earlier this month citing robust U.S. sales. The auto maker expects sales there to gain further ground in the second half as its new 400,000-unit Canton, Mississippi, plant rolls out fresh models.
While Honda is also due to introduce new models in the United States in the second half, its plants are already running at full capacity, and increased production from the expansion of its Alabama plant would take effect only in mid-2004, meaning the best it could do is match its first-half performance.
But while unfavourable exchange rates, a weak performance in Japan and a plunge in North America motorcycle sales took their toll, a rise in income from Honda's units in Asia as well as a lower tax burden pushed up its net profit outlook.
Net profit is seen rising 10 percent to a record 470 billion yen.
SOFT DOLLAR A WORRY
For July-September, Honda's operating profit fell 0.9 percent to 151.69 billion yen, although sales expanded 5.2 percent to 2.017 trillion yen -- a record for a second quarter.
Honda said brisk sales of the new Accord, Pilot and Element models in the United States were not enough to make up for a more than 20 percent slide in domestic sales and a rise in research and development costs.
But net profit for the quarter grew 58 percent to a record 137.36 billion yen, helped by big non-operating gains from financial activities.
Analysts said earnings for the October-March second half would likely come under pressure from a stronger yen and a sales slowdown in the United States, which accounts for about four-fifths of Honda's profits.
"Among the exporters, it's relatively difficult for car makers to absorb the bad effects of a stronger yen," said Akio Yoshino, general manager at SG Yamaichi Asset Management, noting the industry's high level of local production and parts procurement.
"If the stronger yen continues, auto makers will be one of the hardest hit sectors in the 2004 business year."
But rather than the direct impact on its earnings from a weaker dollar, Honda's Amemiya said he was more worried about what it would do to the U.S. economy, and by extension car consumption in that country.
"We produce a little less than 80 percent of the cars we sell in North America locally, and in that sense the currency impact is limited," he said.
"The more important issue is what the dollar-yen rate of 110 yen would do to the U.S. economy."
Honda changed its assumption for the dollar rate for this year to 115 yen from 117 yen, and the euro to 127 yen from 126 yen. On Tuesday, the dollar was trading at three-year lows around 108 yen, and the euro at just below 127 yen.
Before the announcement, Honda's shares ended down 1.4 percent at 4,270 yen, compared with a 1.2 percent rise in the TOPIX index of all first-section shares.
During the July-September quarter, Honda's shares lost 1.8 percent, underperforming a six percent rise in the Tokyo stock market's transport sector index and a 29 percent jump in the TOPIX index. ($1=108.43 yen) (Additional reporting by Daniel Hauck and Edwina Gibbs)