Japanese Motor Companies Are Missing The Mark


At the height of the recession came a renewed interest in ultra-efficient Japanese cars that sip gasoline rather than burn through crude like their brusque American counterparts.  The gas guzzling SUVs cost a lot of money up front and then a lot more money at the pump, making smaller sedans look like an easy answer to a major problem for cash-strapped families.  Change has been in the air of late, however, and the increased spending power of the dollar in tandem with an absolute face-fall for the price of crude has put the American spending habits back into the realm of big and brash.  If that wasn't enough bad news for Japanese automakers, fiscal issues with the yen as well the Japanese economy more broadly have put a major anchor on the two biggest overseas auto manufacturers.

Summer Fun

The analysis of summer auto sales in the US has come in without much good news for auto manufacturers or their customers.  Sales of cars are down overall, having dropped almost 2% in comparison to Q2 of 2014.  While the advent of Labor Day weekend sits just around the corner, a holiday that features traditional big-spending on cars, one good weekend can't overcome a spending disparity.  Edmunds reports that sales of Honda vehicles (HMC on the NYSE, trading for $30.94 a share) fell by 6%, while Toyota (TM on the NYSE, trading for $119.61 a share) fell by twice that figure.  It's a reflection on the shift away from sedans, a vehicle class that Japanese manufacturers produce more of, and profit more from, than American auto manufacturers.  The Toyota Camry lost its vaunted spot as the best-selling car in the United States, surrendering the number one seed to the Ford F-150 and the Chevy Silverado, two pickup trucks that are reknowned for their towing capacity and horsepower, not their gas efficiency.  No Toyota or Honda small sedan has seen any positive sales growth in Q2; only the Toyota Corrola saw positive sales growth of all the Japanese mid-size sedans.  At the same time, both GM and Ford reported strong sales of their bigger SUVs.

If You Can't Beat Them

Both Honda and Toyota, of course, both sell SUVs and trucks.  Indeed, the Honda CR-V is the 8th best-selling vehicle in the US, while sales of their trucks grew by five percent over the summer.  What's more, Honda rode the success of their compact crossover SUV to the tune of 20% increased profits through Q1.  Yet the balance of production remains very strongly tilted in the favor of US auto manufacturers: look no further than the fact that Ford's F-150 pickup trucks sell better in the US than all Volkswagen, Mitsubishi, and Cadillac sales combined.  The Japanese business plan relies on the slow but steady growth of small and mid-size sedans, a trend that the US appears to be leaving in the dust to re-ignite our love affair with the bigger auto.  With average gas prices below $3 per gallon for almost 12 consecutive months, the Japanese auto industry appears to be backing the wrong horse.

Trouble At Home, Trouble Abroad

As if the issue of auto size and the American market didn't hit Honda and Toyota hard enough, the sinking yen value puts both companies in a particular bind.  The yen hasn't traded above 100-to-1 with the USD, the favorable balance point for Japan, in two years.  What's more, the value of the Japanese currency has been steadily falling over the past four years.  At the same time that the US Federal Reserve raises questions about interest rates and preserving the value of the dollar, the Japanese central bank ardently refuses to raise interest rates for fear of creating an inflationary spiral that mitigates the country's buying power.  This makes it far more difficult for Toyota and Honda to get good value on their loans as well as their investments abroad, and particularly the United States, while crimping their budgets for buying raw goods ranging from steel to rubber. 

  • The Takeaway: with the pressure on both Honda and Toyota at the moment, investors need to steer clear of these highly-volatile stock choices.  Both can usually be counted upon for good growth, but both have taken a beating through 2015 and unfavorable circumstances will keep them further down for the near future.  If you have shares of either company in your portfolio, consider selling them and purchasing American auto manufacturer stock (Chrysler is doing far better at the moment than Ford or GM, but all three appear poised for good growth through Q3).
  • The same fiscal policies that limit Toyota and Honda's buying power serve to amplify the value of currency-exchange ETFs.  Each day that the US dollar pounds on the yen (and the Euro, for that matter) represents profit for investors in US dollar ETFs like the DB USD Index Bullish.  Currency ETFs have huge degrees of volatility, however, meaning that investors looking for low-risk investments may prefer traditional stocks.

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