For the first time in nearly a decade, Japanese automakers have overtaken the Big Three in Detroit, the United States, their largest market. Investors should be concerned with what feeds them.
The Japanese pulled off this feat last month, according to data this week. Car sales in the United States are down 7% from the previous year, but the drop is mainly due to General Motors,
Ford F 1.54%
Japanese automakers, including Toyota,
Mazda 7261 2.20%
and Subaru, gained market share, with Toyota closing in on tied first place with GM, each holding nearly 16% of the US auto market.
It comes at a cost, however. Toyota on Friday recorded a 46% drop in operating income in the first fiscal quarter in North America, its largest market, good for more than 700,000 cars per quarter, despite 8,000 more cars sold. The reason: higher marketing spend.
In theory, taking over from US automakers as they struggle to liquidate inventory is opportunistic behavior. On average, US manufacturers’ inventories exceed 100 days of sales, nearly double the 55 days of their Japanese rivals, although this is 10 days above the historical average for Japanese manufacturers.
Overall, inventories are the largest since 2009 by this measure. To keep moving goods, everyone’s offering big incentives, as generous as cash back plus 0% financing for six years. The average for all manufacturers in July was about $ 3,640 per car, up more than $ 200 from the previous year. However, Toyota and Nissan’s incentives have increased by twice as much and Mazda’s by almost three times as much.
At the same time as they are setting in motion big incentives, the Detroit Big Three are cutting fleet sales, which may improve their margins, but at the expense of revenue. Toyota enjoyed a 25% to 31% jump in sales of its SUV models in July, but idling Corollas and Priuses are piling up. Other manufacturers are increasing their numbers by pushing leases, which accounted for a third of new car sales in the first half of the year, but as used car prices fall, residual value losses will pile up.
In short, there are speed bumps to come. With stock prices for Japanese manufacturers at 9.6 times futures earnings, compared to an average of 6.1 for their US counterparts, it seems investors are giving them way too much credit.
Write to Anjani Trivedi at [email protected]
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