February 8, 2012
What To Expect: Trends and Analysis with CLSA
Christopher Richter, Deputy Head of Research and Senior Analyst in the CLSAJapanese Equities Division (read: top auto analyst), joined me in the studio for a quick chat about industry expectations as we step into 2012. Richter discussed the impact of the strong yen on Japan’s auto industry, the growing trend of tie-ups and what three key trends he sees in the coming year.
Q1. We’re aware of the negative impact of the strong yen on exports and domestic production, but how will it continue to impact Japanese automakers’ bottom lines in the near future, and how do you envision the industry’s continued response?
CR: First off, lately we haven’t had that much of a move in the yen, so it’s probably going to affect [the industry] a lot in the coming fiscal year – just like it did last year. It is an enormous competitive drag on the automakers. Some of the makers are losing to the tune of hundreds of billions of yen per year in Japan – and this is a very globally competitive industry.
So you’re going to do everything you can do to mitigate that in the short term, such as procuring components from overseas or importing cars into Japan – Nissan’s doing that from Thailand with one vehicle – and all of these other kind of measures. But if we’re in it for the long haul, you do start to ask yourself ‘Is having such a large manufacturing base in Japan sustainable?’ or do you have to start shuttering some plants?
[Government] intervention in the currency markets – in my opinion – isn’t long-lasting. The government can intervene and maybe the yen will move to a slightly weaker position for a while. But, really, by itself I don’t think it can move the yen – especially where we are right now. It’s not mainly a problem with the yen, it’s mainly a problem with the U.S., the U.S. dollar and the euro. So, in a way, it’s out of their control.
The other measure that they’ve done to help is to create some new subsidies for cars. They’ve reintroduced the eco-subsidies, hopefully boosting domestic demand a bit and maybe that means Japanese makers can export less cars.
Q2. Global auto alliances and tie ups have certainly had more divorces than successful marriages in recent history, but looking at the now profitable Chrysler-Fiat, for example, can we expect more such link-ups in the future?
CR: It’s a good point you make. These close tie-ups are very difficult to manage. And, really, Nissan has been an exceptional one on a highway that is littered with the corpses of failed alliances. I think most makers tend to go, or are not going down the road of a full marriage, but are looking to specific makers that can help them with specific issues. And I do think there’s a greater recognition among auto executives that you can’t do it all yourself. The one that was really striking for me: Toyota teamed up with BMW for some work on diesel technology. That sort of shocked me because Toyota has always been a sort of their-way-or-the-highway type of company. But now they’re even reaching out to others – just a sign that it is a way of the future.
Q3. What are three key trends in the auto industry that we can expect in 2012? Are there going to be any surprises?
CR: I think at least speaking specifically to the Japanese auto industry, in 2012 this should be the year of recovery. Now, of the large three Japanese makers, Toyota and Honda were hit very hard by both the disasters in the Tohoku region and the flooding in Thailand. Nissan managed to sidestep both of those issues. But for the other two companies, it will be a year of big recovery and big earnings growth. One key theme that we’ll see this year is that maybe Japan roars again in the global automotive space.
A second theme will be to see how cars develop in the green space. Last year we had the Nissan LEAF first come out. Now Toyota, as of January, has a plug-in hybrid in the market, so we’re actually going to watch these two somewhat different concepts compete in the green space and compete against each other, and see what people really want to buy.
A third key trend will be where we’re going to see strength in the global vehicle space this year. One thing we’re starting to see right in the first month of the year is that the United States is looking surprisingly strong – cracking through the 14 million-unit SAAR barrier for the first time in January. This is the highest level of sales the U.S. market has seen since the financial crisis bottomed in 2009.
We’re also expecting on the back of recovery a very strong market in Japan. Japan could well likely be up 20% year-on-year. A question mark will be how things develop in China. China has been struggling, especially with a tight money situation there. So maybe of the big growing markets, maybe we expect less from China. Finally, looking at another emerging market India, which was slow last year, but the authorities are looking like they want to loosen, and perhaps that could set that market back on fire.
Producer, Global Media Center