Japanese major automakers perform favorably despite cuts in output

The Yomiuri Shimbun

14:25 JST, February 14, 2022

Major Japanese automakers are performing favorably on the back of strong demand after emerging from a difficult situation marked by production cuts due to parts shortages.

Toyota Motor Corp. posted a record-high net profit for April-December 2021, while Nissan Motor Co. and Honda Motor Co. revised upward their profit forecasts for the business year ending in March 2022.

The favorable results come as an increasing demand for cars has far exceeded supply amid the global economic recovery from the novel coronavirus pandemic, allowing them to sell well even at moderate discounts.

Weak yen a tailwind

According to Toyota’s consolidated financial results for April-December released Feb. 9, sales increased 19.2% from the same period of the previous year to ¥23.27 trillion, while operating profit rose 67.9% to ¥2.53 trillion, and net profit surged 57.8% to ¥2.32 trillion — all record highs.

In its key markets of North America and China, Toyota’s strong sales of high-priced sport-utility vehicles and fuel-efficient hybrid vehicles offset the negative impact from production cuts on sales.

While automakers have been cutting production, demand for vehicles remains strong.

Deliveries to customers, however, are another matter, with exceptionally long delays being seen after customers sign their sales contracts.

An extreme example of delayed deliveries involves Toyota’s popular SUV Land Cruiser — now estimated at up to four years.

Competition is particularly fierce in North America, the main battleground for global automakers. In order to avoid having excessive vehicles in their inventories, carmakers have traditionally provided dealers with sales incentives, which become a source for discounted sales.

Automakers now face a shortage of vehicles to sell immediately, which in turn has led to fewer sales incentives, especially in North America, which led to the growth in profits. This boosted Toyota’s operating profit by ¥150 billion.

A weakening of the yen is also providing a tailwind for Toyota: Its annual operating profit increases by ¥40 billion when the yen weakens by ¥1 against the dollar,

In the April-December period, Toyota’s operating profit turned upward ¥445 billion because of foreign exchange factors as the yen weakened by ¥5 against the dollar from the same period of the previous year.

Other automakers are also improving profitability by curbing discounts, while benefiting from the weaker yen.

Nissan announced Feb. 8 that it revised upward its annual consolidated net profit forecast for the business year ending March 2022 to ¥205 billion, an increase of ¥25 billion over the previous outlook as of November.

Honda also announced similar figures on Feb. 9, and lifted its forecast to ¥670 billion, an increase of ¥115 billion from a projection in November last year.

In its key market of North America, Honda has kept its sales incentives for dealers at about $900 per unit, less than half the usual amount.

Parts suppliers struggling

Auto parts suppliers, however, are still struggling to cope with production cuts and soaring raw material prices.

Seven of 12 major Toyota-affiliated parts suppliers have revised downward their annual net profit forecasts through March.

Toyota said there has been a significant increase in the prices of steel and aluminum among other materials.

Such price hikes are a blow to parts makers as they cannot immediately reflect the hikes in their delivery prices to Toyota. In consideration of the impact on its entire group, Toyota is looking into ways so that parts makers can earlier reflect an increase in prices.

Toyota Motor itself has also been affected by the rise in raw material prices, which was a negative factor equivalent to ¥365 billion on Toyota’s operating profit in the nine months through December. Toyota expects this impact to be equivalent to ¥630 billion for the full year to March.

The biggest reason for the decline in automobile production is the shortage of semiconductor chips. Further production is also uncertain due to the spread of the omicron variant of the coronavirus. Many insiders are pessimistic.

Ashwani Gupta, Nissan’s chief operating officer, strongly believes that the chip shortage will not be resolved anytime soon.

Toyota has revised downward its sales forecast for the business year ending March 31, 2022, compared with the November forecast, while leaving its net profit and other figures unchanged.

Should automakers’ inventory drop further, sales volumes will drop significantly, making it impossible for them to keep up with the current strong performance, which they have enjoyed thanks to the weaker yen and shrinking sales incentives.

“Their favorable performance this time is largely due to external factors, which may end up being a temporary tailwind,” said SC-ABeam Automotive Consulting President Shinya Omori.

With the shift to electrification and automated driving, the automotive industry is at a major turning point. Thus, the focus will be on whether the companies will be able to change their profit structures from a long-term perspective.