BMI View : Amid the recent volatility in EMs, Nissan's earnings have taken a hit, forcing the carmaker to recalibrate its strategy. We believe the firm's move to increase localisation in India and concentrate on SEA's growth markets such as the Philippines, is a step in the right direction to ride out the current slowdown and remain positioned for an upswing in the future.
Nissan Motor posted rather lacklustre earnings in Q413 of JPY84.3bn (US$824mn). Its net margins of 3.3% were the lowest among all Japanese automakers in that quarter.
Indeed, the carmaker's recent woes started sometime in July 2013, when emerging markets (EMs) first began to experience volatility amid the talk of tapering by the US Fed. The accompanying chart shows the rebased share prices of the J3 automakers ( Toyota Motor, Honda Motor and Nissan) from the time the Japanese yen began depreciating in September 2012. As seen, Nissan has not only underperformed its J3 counterparts, but its share price has also been on a decline since July 2013 (when EM's began facing economic stresses), due to the automaker's huge EM exposure.
|Nissan The Clear Laggard|
|Share Prices Of J3 Automakers Rebased To September 2012, JPY|
However, Nissan continues to believe in the growth potential of EMs. Furthermore, the firm has re-aligned its strategy in Asia, which we believe will help it to ride out the current slowdown in demand and position the company to take advantage of an upswing when it arrives.
Increasing Localisation In India
The past two years have been tough for automakers in the Indian market. In fact, vehicle sales declined more than 6% in FY2013/14 (April-March), due to a slowing economy and tight credit. Despite investing a lot of resources in India, Nissan has struggled to gain market share, with its 2013 domestic sales of 30,000 units making up merely 1% of the market. However, the automaker is modifying its strategy to place a greater emphasis on locally-produced variants. It has stopped importing the X-Trail crossover SUV and 370Z sports car into the country and is instead adding domestic production of new models such as the Datsun brand as part of its target to increase its market share to 10% by FY2016/17 (April-March).
We believe this is a sensible shift in strategy. By reducing imports, Nissan is lowering its exposure to fluctuating exchange rates, which could increase its costs and force it to raise the prices of its models. Furthermore, given that Nissan and Renault own a factory in Chennai that can manufacture 400,000 cars annually, it makes more sense to use spare local capacity to increase domestic sales rather than letting it go idle. Nissan's drive towards increasing efficiency is supported by our view that although the worst seems to be over for the sector, the recovery in passenger car sales for FY2014/15 will be mild ( see 'Excise Tax Cut Not Enough On Its Own', March 6).
|Mild Recovery In FY2014/15 Encourages Efficiency|
|Passenger Vehicle Sales, Units (LHS); % chg y-o-y (RHS)|
Committed To SEA
While we have flagged up the growing uneasiness among automakers to increase their investment in the Thai market due to the ongoing political tensions ( see 'Slashing Forecasts Due To Political Unrest', February 24), the firm believes that the current unrest in the country is temporary and has said it will continue to invest in Thailand and the rest of the region.
Nissan currently has an 8% share of the South East Asian auto market and hopes to expand it to 15% by 2016. We too are bullish on the region's prospects and expect some of the markets in South East Asia (SEA) to be outperformers in Asia over the next few years.
In the Philippines, Nissan established a joint venture (JV) with Universal Motors Corporation and Nissan Motor Philippines, Inc, towards the end of 2013. The JV will be called Nissan Philippines, Inc and will reinforce the carmaker's brand and sales power by broadening its product line-up and investing in dealerships in the country. Given our bullish outlook on the Philippines auto market, we believe this is a suitable market for the firm to increase its focus on in order to boost its SEA sales ( see 'Positive Sales Momentum Set To Continue', February 13).
Not Shying Away From Frontier Markets
At the same time, the automaker has shown that it is not averse to investing in frontier markets. In September 2013, Nissan and Tan Chong Motors won a license in Myanmar to produce completely knocked down kits locally ( see 'Nissan Takes The Domestic Manufacturing Plunge', September 19 2013). While the plant will have an eventual capacity of over 10,000 units, we caution that sales will remain slow for the carmaker when the facility commences production in 2015, due to our belief that the country's consumer story will be a slow burner ( see 'Commercial Vehicles To Remain At The Forefront', July 11 2013).