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Big US auto discounts are bane to Asia carmakers' profits

Friday, July 28, 2017 - 11:36

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Nissan Motor Co and Hyundai Motor Co both cited higher incentive spending in the US as reasons behind a slump in quarterly profit, with a political backlash in China adding to a cloudy outlook for Hyundai, South Korea's largest automaker.

[TOKYO] Asian carmakers are taking hits to their profits from having to spend more to move metal in America.

Nissan Motor Co and Hyundai Motor Co both cited higher incentive spending in the US as reasons behind a slump in quarterly profit, with a political backlash in China adding to a cloudy outlook for Hyundai, South Korea's largest automaker. More evidence of the industry's pain is likely to come next week, with Toyota Motor Corp. and Honda Motor Co scheduled to report earnings.

"Competition is rising in the US," Joji Tagawa, a Nissan corporate vice president, said Thursday at the company's earnings briefing in Yokohama, Japan. Marketing and selling expenses were the biggest contributor to its 13 per cent decline in operating profit. The company spent US$4,086 on incentives for each vehicle last month, the highest level among Asian auto brands, according to Autodata Corp.

Nissan is stepping up the introduction of SUVs to make up for the loss in the sedan market and benefit from the faster growth in the crossovers and trucks segment. Jose Munoz, Nissan's North American chief, has said the company will generate 60 percent of sales from SUVs, which should help improve profitability.

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Among the models expected to help drive sales are the Rogue Sport, refreshed Qashqai and X-Trail, the company said Thursday. Two new models under its Chinese Venucia brand will also contribute to second-half deliveries, said Jun Seki, its China chief.

The company's shares fell as much as 4.5 per cent as of 9.35 am in Tokyo trading, the biggest intraday decline since Nov. 9. The benchmark Topix Index slid 0.3 per cent.

Nissan has been expanding its US fleet business as some dealers criticize its use of retailer incentive programs and rising discounts to consumers drag on earnings. The company risks reducing the value of its models over time, a hidden cost to buyers that also makes it harder to finance competitive leases.

"Their US performance is kind of tricky," Tatsuo Yoshida, an analyst at Sawakami Asset Management Inc., said before the earnings announcement. "They're very aggressive in growing sales and they've utilized all means of marketing, including incentives, leasing and the fleet sales. It's a risky approach." Industrywide deliveries of cars and light trucks dropped each of the first six months of the year in the US. Both Ford Motor Co and General Motors Co have cut their annual sales projections as collapsing demand for sedans overwhelms Americans' still-ample appetite for sport utility vehicles and pickups.

"You always see more incentives when you're in a post-peak cycle," said Michelle Krebs, a senior analyst at Autotrader. "What we're seeing across all car companies is incentives are biggest on cars, especially small and midsize cars." Hyundai's Spending At Hyundai, spending per car rose 42 per cent to US$3,259 in June. That's the highest level of incentives offered by the company since at least the global financial crisis in 2008-09, according to Korea Investment & Securities.

Part of that is due to the South Korean carmaker's portfolio: It's having to offer more discounts to sell its predominantly sedan lineup at a time when American consumers are clamoring for SUVs and pickup trucks. That's filtered through to earnings, with operating profit in the April-to-June quarter tumbling 24 per cent and falling short of analyst estimates.

Hyundai's Chief Financial Officer Choi Byung-chul predicted competition in the US market will get even tougher as demand for sedans falls and SUV sales growth slows. He said the Seoul-based automaker will "focus on stabilizing the level of incentives and inventories." The crisis in its two biggest markets comes at a critical time for Hyundai, which has set a record delivery goal of 5.08 million vehicles for 2017, after missing its target for a second straight year. Hyundai's first-half sales dropped 8.2 per cent to 2.2 million cars.

The midsize sedan market probably will see some of the stiffest competition among automakers.

Toyota updated its Camry last month, while Honda is introducing its new Accord in July. The two models are the best-selling midsize cars in the US and will put pressure on Nissan's Altima, which has seen sales fall this year. Hyundai is introducing the new Kona, its first global compact SUV, and rolling out the high-performance i30N hatchback and Genesis luxury G70 sedan, which the company expects will help improve sales in the second half.

Toyota, which is scheduled to release its fiscal first quarter results on Aug 4, will probably post a 16 per cent drop in operating profit, while Honda may report a 13 per cent decline, according to analyst estimates.

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