A soft European economy has dominated guidance for automakers. However, issues in the supply chain of Toyota Motor Corporation (ADR) (NYSE:TM) are distracting from macroeconomic forces.
European Weakness
Automakers are revising their outlooks for European sales, and this has repercussions beyond just the PIGS nations.
The plant at Bochum is in danger of closing down, and would cease to build Zafira vans by the end of 2014, as soon as the labor agreement runs out.
General Motors Company (NYSE:GM)’s interim European Chief, Stephen Girsky wrote in a letter to employees, “The situation on the European market is still disastrous.” He also called on employees to contribute in cutting costs while at the same time ruling out wage increases as long as they continue losing money on the region. Opel Works Council Leader Wolfgang Schaefer-Klug responded by describing as “unacceptable” the threat to close Bochum and saying that the union would “never agree to permanent wage cuts.”
A weakening Germany and a slow auto market in Europe would be the greatest challenges to GM’s turnaround plan. The European branch of General Motors Company (NYSE:GM) has accumulated more than $17 billion in losses since 1999, and its main target is to turn a profit by mid-decade, which might be hard to reach if adjustments aren’t made in a timely manner.
Russia’s economy is also showing signs of a slowdown. After at least four consecutive years of increases over 10%, Russia’s car market might slow down and even plateau in 2013. During a press conference at Moscow, Joerg Schreiber, chairman of the Association of European Businesses’ carmakers committee, said, “The outlook for the market in 2013 holds little promise for a quick return to growth at the double-digit rates enjoyed in recent years.”
Estimates from the AEB suggest that Russia’s car market in 2013 should end up with sales of around 3 million cars and light commercial vehicles. Although last year’s sales had an increase of 11% in comparison to 2011, such rise isn’t all that impressive when compared to the previous three years, which had consistent increases of 30% or more.
Analysts suggest that this might be related to the gradual slowdown of the country’s economic expansion. According to Russia’s central bank, Bank Rossi, data for November suggested that the Russian economy continued with a steady decrease in its growth, with both retail trade and industrial output stabilizing at low levels. GDP had an expansion of nearly 5% during the first quarter, slowing down to a level below 3% during the last quarter. There also seems to be a lower level of foreign investment in the country.
Toyota Supply Chain Seen as Cartel
Toyota Motor Corporation (ADR) (NYSE:TM) suppliers are rebounding from their involvement in the largest cartel probe, recovering from a slump brought by almost $1 billion in fines in the U.S. and Japan. Unfortunately, the prospect of even more penalties looms in Europe.
Japan’s Fair Trade Commission director Takeshi Shinagawa said more than a dozen parts makers including JTekt and Sumitomo Electric Industries could be levied fines this year, with amounts higher than those meted in Japan. Toyota affiliates Denso and Sumitomo Electric, which also supply parts to Honda Motor Co Ltd (ADR) (NYSE:HMC) and Nissan Motor Co., Ltd. (ADR) (PINK:NSANY), were involved in cartel probes following raids on four manufacturers conducted by U.S., EU and Japanese watchdogs in 2010.
Daiwa Securities analyst Syusaku Nishikawa said, “Investors may not have fully factored in the risks of the antitrust fines for the companies still under investigation.” With the fines looming, he can’t recommend a buy rating for Fujikura or any other involved parts maker.
European Commission spokesman Antoine Colombani declined to comment, however, on the fines for the car parts makers but revealed that EU regulators already visited manufacturers of safety equipment, automotive lighting, thermal systems and bearings, in addition to the car wire harnesses probe started in August. Colombani did not identify the companies involved nor did he disclose the deadline for the inquiries’ completion.
The investigations included companies based in Europe, Japan and the United States, and have expanded to Australia and Canada, with Japanese companies receiving the biggest penalties so far.
Toyota spokeswoman Shino Yamada said, “It’s very regrettable that some of our suppliers have been involved in violations of antitrust laws and we recognize the seriousness of the issue. We will take concrete measures against individual cases based on the details of the investigation.”
Denso and Yazaki refused to comment on the ongoing cartel investigations. Fujikura, Yazaki, Mitsuba, Ichikoh Industries, and Stanley Electric say they will take measures to prevent price-fixing. Fujikura, Koito Manufacturing and Mitsubishi Electric disclosed that they have not allocated money to cover for possible fines, while at least eleven other Japanese companies under inquiry would not comment on the fund allocation issue.
Last year, Denso and Yazaki pleaded guilty to “multiple price-fixing and bid-rigging conspiracies” in selling parts to auto manufacturers in the U.S., according to the Justice Department. Yazaki paid $470 million, the highest by a Japanese parts maker, while Denso shelled out $78 million, accounting for over half of last year’s antitrust fines imposed by the U.S. Department of Justice. In Japan, Yazaki paid a lesser amount of 9.6 billion yen ($106 million).
Purdue University law professor John Connor said that last year, at least $1.1 billion in fines have been levied by antitrust regulators around the world on auto components producers involved in cartel investigations. Based on car parts global sales value, total fines could reach $5 billion even without including consumer damage claims. Osaka lawyer Takuro Maekawa, who represents clients in cases suing for damages involving auto parts price-fixing said, “The loss from the fines could be big enough to shake the foundation of these companies. Japanese companies have been extremely lax in terms of cartel prevention.”
Acura Re-invented as Premium Brand
Honda has created its own challenge for itself: repositioning Acura models as luxury. Basically, the company is trying to make its own version of Toyota’s Lexus. The problem with this strategy is that consumers already connect Acura to value, not luxury. Honda U.S. marketing chief Mike Accavitti said, “What we have to do from a marketing perspective is ramp up the emotional element.” This is a tall order and would require teaching consumers to rethink how they think about Acura as a brand.
This strategy is not going to be a slam-dunk.
Valuation
Unfortunately, Toyota and Honda are pricey on a price-to-earnings basis:
| Ticker | Company | P/E | P/S | P/B | P/FCF | D/E |
| F | Ford | 8.54 | 0.35 | 3 | 17.03 | 6.59 |
| GM | General Motors | 9.02 | 0.24 | 0.99 | NA | 0.44 |
| HMC | Honda | 16.93 | 0.65 | 1.31 | NA | 0.98 |
| TM | Toyota | 19.12 | 0.73 | 1.31 | 41.94 | 1.15 |
Ford Motor Company (NYSE:F) is highly leveraged, enough that investors should think twice about it. General Motors isn’t dramatically better in terms of stability: It went bankrupt in the financial crisis, and it is taking steps to become more leveraged.
Conclusion
There aren’t any compelling buys among carmaker stocks at this time. Current controversy in conjunction with a high P/E ratio would suggest that now is not the time to buy Toyota. Wait for valuations to drop to more reasonable levels before adding shares to your portfolio.
The article Can These Automakers Drive Your Portfolio Higher This Year? originally appeared on Fool.com and is written by Bill Edson.
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