You may be aware of Abenomics by now, including Japanese Prime Minister Abe’s plan to devalue the yen. The yen has fallen from $.0116 to about $.01 so far this year. Toyota Motor Corporation (ADR) (NYSE:TM)’s most recent annual report (2012) is full of plans to remain profitable despite the yen. All of a sudden, it does not have that problem. Its most recent financial results were quite good with revenue up by 18.7% and operating income up by 271.4%.
In other words, the macroeconomic picture is making Toyota’s outlook rather rosy. Or is it? First, devaluing the yen does not make Japanese cars any cheaper for Japanese buyers. In fact, it will likely induce some inflation above average wage increases and thereby reduce the amount of money Japanese buyers have to spend money on cars. This could be offset by higher employment. Essentially, if Abenomics pays off, it will help Toyota Motor Corporation (ADR) (NYSE:TM) long-term, but if it does not, it will hurt. This might put a significant damper on Toyota’s plans in Japan, which makes up 60% of Toyota’s market by revenue (Annual Report). Some of you may say fine, Toyota Motor Corporation (ADR) (NYSE:TM) is an export-based blue chip: the point of the devaluation wasn’t to spike Japanese sales.
Toyota’s more than the yen
Not so fast. Toyota Motor Corporation (ADR) (NYSE:TM) produces a total of 5 million cars overseas, more than the 3 million it produces in Japan. In other words, the majority of Toyota’s cars receive no pricing advantage as a result of the devaluation. Furthermore, what is Toyota’s second biggest market? North America, which represents 25% of its revenues. Toyota has not been doing that well in the United States. Its regional quarterly profit there was less than a billion dollars, and its sales fell in April for the first time in 18 months. Most troubling, the Camry, America’s best selling car for over a decade, was outsold for its second consecutive month. This is occurring at a time, when some American car manufacturers are having a hey-day. Ford Motor Company (NYSE:F) , for example, recorded its highest profits in a long time.
Well, then what about China? The news here is pretty disappointing as well. Toyota Motor Corporation (ADR) (NYSE:TM) was only able to realize 4.4% year-over-year increase. In comparison, Ford Motor Company (NYSE:F) reported a year-over-year increase of 54%, which is over 12 times as large. Toyota is doing better in India, whose growth powered a 5.7% increase for Asia as a whole, but the Chinese report is still quite troubling. To sum it up, Toyota is facing significant headwinds in Japan and North America, which together comprise 85% of its market. Furthermore, it isn’t roaring ahead in China, soon to be the world’s largest automobile market. It did well over fiscal year 2013 because of the devaluation of the yen, but apart from that it’s facing some real troubles.
What about Honda?
Honda Motor Co Ltd (NYSE:HMC) is the third largest Japanese car manufacturer and a perennial contender in North America. Between 2012 and 2013, its revenue was up by 12% and its income was up by 31%. These numbers are quite respectable, although not as good as Toyota’s. It is doing well in North America with revenues up 24%, and its Japanese revenues are up by 13%. However, it faces the same problem in Japan that Toyota Motor Corporation (ADR) (NYSE:TM) does with the likely increased inflation around the corner. Furthermore, it doesn’t gain much with regard to America from the devaluation, because similar to Toyota, most of the cars intended for sale in the U.S. are produced there. Its Chinese performance is also disappointing with the most recent annual report (2012) announcing unit increases of only 2%. On the plus side, Honda Motor Co Ltd (NYSE:HMC) also sells motorcycles, and as such is aimed more down-market, which will be a strength in developing nations.