After five years of challenges, Japanese car companies are experiencing record profits, in part caused by a weaker yen. The profits mean that the automakers will have enough cash on hand to weather potential downturns, and invest more in new factories, R&D, and new products. They can also use the cash to add content to vehicles or put it on the hood of cars and trucks in the form of incentives. The net result is that Japanese automakers are in their most competitive form that they've been in a while
"This is a kind of renaissance for Japan's carmakers, after the dark ages of the financial crisis, the tsunami and the exceptionally high yen," Tatsuo Yoshida, an analyst at Barclays Securities Japan, said. "They have much more freedom and latitude."
R&D spending is the lifeblood of new and better products. In the current fiscal year Toyota plans to spend 12% more on R&D than in the previous year, a total of $8.95 billion. Honda expects R&D spending to rise 13% this year, up to $5.99 billion. Both of those automakers are spending more on research and development than General Motors' 2013 net income of $3.77 billion.
The R&D spending is supported by strong financial results. Toyota, Mazda, Mitsubishi and Subaru parent Fuji Heavy Industries all are predicting record net profits when the current fiscal year is over.
Though Japanese automakers won't detail how they will spend their windfall, analysts expect them to build new factories and invest in new markets and new technologies, like hydrogen fuel cell vehicles.
The Japanese automakers' profits that are exceeding prerecession highs are attributed largely to a Japanese currency that has lost about 20 percent of its value against the dollar in the past year. Prime minister Shinzo Abe is a big supporter of a weaker yen. Another reason for the record profits are being lean after years of cost cutting.
Toyota estimates that the weaker yen will account for $8.36 billion of this fiscal year's record operating profit of $22.81 billion, compared to $2.28 billion accrued through cost cutting. Toyota executives in North America stress how those record profits are taking place in a smaller overall market with less favorable yen to dollar rates than when they set their previous record in 2008. Those comments were in response to Ford president Joe Hinrichs' recent complaints that Toyota has benefited from currency manipulation.
Hinrichs' comments were "misleading," Toyota Managing Officer Takuo Sasaki said. "We have been reducing costs and implementing structural reform, which are showing visible positive results."
Sasaki pointed out that Toyota's Global Vision midterm business plan, unveiled in 2011, called for a cost base that can deliver profits at an exchange rate of 85 yen to the dollar. The yen is currently trading at approximately 100-105 yen to the dollar. "We are right on track to realize that vision," Sasaki said.
Besides Toyota, during the belt-tightening years, Japanese car companies eliminated capacity in high cost Japan, expanded sourcing from low-cost Asian suppliers, switched vehicles to cheaper architectures, and shifted production overseas to reduce exposure to currency fluctuations. When the exchange rate improved, the automakers were positioned to benefit.
For example, Mazda started restructuring it's global manufacturing operations during the depths of the financial crisis, setting up joint manufacturing ventures in Russia and Vietnam, and opening an assembly plant in Mexico. It also put funds into developing its Skyactiv line of powertrain, chassis and body technologies, which are meant to save manufacturing costs as much as they are to save consumers on fuel costs.
Honda did likewise with its new Earth Dreams powertrain lineup and a new global platform strategy. Nissan is moving forward with using low-cost modular platforms, as is Toyota.
Higher margins and greater operating profits have boosted profits along with the exchange rates.
"We've been working on structural reform for several years, and it's steadily bearing fruit," Mazda CEO Masamichi Kogai said. "It's from here out that we'll see decisive results."
Those structural reforms will be important should the yen strengthen again and eat away at those margins. For that reason, companies are hoarding cash. At the end of 2013, Toyota reported having almost $34 billion in cash and cash equivalents on hand, up 29 percent from 2012. Fuji Heavy Industries, maker of the Subaru brand and Japan's smallest major car company, had $4.73 billion in cash on hand at the end of last year.
When deciding what to do with that cash, a major focus will be on product development, not shareholder dividends.
"In the short run, they will focus on r&d," Toru Hatano, an auto analyst at IHS Automotive, said. "The needs of r&d are becoming wider and wider. They have to build new facilities and hire new engineers."
"Wise investment is what we have in mind," said Toyota's Sasaki. "We want to develop advanced technology for future growth."
from The Truth About Cars http://ift.tt/Jh8LjA
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