REUTERS
Japan’s three leading automakers expect a stronger yen will cost them around $14 billion in lost operating profit this year alone — just as they need to invest more in everything from cleaner fuel to driverless cars.
After three years of supernormal profits on the back of a weaker currency, Toyota Motor, Nissan Motor and Honda Motor now face a reality check after the yen has turned around.
While the recent years’ currency boon filled automakers’ coffers — Toyota alone has around $10 billion in cash — a squeeze on margins will put them under pressure to focus their investments, analysts say.
“How to respond to yen rises while securing profits and continuing future investments — this balance is important,” Toyota Executive Vice President Takahiko Ijichi said this past week.
The dollar climbed roughly 60 percent against the yen between late 2011 and mid-2015, a huge windfall for Japan’s carmakers, but so far this year it is down roughly 9 percent against the yen.
Toyota, the world’s largest automaker, has forecast a 40 percent drop in operating profits this year because of the stronger yen — a ¥935 billion ($8.6 billion) hit for a company that exported nearly half its Japanese production last year. Honda forecast a ¥303 billion hit to its operating profit, while Nissan expects a “massive impact” of 2¥55 billion on its operating profit.
Even automakers that have invested more in production outside Japan expect some currency pain. Suzuki Motor Corp., which through its Maruti Suzuki venture has almost a 50 percent market share in India, expects annual net profit to fall by a fifth.
This is all money that could be invested in cleaner alternative propulsion systems, technology to link cars to data services and the development of autonomous driving.
In the United States, for example, General Motors has invested $500 million in the ride-sharing service Lyft to develop an on-demand network of autonomous vehicles. It also bought Cruise Automation, a San Francisco startup focused on developing driverless cars.
Toyota has said it would set up a research and development company to focus on artificial intelligence in Silicon Valley, in a departure from its cautious stance on automated driving.
Japan’s top three automakers are, however, verging on the conservative with their assumed yen rate of 105 to the dollar. This is more downbeat than a Reuters poll of foreign exchange analysts that forecast the yen easing to 115 per dollar by next April.
And that is already having an impact.
Toyota forecast its smallest rise — just over 2 percent — in R&D spending in four years, to ¥1.1 trillion in 2017.
“We’re seeing a double whammy of yen strength combined with Japan Inc.’s tendency to give very conservative guidance,” said Stefan Worrall, director of Japan equity sales at Credit Suisse. “So you have to acknowledge some uncertainty over how much capex [capital expenditures] will actually be impacted by the stronger yen because we’re unsure just how much exaggeration we’re seeing in dim earnings forecasts.”
Nissan, whose development capacities may be boosted by a proposed tie-up with Mitsubishi Motors, has ramped up production of its Rogue crossover SUV in Japan, a model that has been selling well in the United States. That made sense when the yen was weak, but less so now.
But capacity constraints mean Nissan has little hope of altering its plans to increase Japan production.
“We’re not using it as a strategy, we’re using it as an opportunity. We have capacity available in Japan and no capacity available in North America,” said CEO Carlos Ghosn.
He called the stronger yen a “massive headwind.”
In the short term, companies will look to rein in costs, analysts say — and that could be bad news for Prime Minister Shinzo Abe’s efforts to stimulate a stalled economic recovery, as salaries will likely be a prime target.
http://www.japantimes.co.jp/news/2016/05/14/business/strong-yen-cut-cash-japanese-carmakers-research-development/#.VzbdYWhkjIV
