Researcher Bullish on Near-Term Outlook for Japan Big Three

TOKYO – Japan’s Big Three auto makers are on a trajectory to achieve record earnings in the next three years, aided by more favorable exchange rates, the bottom-line effects of intense cost-cutting and the planned rollout of a number of new and revamped models, according to a senior analyst at CLSA Asia-Pacific Markets.

Chris Richter, head of Japan research for the brokerage and investment group, predicts Toyota will see global production and sales grow to a record 9.4 million units in fiscal 2016, up from 8.9 million in the 2012 fiscal year ended March 31.

Toyota revenues also will reach new highs in the period, he says, hitting ¥26.0 trillion ($276.5 billion) from ¥21.8 trillion ($231.4 billion) last year. Operating profits will surge to a record ¥2.7 trillion ($28.2 billion), compared with an estimated ¥1.5 trillion ($15.8 billion) in fiscal 2012.

The trend is similar at Nissan and Honda, Richter says.

Nissan should produce 5.1 million vehicles in 2016, up 600,000 units from fiscal 2012. Sales will grow 29% to ¥12.5 trillion ($133.2 billion) and earnings increase 119% to ¥1.5 trillion ($15.9 billion), he predicts.

Honda profits are forecast to grow to ¥899.0 billion ($9.6 billion) in 2016 on record sales of ¥12.3 trillion ($130.3 billion). Production is expected to remain flat at about 3.3 million units.

CLSA is basing its outlook on exchange rates of $1:¥90 and €1:¥120 over the next three years.

“Exchange rates are going to have a profound impact,” Richter says. “In the case of Toyota, each ¥1 swing against the dollar and euro has a ¥35 billion ($350 million) and ¥5 billion ($50 million) effect on earnings,” based on sales volumes for the auto maker in the U.S. and European markets.

Moreover, he reports deep cuts in the industry’s cost structure, estimated at ¥3 trillion ($32 billion) since fall 2008, have lowered the exchange-rate breakeven point substantially.

“The level of profitability they could have achieved in 2008 at $1:¥115 they can now achieve at $1:¥100 or even $1:¥95,” Richter says. “They don’t need to incentivize. They can gain market share the old-fashioned way, by having new product.”

New models in the pipeline include a redesigned Honda’s Acura MDX, Nissan’s Rogue and Infiniti G series and the Toyota Corolla and Highlander, the report points out.

Despite a weaker yen, which has lost 15% in value against the euro and dollar since mid-November, Richter insists Japanese auto makers “have no intention of reducing their urgency to localize production outside Japan.

“They are keenly aware what a tremendous risk (foreign exchange) has been over the last four-plus years and that this could reverse in a second,” he says. “They will do whatever it takes to reduce foreign-currency risks, and that means continuing to localize production.”

Richter draws particular attention to capacity expansion in Mexico.

Nissan is scheduled to open a third assembly plant there by year’s end to produce B-cars. Planned capacity at the $2 billion facility, the auto maker’s second in Aguascalientes, is 175,000 units.

Honda and Mazda will open Mexican plants in 2014. Honda will build up to 200,000 Fits in a new facility in Celaya, Guanajuato. Mazda will christen a $650 million plant in Salamanca, in central Mexico, to produce 180,000 Mazda2 and Mazda3 cars annually, plus 50,000 subcompacts for Toyota.

Toyota also is expected to shift Lexus ES sedan production to its Georgetown, KY, plant in the U.S.

“Fuji Heavy Industries (maker of Subaru cars) has announced that it will expand its Lafayette, IN, plant by 30%, including (capacity to build) 70,000 Toyota Camrys,” Richter says. “We don’t believe Toyota needs more Camry capacity in the U.S., but is merely looking to find space in another plant to build its Lexus ES sedan.”

Richter also believes Toyota ultimately will produce Prius hybrid models at its 16-month-old Mississippi plant.

“If Toyota follows through on these additions, we could expect the share of North American vehicles it produces locally to reach 85%,” Richter says, adding that the auto maker’s current production stands at about 70% of its sales volume in the region, up from 50% in 2007.

Toyota declines comment.

The analyst is bullish on Toyota for another reason: its newfound willingness to cooperate with other OEMs.

In addition to building cars at Mazda and Fuji plants outside of Japan, the auto maker is cooperating with BMW on hydrogen-fuel-cell, electric-drivetrain and lithium-ion-battery development. Beginning in 2014, BMW will supply Toyota diesel engines in Europe.

“The fact Toyota has begun looking outside their organization is a positive change in how they view capital efficiency,” Richter says. “This is healthy trend. In the past, they have been accused of over-investing.”