Weak domestic consumption is undermining the auto industry but companies that aggressively engage th...
Weak domestic consumption is undermining the auto industry but companies that aggressively engage the domestic market or are strong exporters are bucking the trend.
In 1997 car sales fell by 14% and in 1998 by 6%. Despite talk of the economy picking up, sales have since done worse, falling by 10% in the past 12 months. The smaller companies such as Nissan and Mitsubishi have had more market success recently than the larger companies. Yet Anne-Marie Main, head of Japanese equities at Hill Samuel, thinks the success of second-tier companies such as Nissan and Mitsubishi is short-term only and believes the large players such as Toyota and Honda are the best bets for long-term growth.
In her pension fund strategy, which stays closer to the benchmark than her unit trust strategy, Main is going from underweight to neutral with Toyota because she thinks that it has an aggressive enough domestic policy to profit from a recovering economy. Domestic consumer spending is low, especially for big-ticket items such as cars. Main says that department stores and retail outlets have been similarly losing out, while certain niche markets have gained, such as Muji stores. PC sales have also gone up.
She says: "We still expect consumption to remain lacklustre at best. We don't expect consumers to be spending money. The market will stabilise next year."
In the meantime, Toyota is keeping the pressure up with a series of product launches, an essential element to keeping market share.
Main says: "When a company introduces a new car, sales go up. Car launches are very important. Toyota has had the upper hand this year."
Main thinks the recent Vitz series, which includes a mini-van and hatchback version, is dynamic enough to keep Toyota afloat in the domestic market.
Toyota also seems to be taking a stronger line with other aspects of its business, including expanding its telecoms companies.
Honda, by contrast, is strong because of its overseas markets. Philip Whittome, fund manager at Investec Guinness Flight, says: "Honda is international. It makes more profits, more sales and it sells more cars overseas than in Japan."
Main says: "Later on Honda will benefit. It has no excess capacity and is a profitable company. It does not have the same level of underperforming assets that Nissan has."
Despite Honda's strength, the only car manufacturer Whittome is investing in is Suzuki and that is because of its dominance of the market for mini-cars, the small, low-powered cars that are getting increasingly popular in Japan. While car sales overall fell 6% last year, mini-car sales went up 8%.
He says: "Mini-cars are subject to especially low taxes and the theoretical reason is that they are smaller and require less parking space."
In the present economic climate, the low price is as attractive as the size and sales are taking off in poorer rural areas.
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