Europe: Less of a problem for Japan autos

by SR on July 30, 2012

European passenger car market share (%) in 2011

Conclusion: the turbulence in Europe is a negative factor for the auto industry globally, but a relatively small one for Japanese auto parts suppliers, including those associated with the Toyota group. The reason is simply that Japanese auto OEMs still make up the bulk of the customer base of the Japanese parts suppliers and those same Japanese OEMs have low market share in Europe. Parts suppliers such as Denso do supply to non-Japanese auto OEMs, but Europe typically accounts for around 10% of global revenues and only a few percent of profits. Conversely, the US market – which is having a great year – is an area of strength for the Japanese parts suppliers.

My take: the managements of Denso and Aisin Seiki will make worried comments about Europe when they release Q1 (April-June) 2012 quarter results at the end of this week, but they are unlikely to revise down their guidance. However, they may use the lack of visibility in Europe and after the ending of eco-car subsidies in Japan this summer to avoid revising up guidance even if Q1 results are strong.

Sometimes weakness is a blessing in disguise

The Japanese auto OEMs have never managed to get Europe right. Whatever it is that attracts the European car buyer, it isn’t what the Japanese offer. One can make excuses for Toyota, Honda and Nissan, and talk of protectionism or “home ground advantage” and there might be some truth to that. Still, the Japanese overcame similar problems in North America largely because they offered cars that many Americans found attractive. In Europe, the same companies have not offered cars that many Europeans find attractive.

The upshot of this dynamic is the chart above, which shows the market share of Japanese auto OEMs in Europe for calendar 2011. Basically the largest Japanese supplier (Toyota) has less than a 5% share of volumes. (A word on methodology: we have taken the passenger car volume sales for each auto OEM in the EU27 countries plus EFTA from ACEA and compared them to total sales for the EU27+EFTA countries as a whole. So, taking total shipments of passenger cars in 2011 to be 13.6 million units, the 560 thousand units of Toyota equate to a share of 4.1%.) Although the Northern Japan earthquake of March 2011 may have affected the market share of the Japanese somewhat the impact in Europe seems to have been minor; Toyota’s market share in 2010 was 4.4%, not much different to that of 2011.

The Japanese auto companies have three main problems in Europe.

  1. Diluted competitive advantage. The traditional unique selling point of Japanese cars is reliability. Unfortunately, European consumers do not seem to place as much importance on ruggedness as their counterparts in North America. If you monitor the discourse in the European car magazines, it is clear that reviewers are looking for something more, such as design flair and (especially for the interior) a sense of something different or special. And this isn’t just a question of picky journalists: the chart at the top of the page shows that European consumers are not particularly fond of Japanese cars. It is likely that the Japanese weakness in auto design is hurting sales.
  2. Powerplant mismatch. There is a gap between what 50% of European consumers want, which is a vehicle with a diesel engine, and what the Japanese can offer, which is usually either a gasoline or a hybrid engine. Sure, the Japanese have offered diesel engines and some of them – like the sturdy 1.4L that Toyota used in early Yaris models, or the creamy 2.2L used in the Avensis – were very good. But their corporate heart isn’t in it because the economics just don’t make sense. Diesel engine design is hard, the competition (companies like BMW) is tough, and the costs for Toyota can only be amortised over a small number of units i.e. Europe, rather than globally.
  3. New rivals at the low end. Hyundai Motor and KIA have encroached rapidly on what used to be Japanese territory at the “value” end of the European market. Not only do the Koreans offer more generous warranties than the Japanese in many cases, but Hyundai and KIA have already succeeded in an area where the Japanese are still failing: design. Motoring journalists note that many of the latest crop of Korean vehicles are handsome, even distinctive. Of the Japanese only Nissan, with the Qashqai and the Juke, has made any real attempt at individual design and both of those models have sold well. It is not clear (at least to me) that Hyundai and KIA are solely cannibalising customers who previously bought Japanese vehicles; that seems a bit of a stretch. The two Korean OEMs are probably attracting some drivers who are fed up with European brands such as Peugeot, Opel or Fiat.

Auto parts and Europe

As mentioned above, the exposure of the major Japanese auto parts suppliers is small, as can be seen in the following chart. (Please note that the figure for Toyota Industries is an estimate, as the company has stopped disclosing public information on regional sales. Note also that Toyota Boshoku discloses an ‘Other’ category that includes Europe, rather than a figure for Europe alone.)
European sales as percent total

As you can see, NTN has the highest exposure at 25.8% in the March 2012 financial year, which is due to its acquisition in 2007 of French bearing supplier SNR. JTEKT, which in 2009 acquired the needle bearing business of Timken including the European operations also has fairly high exposure. Most other companies have 10% or less; I have thrown in Honda’s main supplier Keihin and Nissan’s group supplier Calsonic Kansei to demonstrate that this is not just a Toyota group issue.

However, low revenue exposure doesn’t guarantee black ink, as the next graphic makes clear. On an operating profit basis, the figures look like this.

European operating profit as percent total

Again, NTN has the highest exposure to Europe as a percentage of total operating profit (22%), while the next largest is Toyota Industries at around 10%. All others are under 10%. For JTEKT, the high costs and lack of revenue being generated in Europe is causing losses. A few months ago, at the very bottom of this post I argued that the economic difficulties in Europe could force JTEKT into an early restructuring of its troublesome operations there. Rather than exiting Europe altogether, JTEKT would shift most of the manufacturing operations them to Eastern Europe, as it still needs to supply its customers in mainland Europe. Freighting fully-assembled systems from Japan is not a sensible solution. I think such a restructuring is becoming more rather than less likely for JTEKT – and that would be a positive for the company and the stock.

How does the market feel about these “European exposure” stocks? For NTN, JTEKT and NSK it is difficult to disentangle the impact on the share price of the European slump from the ongoing investigation by Japanese authorities into allegations of price-fixing in the bearing industry. I don’t think you should get involved with these stocks until this invesigation has been closed. What is clear is that bearings stocks have underperformed.

Below we have a graphic showing the percentage change in the share price of nearly 50 auto parts and tyre stocks in Japan, covering a wide range of products and market capitalisation. The thing that stands out is that NTN is the worst performer of all, with its share price down 36% since the start of 2012. JTEKT has fallen 12.8% year-to-date and NSK is 6.4% lower. For comparison, the Topix market index (in blue) is flat. Denso and Aisin Seiki have managed increases of 15.5% and 7.6% respectively and even much-reviled Toyota Boshoku has risen by 6.6%. Toyota Industries, which has unwelcome exposure to the forklift market, is flat year-to-date.

Share price performance of Japan auto parts and tyre stocks year-to-date (%)

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