Honda Cuts Profit Forecast amid China-Japan Dispute

on Oct 29, 2012
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Honda Motor Co (TYO:7267), Japan’s third-largest automaker, reduced its full-year net profit forecast by almost a fifth after sales in China, the world’s biggest autos market, were hit by a backlash against Japanese products, triggered by a territorial dispute between the two Asian countries, Reuters reported on 28 October 2012.

Honda’s Revised Forecast
“We expect earnings to come below the estimates announced on April 27, 2012, due to a decrease in sales volume amid the changing business environment and the impact of currency exchange rates,” Honda said in a statement.
The Tokyo-based carmaker said that it was reducing its operating profit forecast for the fiscal year ending March 30 by 17 per cent to 375 billion yen (£2.9 billion) from its former estimate of 470 billion yen (£3.6 billion). In addition to the cuts in its annual profit forecast, Honda announced that it was reducing its revenue projection by 4.9 per cent to 9.8 trillion (£76.4 billion). The company is also cutting its annual vehicle-sales target to approximately 4.12 million units from the former target of 4.3 million, citing the changing business environment in its major markets — China, Europe and South America.

Sales Slump in China
Along with its revised profit forecast, Honda announced a reduction of its full-year Chinese sales estimate by 17 per cent, after the demand for Honda’s cars in the Chinese market was hit by a backlash against Japanese products. The adverse reaction has been provoked by a territorial dispute over islands in the East China Sea, controlled by Japan but claimed by China. The decades-long dispute, involving the islands named Senkaku in Japan and Diaoyu in China, was reignited in April, when Tokyo Governor Shintaro Ishihara, a long-time critic of China, proposed buying the islands from their private owners. That led Japan’s Prime Minister Yoshihiko Noda’s administration to purchase the islands last month, escalating tensions between the two nations and sparking violent protests across China. Since the demonstrations have started, shares in Honda have fallen 15 per cent to near 9-month lows.

Other Japanese carmakers have also suffered from China-Japan tensions. Toyota Motor (TYO:7203) and Nissan Motor (TYO:7201), whose profit forecasts are also expected to be cut, reported a slump in sales in China. The Japanese automakers have also come under pressure from the value of the currency, which last year hit record highs against the dollar and remains strong, making exports relatively more expensive overseas and cutting the value of repatriated earnings. The aversion towards the Japanese brands and the impacts of the country’s currency exchange rates have turned into an opportunity for Germany’s Volkswagen (AG ETR:VOW) and South Korea’s Hyundai Motors (KRX:005380) to pick up market share in China, the world’s largest auto market.

Accidental Release of Honda’s Quarterly Profit
Honda released its quarterly earnings three hours earlier than planned, after accidentally posting the results on its website. The company quickly took down the numbers, but was told by the Tokyo Stock Exchange to bring forward the full announcement.
Honda’s Net profit for July-September rose 36.1 per cent to 82.2 billion yen (£640 million). Earnings per share increased to 45.63 yen, while net sales and other operating revenue advanced to 2.271 trillion yen (£17.7 billion). Honda said that a recovery from March’s earthquake and new model introductions led to an increase for automobile business operations. According to analysts, however, the ongoing Japan-China dispute could lead to fallout in the current and fourth quarters.

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