Note: this discussion focuses, where possible, purely on the core light vehicle operations, excluding contributions by other divisions such as credit, components, HCVs etc.
A snapshot of the latest results for the world’s car manufacturers in the first nine months of 2013 shows the year to be playing out much as expected:
- the Japanese OEMs are continuing to benefit from the weaker yen, reporting an average operating margin of 7.1% compared with 4.2% a year earlier;
- North American producers continue to benefit from the recovering US market and Ford’s European operations are turning around faster than expected;
- Europe’s mass-market producers continue to suffer from the prolonged downturn in most EU markets as well as adverse currency movements;
- Korean OEMs have seen profits decline as domestic demand has weakened, competition both at home and abroad is tougher and domestic strikes have been costly.
Interim results – period to September 2013
Japan – things are looking up
Reporting for the first half of the 2013/14 fiscal year, the seven major Japanese producers saw an 84% rise in aggregate operating profit as all except Nissan improved on their year-ago performances.
As in the first quarter, the dominant factor in this improvement remains the weaker yen, currently trading at a six-month low versus the dollar and four-year low against the euro. As shown in the accompanying table, more favourable exchange rates contributed 126% of the net improvement in aggregate operating profit for the period.
A further positive development for the Japanese OEMs is the recent improvement in their domestic market, with new car registrations rising by 18% year-on-year in both September and October. This has left the market down by just 3.5% over the first ten months, a better performance than had been expected.
It had been thought that this domestic sales improvement would be short-lived, as it has taken place against the backdrop of Japan’s planned increase in sales tax from 5% to 8% in April 2014, with a further rise to 10% in October 2015. However, recent comments by Toshimitsu Motegi, Japan’s minister of Economy, Trade and Industry, indicate that the government plans to implement offsetting cuts to car purchase taxes when the general sales tax is increased.
Japanese OEMs – aggregate first-half operating profit
Nissan under-performed over the first half as its operating profit dropped by 2.6% from a year earlier and its margin fell by 0.9pts to 4.7%. Despite the benefit of a ¥145bn gain from exchange rate changes against major currencies, the company was hit by higher-than-expected costs related to product recalls and lower sales in several emerging markets – where it also suffered from some unfavourable movements against minor currencies.
North America – general market recovery puts profitable pickups back on the agenda
Ford and GM both reported higher automotive operating profits over the first nine months of the year, though at Ford the (pre-tax) margin dipped by 0.4pts to 4.5%. Both companies are benefiting from the general recovery in the North American market and more specifically the recovery in demand for full-size pickups.
In North America, Ford continued to enjoy a double-digit operating margin, albeit 0.5pts lower than a year ago at 10.7%. In Europe, Ford’s nine-month operating margin and pre-tax loss were both about equal to a year earlier, despite the additional burdens of US$400m of restructuring costs and lower industry volume. For full-year 2013, the company now anticipates a smaller loss in Europe than 2012. This is an improvement from its previous forecast of a loss about the same as a year ago.
GM’s North American operations were not that far behind Ford’s by the end of the period, reaching a 9.3% EBIT margin in Q3-2013, mainly boosted by mix and price factors. GM’s European operations reported an operating loss of US$(499)m over the first nine months compared with a year-earlier loss of US$(1,175)m.
Europe’s OEMs – the premium/mainstream divide widens
In Europe, Fiat and VW both reported operating profit declines in their automotive divisions for the first nine months. In Fiat’s case, the 5.9% drop was attributable to weaker performances in:
- NAFTA – due to higher costs for product launches and adverse currency movements;
- Latin America – due to higher costs and an unfavourable product mix.
Fiat reported higher profits in Asia-Pacific and lower losses in EMEA due to tight control of costs.
At VW Group, the 7% drop in the passenger car division’s nine-month operating profit to €6.7bn would have been substantially worse but for the inclusion of Porsche, which contributed €1.89bn. Excluding Porsche, the division’s operating profit fell by 18.2%, with falls of 34.5% at Skoda, 26.6% at VW and 10.8% at Audi.
PSA and Renault do not report quarterly profit figures, but both companies reported losses for the first half of the year.
The car divisions of BMW and Mercedes-Benz also reported lower profits over the first nine months, down by 11.9% and 23.7% respectively. In BMW’s case, the decline reflected increased launch costs, tougher competition and higher personnel costs. The margin slipped from 10.9% to a still-healthy 9.5%. The narrative for Mercedes-Benz was similar, with a weaker model mix and higher expenses in connection with product enhancements. However, in the third quarter alone, the division increased its profit by 23% and the margin improved by 0.9pts to 7.3%, mainly due to growth in sales.
South Korea’s OEMs see domestic profits hit as overseas competition intensifies
Aggregate automotive operating profit at Hyundai (HMC) and Kia dropped by 9.4% in the first nine months. Domestic profits have been hit by tougher competition due to:
- falling demand – there was a 2.0% decline in Korean sales over the first nine months;
- the inroads being made by foreign premium brands (BMW, Mercedes and VW were the top import brands during 2012) following the 2011 Free Trade Agreement with the EU. Over the first ten months of 2013, sales of import brands rose by 21% to 130,000 units.
Overseas competition has also intensified, due to the appreciation of the won and depreciation of the yen, as well as the non-recurrence of some of the problems (natural disasters, recalls, bankruptcies etc.) that have constrained the Japanese and US OEMs in recent years. The Korean producers made some useful market share gains as a result of those problems but as expected, some of those gains are being lost as competitors recover. The pressure HMC is under can be seen from the fact that in the US its spending on incentives rose by 47% over the first nine months compared with a decline of 2.2% at Toyota and the market average of a 2.4% increase.
The Korean producers’ earnings will also be hit, both short-term and long-term, by the impact of strike action. In early September, union workers in South Korea agreed to end a three-week strike estimated to have cost more than Won 1 trillion (US$920m) in lost output after they accepted HMC’s offer to raise base salaries by 5.1%. This was the second disruption of the year at the company where strikes have occurred in all but four years since 1987.
In addition to the increase in base salaries the company offered bonuses worth 3.5 months of wages plus Won 5m in cash. According to the company, the total package equates to an average of Won 28.8m (US$27,000) extra per person.
Later in the month, Kia also reached an agreement which ended a three-week strike. The terms were similar to those offered by Hyundai.
The various negative factors affecting the Korean producers should not obscure the fact that they remain among the most profitable mass market players in the industry, with HMC reporting a 9.6% operating margin over the first nine months and Kia 7.1%.
2013 draws to a close – will that relieve the Europe-dependent mass market OEMs?
As 2013 draws to a close, the outlook for global LV demand is stronger than at the corresponding time a year ago. For the most part, markets which have grown in 2013 are expected to continue to rise in 2014, albeit at a slower pace in some cases, while many markets which have declined in 2013 are expected to begin recovering next year.
For the most Europe-dependent mass market OEMs in particular (i.e. Fiat, PSA and Renault), this will be a welcome development. Although the expected improvement in European demand will be too anaemic to transform their prospects, it should at least mark the beginning of recovery. It is hard to avoid the thought that, had the Europeans cut capacity like their North American peers at the corresponding stage in their cycle, the recovery would be swifter.
Jonathan Storey
About the author: Jonathan Storey is the director of Automotive Reports, a consultancy providing research, analysis and forecasting services for vehicle manufacturers, suppliers and regulatory authorities
