Asia Autos Outlook Update: Japan Carmakers To Outperform South Korea
BMI forecasts medium-term appreciation of the Korean won against the Japanese yen. This implies South Korea’s Hyundai Motor Company and Kia Motors Corp are likely to continue ceding market share to Japanese automakers such as Toyota, as South Korean competitiveness is eroded and Japan enjoys a resurgence on the back of a brightening export outlook.
The recent slide in the share prices of South Korea’s largest automakers has confirmed our downbeat outlook expressed in July 2012 (subscribers can refer to Business Monitor Online, July 13 2012, ‘Macro-Industry Strategy: Cautious Outlook On Korean Automakers’). The two companies have been hurt by several months of negative news flow, such as the overstated mileage claims controversy in the US in late 2012. However, the biggest headache for South Korean car manufacturers has been the strengthening of the Korean won against the Japanese yen since May 2012, which has seen Kia’s share price slide.
Near-term indicators suggest Korean automakers’ shares are slightly oversold at this point, and we could see a short-term bounce. However, in the medium term, we forecast underperformance in both Hyundai’s and Kia’s share prices. This is because we anticipate continued weakness in the Japanese yen against the Korean won due to Japanese Prime Minister Shinzo Abe’s expansionist monetary and fiscal policy.
Also noteworthy is that both Kia and Hyundai’s US market share reached a cyclical peak of 4.6% and 5.6% of total US car sales, respectively, in May 2011. As the US consumer remained in deleveraging mode, Korean brands benefited from their more affordable and fuel-efficient mass market models, as well as a weaker won. However, going forward, Hyundai and Kia might face a new scenario in the US. BMI has turned more bullish on US 2013 economic growth, and with American households enjoying more secure finances, consumers may be looking to ‘trade up’ and make new auto purchases. This would be another blow to Korean brands, as they seek to arrest their sliding market share.
One chart that portends the shape of things to come for Asia’s auto industry is the ratio of Toyota’s share price to that of Hyundai. From 2007 to late 2012, the falling ratio shows the remarkable outperformance of Hyundai against Toyota. As Japanese automakers struggled with an ever-strengthening yen and a host of product recalls in the past few years, they also had to grapple with the Great Tohoku earthquake and Thailand floods in 2011, which disrupted their supply chain. The outbreak of the Sino-Japanese territorial dispute in September 2012 didn’t help either. Now, without the stranglehold of the strong yen, Japanese automakers could be ripe for a major comeback.
Full analysis of the global car industry, including five-year forecasts for production and sales, is available to subscribers at Business Monitor Online.