TOKYO (Reuters) - The seemingly unstoppable profit machine that is the Japanese auto industry is about to come to a grinding halt.
By Nobuhiro Kubo and Nathan Layne
TOKYO (Reuters) - The seemingly unstoppable profit machine that is the Japanese auto industry is about to come to a grinding halt.
The sector, led by Toyota Motor Co <7203.T>, Nissan Motor Corp <7201.T> and Honda Motor Co <7267.T>, has managed to grow profits for seven straight years by expanding sales in overseas markets and steadily cutting production costs.
But a slide in profits looks increasingly likely in the next business year from April due to a slowing U.S. market, rising costs for steel and other materials, and the dollar's tumble last week to a 13-year low against the yen.
!ADVERTISEMENT!Daiwa Institute of Research (DIR) estimates the combined operating profit of Toyota, Nissan, Honda, Suzuki Motor <7269.T>, Mazda Motor <7261.T> and Fuji Heavy <7270.T> would drop by about one-fifth if the dollar stays at 100 yen through the year.
"It would take a miracle to achieve higher profits with the dollar at 100 yen," said DIR analyst Shingo Hayashi.
A stronger yen makes cars imported from Japan less competitive abroad while also slicing into profits made in the U.S. when brought back to Japan.
The numbers at stake are not small. Every one-yen gain on the dollar cuts into Toyota's operating profit by about 35 billion yen. So if the dollar settles at about 100 yen, Toyota could see more than $4 billion wiped away by currency fluctuations alone.
And the nightmare for Japan's car makers does not end there.
Some analysts think the U.S. auto market could shrink to about 15 million units in 2008 from 16.15 million last year, hitting its lowest level in more than a decade as consumers stop buying cars due to tighter credit conditions and higher fuel prices.
The U.S. market is feeling the full force of the subprime mortgage crisis. Many U.S. consumers, unlike their counterparts in other countries such as Japan, use their homes as collateral when purchasing an automobile.
Toyota saw sales dip 6.6 percent in the United States in February despite the introduction of a new Corolla sedan model while Nissan lodged a 3 percent decline, while both Ford Motor <F.N> and General Motors <GM.N> suffered even bigger falls.
"The subprime loan crisis is now clearly having an impact on consumer spending," said Nikko Citigroup analyst Noriyuki Matsushima.
DUMPING CONCERNS
Honda stood out with a 1 percent gain in U.S. February sales on the popularity of a recently remodeled Accord, but analysts said demand for other cars was weak and expressed doubts that Honda would be able to continue to buck the downtrend.
"There is a limit to a one-pronged approach," said Credit Suisse analyst Koji Endo.
In fact, Honda is the most dependent of Japan's "Big Three" auto makers to swings in U.S. demand. It generates just under half of its sales from North American market, compared with about one-third for Nissan and Toyota.
Honda and Nissan produce about 80 percent of their cars for the North American market locally. Toyota imports a higher percentage of vehicles, but has also mitigated its currency risk by boosting local production to 55 percent.
Even with the high level of local assembly, some analysts are warning that Japanese makers could be forced into raising prices to avoid charges of dumping, just as they did in 1995 when the dollar fell to an all-time low near 80 yen.
"There is a fear the U.S. Big Three will criticize them for dumping," said UBS auto analyst Tatsuo Yoshida.
Hiking prices would likely put a further dent into sales at a time when car makers are already cutting on production due to slowing demand.
Toyota said earlier this month that it would trim U.S. production of its full-size Tundra pickup trucks while Nissan Motor Co <7201.T> is planning to halt operations at an assembly plant in Tennessee from March 28-31.
Auto executives have also started to become more conservative in their comments. Gone for now is the notion that fast-growing demand in emerging markets such as China would be enough to offset yen strength and a U.S. downturn.
"Frankly speaking, sales in the U.S., Europe and Japan are showing signs of slowdown," Toyota Executive Vice President Tokuichi Uranishi said last week, acknowledging it could fall short of its target of selling 9.85 million cars this year.
(Reporting by Nobuhiro Kubo and Nathan Layne; editing by Gary Crosse)
