Where General Motors goes, America goes. Likewise, where Toyota and Honda go, Japan goes. If the latest signals from these two Japan Inc icons are any guide, Asia’s No 2 economy is veering off the road into an even deeper ditch than anticipated.
The 86% plunge in operating profit that Toyota, Japan’s biggest automaker, reported in the January-March quarter dramatizes the stakes as the coronavirus fallout intensifies. What’s more, the 80% profit plunge Toyota expects in the year to March 2021 is the worst in nine years.
But even that could be optimistic as global demand seizes up and Japan skids into recession.
As President Akio Toyoda puts it, Japan Inc’s most important blue-chip faces its biggest stumble since the global financial crisis. But that 2007-2008 crisis was only a debt-crash-driven event. The current disaster features that – plus consumers everywhere being too afraid to visit dealerships even if they have cash.
The second blow in the one-two punch was Honda’s 13% profit drop in the January-March period – and a 15% sales decline. So uncertain is today’s terrain that Honda declined to provide full fiscal-year forecasts.
Toyota’s initial hit is bigger because it’s far more exposed to the US and Chinese markets, where production shutdowns and declines in demand have been most acute. And Toyota, with a US$172 billion market capitalization, dwarves Honda’s $41 billion market cap.
Meanwhile Nissan, still reeling from the late 2019 arrest of former Chairman Carlos Ghosn, will report results later this month.
Across the board
Investors had been braced for a sharp downshift as the coronavirus skewers Asia’s 2020. The damage is proving to be just as spectacular in sectors typically viewed as less vulnerable to business-cycle shifts, from cosmetics to beer.
The red shading dominating Shiseido’s balance sheet colored the Nikkei 225 Stock Average’s rocky performance on Tuesday. From January to March alone, profit fell 95% from one year ago.
It turns out, slapping on makeup makes little sense in the age of face marks and social-distancing. Airport duty-free counters also are eerily quiet.
Beer, meantime, might seem as recession-proof as ever as anxieties surge and Zoom drinking sessions abound. Hardly. Shuttered bars and restaurants hit breweries as rarely before.
Japanese giant Asahi Group Holdings reported a 45% plunge in quarterly operating profit. Though many beer taps are still open in Japan, where Covid-19 cases lag behind most developed nations, sales of Asahi’s global brands from Italy’s Peroni to Czech market leader Pilsner Urquell are sliding fast.
Yet it is the bleeding among automakers has the biggest implications for Japan.
Even as the service sector expands, the health of giant exporters still plays an outsized role in perceptions about the corporate sector. And here, it’s not just the Big Three automakers flashing warnings, but names like Mazda, too.
This week, Mazda accelerated efforts to secure nearly US$3 billion of financing from the nation’s financial spigots. According to local press reports, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, Mizuho Financial Group and others including the Development Bank of Japan are ready to oblige.
Mazda is as good a microcosm as any for how the Covid-19 shock has household names halting production lines around the globe. The sudden nosedive in demand is already slamming balance sheets and raising concerns about the levels of interest-bearing debt relative to cash in hand.
Mazda’s $6 billion debt burden, for example, far exceeds its liquid assets.
More help, please
Yet the numbers out of Toyota and Honda signal even greater pain to come. Pain that government stimulus efforts do not sufficiently address. The record $1 trillion rescue package Prime Minister Shinzo Abe’s government announced last month already seems unequal to the trauma hitting Japan Inc, says analyst Scott Seaman of Eurasia Group.
Earlier this month, Abe’s team sought to supersize that package with moves to stave off large-scale bankruptcies and support the real estate sector. Yet pressure is already building for more aid to businesses and households alike.
“The number of bankruptcies among mostly small business attributed to the Covid-19 pandemic is on the rise, making any additional support the government provides for businesses to make rent, improve liquidity and maintain their employee headcounts both economically and politically salient,” Seaman said.
The economic tsunamis slamming Japan are causing ripple effects far across Asia. As of May 8, Fitch Ratings downgraded at least 28 Asia-region companies with an additional 28 negative-outlook warnings.
The homebuilding sector led the way, followed by companies in the gaming and hospitality spaces. After that, it was oil and gas, autos, basic materials, mining, retail and capital goods.
The auto sector disruptions, from Fitch’s perspective, are particularly acute for Japanese and South Korean names.
That’s true, too, of analysts at Moody’s Investors Service, though Japan’s tech sector is also in their sights. Moody’s recently slapped a negative outlook on Panasonic.
The auto realm, though, is as on the frontlines as any. Even if China can stimulate its way back to stability – a very big “if” – conditions in the US, Europe and Japan are a long way from being conducive to global profits. The same goes for rising enmity between Donald Trump’s America and Xi Jinping’s China.
In China, says Michael Dunne, CEO of consultancy ZoZo Go, “yes, car sales are recovering. But doubts linger about China’s economic recovery because the rest of the world remains mired in battles with the virus. Political tensions are mounting as well.”
Those tensions have Tokyo adopting some truly Trumpian tactics, including listing Toyota, Sony and other Japan Inc icons among those worthy of more stringent foreign-ownership laws. Abe’s government designated 518 of about 3,800 listed companies as vital to national security.
That’s more theater than substance, of course. For generations, Japan’s biggest companies have used labyrinthine networks of cross-shareholdings to fend off takeover attempts.
Still on the virus front – and contrary to some popular perceptions – Japan has managed things well.
“Japan is well positioned on the coronavirus, with a vastly under-appreciated combination of preserving life while preserving livelihoods with a semi-lockdown,” said analyst Nicholas Smith of CLSA Securities,
But domestic uncertainties – coupled with weak demand abroad – is sure to put downward pressure on equity values as the year unfolds.
Abe is reading from the Trump playbook in putting economic revival ahead of coronavirus testing. Japan’s official case tally is remarkably low – fewer than 16,000 infections and less than 700 deaths – but a lack of testing might discourage consumers from embracing a return to normal, depressing retail spending.
The vibrancy of the Nikkei and Topix indices will rely very heavily on Tokyo’s ability to stabilize the economy. The 7.1% plunge in 2019’s fourth quarter happened well before Japan recorded its first Covid-19 cases. And indications from the corporate sector are pointing to even greater headwinds – and pains – to come.