Is the worst over for Japan's automakers?

Posted by: Ian Rowley on July 30

There is no denying Japan’s automakers took some extreme measures at the start of the year. As sales slumped around the world, nothing was safe from cost cutting. Mitsubishi Motors apologized before one press conference for not providing water as an emergency cost saving measure. The chief engineer of a new Lexus shared a car with two colleagues rather than take the bullet train from Toyota City to Tokyo, even though it took four hours versus 90 minutes on the train, to save $300 in train fares. More important: the likes of Toyota, Honda and Nissan slashed production at the start of the year—in some months trimming output 65% from a year earlier—as they battled to reduce inventories.

This week’s earnings results suggest the tough steps are paying off. After racking up huge losses in the first three months of the year, Honda, Nissan, and Mazda have all posted better than expected results for the April-June period. Honda, one of only three Japanese carmakers, to make an annual profit in the financial year that ended on March 31, surprised analysts yesterday with a small profit. Today’s its stock rose 8%. Nissan, which posted a smaller than expected loss a couple of hours after Honda’s results, surged 10%. Mazda’s better-than-hoped $264 million loss also warrants a mention given that the Hiroshima-based carmaker exports about 85% of the vehicles it makes in Japan. That makes it especially vulnerable to the strong yen, which surged against other currencies last fall and remains at painful levels for exporters.

For all that, the recent recovery in confidence—and share prices—could prove fragile. One question mark is what will happen to auto sales once government incentive schemes come to an end. “Cash for clunkers” and tax breaks for eco-friendly cars are one reason for better-than-forecast results. In China, government measures, including boosting sales of cars with engines sizes of 1.6 liters or smaller, continue to stoke sales. In Japan, subsidies for eco-friendly vehicles, such as the Honda Insight and Toyota Prius, have propelled hybrids to the top of the sales rankings for the first time. But what happens when the government help runs out?

Then there’s the Toyota factor. The company, the world’s largest automaker, doesn’t reveal its quarterly results until August 4. Given its huge importance to the Japanese auto industry, if its numbers disappoint, the recent improvements in sentiment could quickly go into reverse.