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Japanese automakers’ rosy profits may be short-lived

by Shusuke Murai

Staff Writer

Japan’s big three automakers enjoyed soaring net profits in the last business year, but analysts warn it is too early to say the robust results suggest a return to their glory days.

The analysts said the strong earnings mostly stemmed from transient factors such as a favorable foreign exchange and tax cuts.

On Monday, Nissan Motor Co. announced its net profit rose 12.6 percent to ¥746.9 billion for the business year that ended in March.

Sales jumped 2 percent to ¥11.95 trillion. But Nissan’s operating profit dropped 22.6 percent to ¥574.8 billion, hit by an inspection scandal in the domestic market that came to light in September.

Although hurt by the scandal, in which unqualified personnel conducted final vehicle checks, the carmaker managed to increase unit sales in Japan thanks to new models such as the Note e-Power hybrid and Leaf electric vehicle, said Nissan President and CEO Hiroto Saikawa.

He also said that “improving profitability in the (North American) market will be the most important point for us” this year.

Toyota Motor Corp., the nation’s leading automaker, released its 2017 financial results last Wednesday, reporting a record ¥2.49 trillion net profit. Sales came to an all-time high of ¥29.4 trillion.

Honda Motor Co. announced last month that its net profit soared 71.8 percent from the previous year to ¥1.06 trillion — the first time the company surpassed the ¥1 trillion threshold.

The strong financial results, however, do not necessarily reflect the companies’ real earning power because large portions of last year’s profits came as a bonus from a weaker yen and corporate tax cuts in the United States, said Takaki Nakanishi of automotive industry research and consulting firm Nakanishi Research Institute Co.

Japan’s export-driven automakers are beneficiaries of the weaker yen against other major currencies, which makes their cars less expensive in overseas markets and increases their competitiveness.

Toyota’s operating profit was up 20.3 percent last year, mostly thanks to the easier yen and cost-cutting efforts. But its unit sales declined in major markets except for European countries and some smaller markets such as Latin America.

While acknowledging that Toyota’s cost-cutting efforts played a key role in improving profitability, “I think it’s too early to give a passing grade” to its competitiveness merely based on last year’s financial results, Nakanishi said.

“Although the situation is getting better than before, it doesn’t mean the company has come up with a new solution to turn things positive,” he said. “Unit sales are not growing and fixed costs are increasing. And it is facing a tough battle in the American market.”

Another auto industry analyst, Koichi Sugimoto of Mitsubishi UFJ Morgan Stanley Securities Co., said that although Toyota’s financial result was better than expected and that its operating profit excluding the foreign exchange factor is improving, its record net profit was due in large part to the one-time boost from the tax revision in the U.S.

Toyota is forecasting that net profit for this business year will drop 15 percent to ¥2.12 trillion amid expectations that the yen will strengthen. The projection is based on the dollar running at about ¥105 on average, versus ¥111 in the 2017 business year.

Honda is predicting a 46.2 percent decline in net profit for the current business year, based on the same foreign exchange rate. Nissan is expecting a 33.1 percent drop in net profit under the same rate.

How to raise profits in North America, the biggest foreign market for Japanese automakers in terms of sales, will continue to be a headache this year as demand for vehicles is expected to remain sluggish amid rising interest rates, Sugimoto said.

Toyota’s operating profit in North America last year fell by more than half to ¥132.1 billion, down from ¥330.9 billion, largely due to the cost of customer incentives.

Honda experienced a 30.2 percent drop in operating profit in the region, including an expense of ¥53.7 billion to settle a class-action lawsuit related to Takata Corp.’s defective air bag inflators.

Nissan’s operating profit in the region dropped 30.5 percent.

Another concern is pressure from the U.S. President Donald Trump, who continues to criticize Japanese exporters for what he calls “unfair” trade practices that lead to a $69 billion trade deficit in goods with Japan.

Although the situation may not be as bad as the rampant trade friction of the 1980s — Japanese automakers today create a lot of jobs in the U.S. market — the companies “cannot be too optimistic” as long as uncertainty remains a risk, Sugimoto said.

“It may still be possible that what he says will cause excessive reactions in stock markets,” he said.