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Tuesday, Oct. 28, 2008

U.S. financial crisis puts brakes on Japan carmakers


Staff writer

Not only has the U.S. financial crisis sent the Big Three U.S. automakers into deep financial trouble, it is damaging the sales and profits of Japanese carmakers and forcing them to review their alliances.

Because the North American market is so vital to the automakers, they are suffering along with their U.S. counterparts. To make matters worse, the continuing credit crisis has boosted the yen against the dollar and other major currencies, eroding the carmakers' profits earned overseas.

One casualty is Mazda Motor Co., one-third owned by ailing Ford Motor Co.

Cash-strapped Ford is looking to sell part of its stake in Japan's fifth-largest automaker to a number of Japanese firms, including Mazda itself.

Analysts wonder how much of a financial burden Mazda will have to shoulder now and down the road.

As long as Ford maintains some stake in Mazda, stays invested in three jointly operated plants in the U.S., Thailand and China, and continues its projects with the Hiroshima-based maker, Mazda's burden will be limited to share buybacks.

But if Michigan-based Ford is forced to sell off its entire stake and dissolve its joint ventures and projects with Mazda, it will be more than Mazda can bear, analysts say.

"Mazda doesn't have money to buy back all of the three plants," said Koji Endo, senior car industry analyst at Credit Suisse Securities (Japan) Ltd. "I believe they should work together as they do now, and I expect them to do so for the time being."

He added the current alliance is likely to continue for at least several more years, until their ongoing joint research and development projects conclude.

Mazda said those projects include work on development of compact and environmentally friendly vehicles but declined to give further details.

Analysts say the most likely scenario is that Ford will sell a 20 percent stake in Mazda and remain the top shareholder.

Among the possible purchasers of Mazda shares, according to various reports, are Hiroshima Bank, nonlife insurers Tokio Marine Holdings and Mitsui Sumitomo Insurance Group Holdings Inc, trading houses Sumitomo Corp. and Itochu Corp., and parts maker Denso Corp. Mazda has declined comment.

Mazda has taken steps to lessen its dependence on Ford, which has been an investor since 1979. Since 2001, it has increased the number of dealerships that solely handle its models. Currently, 51.5 percent of all Mazda dealers in the U.S. and more than 90 percent in Europe sell only Mazda vehicles.

In March, Mazda reached an agreement with two Japanese financial entities to buy a 96 percent stake in Ford's wholly owned auto finance company in Japan. In the U.S., Mazda this month started a tieup with a JPMorgan Chase & Co. auto finance firm and severed a deal with Ford's group finance firm.

In another development, The Detroit News reported Wednesday that Nissan Motor Co., Japan's third-biggest automaker, offered to acquire 20 percent of Chrysler LLC from Cerberus Capital Management LP, thus bringing the U.S. automaker into its alliance with Renault SA. Nissan declined comment on the report.

Analysts caution that it would be too risky for Nissan to ally with troubled Chrysler, and that the risks outweigh the possible benefits of any cost reductions in component procurement and product development.

"If Nissan buys a 20 percent stake in Chrysler, we might consider reviewing Nissan's rating for a possible downgrade because it would pay a considerable amount of cash and have to lend a further hand to Chrysler," said Tatsuya Mizuno, an analyst at Fitch Ratings Ltd. in Tokyo.

JPMorgan Securities Japan Co. already downgraded Nissan from "neutral" to "underweight" in a report dated Oct. 20.

In a report issued the same day, Takaki Nakanishi, JPMorgan's senior auto industry analyst, said: "According to media reports, (Nissan) CEO Carlos Ghosn is in talks with a U.S. automobile manufacturer on forging an alliance. This would have great bearing on the company's business strategy, and uncertainty over its medium-term strategy threatens to hamper share price recovery."

Meanwhile, analysts expect any merger under discussion between Chrysler and General Motors Corp. to have little impact on Japanese carmakers.

"Such a merger would boost combined sales volume and units, but the problem is their profitability and cash flows. It would not make any difference if two debt-ridden companies merged with each other," Fitch's Mizuno said.

The U.S. financial turmoil has not been confined to the North American market.

There have been predictions that Toyota's global sales for 2008 will see their first year-on-year drop in 10 years and fall short of 8.3 million units. In July, Toyota cut its initial forecast of 8.84 million units to 8.5 million units, against 8.43 million units for 2007.

"The slowdown in the overall car market has had a serious impact on Japanese automakers, even though the trouble involving the Big Three is not a minus factor for those with a strong lineup of hybrids and fuel-efficient compact cars," said Osamu Kobayashi, a chief analyst at rating agency Standard & Poor's.

Amid the gloomy condition of the market, Japanese carmakers are likely to have a tough time in the upcoming quarterly earnings season.

"I anticipate bad earnings results in the second quarter. But I'm expecting incomparably worse figures in the second half," Credit Suisse's Endo said.

"For the full year, it is only natural to see a 20 percent or 30 percent reduction in their forecasts for operating profit and net profit," he said.

"We are lowering our eight-company aggregate operating profit estimates from ¥3.213 trillion to ¥2.591 trillion (down 43.2 percent year on year) in fiscal 2008," JPMorgan's Nakanishi said.

Analysts cited the sharp decline in car sales around the globe, and the yen's surge against the dollar and other currencies, including in emerging markets India, Indonesia, and Brazil, as the major reasons for the deteriorating profits.

Toyota will report its earnings Nov. 6. Honda Motor Co. will release its results Tuesday and Nissan Friday.



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