Honda Motor and Mazda Motor expect to post vastly higher profits this financial year as they take advantage of export-friendly currency moves, but will face a fresh challenge: high costs of expansion.
The Japanese carmakers, which on Friday both reported significant profit rises in the final quarter of the last business year, are cranking up the pressure on foreign rivals including South Korea's Hyundai Motor, which this week logged a 15 percent drop in profits.
"We are investing a huge amount, especially in new plants ... the reality is that such costs related to growth are eating into our vehicle volume growth," Honda Executive Vice President Tetsuo Iwamura told reporters.
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The third biggest-selling Japanese automaker plans 700 billion yen ($5.4 billion) of capital spending in the current financial year, up 18 percent from the previous year, and targets annual worldwide car sales of 6 million by end-March 2017 compared with a record 4.01 million in the year ended this March.
Its smaller rival Mazda, for years hammered by a strong yen because it makes most of its vehicles in Japan and ship about 80 percent of them overseas, is now in a position as an export-led company to cash in on the weakening yen which is advantageous for margins on Japan-made goods sold abroad.
Mazda, which expects the U.S., Europe and China to underpin sales growth of 8 percent in this year, will almost double capex to 130 billion yen.
Honda is focusing on emerging markets and small cars for its growth, and is expanding capacity to thrust into those areas.
It is spending 44.6 billion yen to build a new plant in Thailand that will fire up in 2015. This year it will add an extra line at a factory in Malaysia, start operations at Yorii in Japan and then open a new works in Mexico in 2014.
These moves have required heavy capital spending and will also mean high start-up costs. Koichi Sugimoto, an auto analyst at BNP Paribas in Tokyo, estimated Honda would face an expansion bill of 20-30 billion yen this year alone.
Honda posted January-March profits that were up by 6.6 percent year-on-year, helped by strong sales of its Accord sedan in the U.S., its biggest market, though that increase undershot market expectations of a plus-30 percent profit rise.
Net profit for the year ended March was up 73.6 percent to 367.15 billion yen ($3.69 billion).
Mazda Back in the Green
The Honda and Mazda expansion pushes stand in contrast to compatriot Toyota Motor, which insists it wants "sustainable" growth. The world's best-selling carmaker, which releases its fourth-quarter figures on May 8, does not plan to build any new plants over the next three years.
Shares in all eight Japanese carmakers barring Suzuki Motor have risen in 2013, helped by expectations that Prime Minister Shinzo Abe's economic policies will spark growth.
Honda is up roughly 20 percent and Toyota nearly 35 percent this year, while Mazda, whose shares are up almost 90 percent, turned a net profit for the first time in five years.
The company made net profit of 34.3 billion yen in the year ended March, up from a 107.7 billion yen loss in the previous year, according to results also published on Friday.
Both firms released their results after the Tokyo share market closed.
Underlining a generally positive outlook in the Japanese vehicle industry, Fuji Heavy Industries, which makes Subaru cars, expects to book record annual operating profit of 120 billion yen for the year ended in March, more than double last year's figure.
Also on Friday Denso Corp., the world's second biggest auto parts supplier and a key indicator of the health of the vehicle market, said its operating profit for the current financial year would rise 8.6 percent from last year.
The yen has lost around 15 percent of its value versus the dollar since January, raising expectations of stronger performance at Mazda, but any turnaround will not be immediate, given that the company hedges currency trades six months ahead.
"The current depreciation of the yen will really come into effect for Mazda in the second half of the year ... The company is certainly benefiting from the yen, but that may not be as much as the market expects," BNP Paribas' Sugimoto said.