A worker walks past Nissan Motor Co. vehicles bound for shipment at the Nissan Oppama wharf in Yokosuka, Kanagawa Prefecture, Japan, on Friday, Feb. 28, 2020.
Akio Kon | Bloomberg via Getty Images
As the U.S. auto industry braces for the biggest downturn since the 2008 financial crisis, analysts are counting the cost for Japan’s automakers — whose fortunes depend heavily on the world’s second largest car market.
The United States overtook Italy and China last week to become the country with the most confirmed coronavirus cases in the world. As of Wednesday morning Asia time, there were about 188,000 infections reported and more than 3,800 people killed by COVID-19, according to the latest data from Johns Hopkins University. Cities have been shut down and businesses shuttered as a result of the pandemic.
To reﬂect weaker U.S. demand, Goldman Sachs slashed its combined operating proﬁt estimate for seven Japanese automakers by 22% in a note to clients last week.
In a note last week, the bank said the biggest drop in shipments for Japan’s manufacturers would come from North America — and predicted an 18.6% dip.
The revised forecasts are based on assumptions of a 30% drawdown in U.S. auto sales for 2020 to 12 million units, owing to the bank’s outlook for a major economic slowdown tied to COVID-19.
Although car sales are predicted to slump globally, the drop-off in shipments for Japan’s manufacturers will be most pronounced in North America, where Goldman sees an 18.6% fall, compared to a 9.6% drop for Europe and 3% dip for Japan.
Awaiting US damage report
Major automakers are due to report U.S. sales this week, giving investors a better grasp of the damage from coronavirus containment measures, which have shut both dealerships and factories across the country.
However, since most carmakers have switched from monthly to quarterly reporting, the full extent of the damage will not be revealed until the second quarter release because many stay-at-home notices were initiated in the middle of the month.
Ahead of the reports, market research firmcJ.D. Power forecast that monthly sales alone could plunge by as much as 40% compared to March last year.
Drawing on lessons from the downturn in 2008, however, Goldman predicted that latent demand will drive a sharp sales rebound of 25% in 2021 and 13% in 2022.
Consumer credit cracks
Analysts are also keeping an eye on the carmakers’ sales-ﬁnance business, which Goldman estimated would generate about 25% of operating proﬁts at Japan’s three biggest automakers: Toyota, Nissan, and Honda.
“We see potential downside risk if loan loss ratios rise and used-vehicle prices decline due to a sharp deterioration in macroeconomic conditions,” the bank warns.
Although U.S. auto loan ratios have been stable since 2010, Goldman cautioned that credit scores can deteriorate if unemployment spikes.
Economists expect the U.S. to reveal millions of new weekly jobless claims on Thursday, after a record 3.2 million claims were filed for the week ended March 21.
Best in a bad bunch
Although a great deal of bad news has already been reflected in the double-digit percentage declines in Japanese auto stocks year-to-date, it may be too early to declare a bottom.
“We think it is not yet time to argue that valuations are at historical lows,” Goldman Sachs said in its report.
Nissan is projected to fare the worst under Goldman’s earnings forecast, with fiscal year 2021 operating proﬁt projected to plummet 92%.
Analysts raised concern that Nissan would forgo a dividend in 2021 due to a further blow to free cash flow.
Credit ratings agency Moody’s Japan K.K. also indicated that Nissan could be the weakest link from a credit perspective, when it downgraded the embattled carmaker’s long-term rating by two notches last week. Toyota and Honda were each dealt a one notch downgrade.
Moody’s noted that Toyota was starting from a better base due to a recent run of high profitability and robust liquidity. Still, the ratings agency expects Toyota’s unit sales to decline, “straining its future cash flow and profitability.”
It’s a reminder that even the sector’s strongest players aren’t immune to the coronavirus outbreak.