Drastic Deterioration in Break Even Point Ratio of Japanese Manufacturers May Well Indicate Further Tough Job Market in Japan

Sunday, September 13, 2009 – Osaka, Japan

Nikkei, Japan's leading newspaper specialized in economy and politics, reported today that break even point ratio* of Japanese manufacturers for 2008 increased by 13.1% from 2007 to 89.2%, reaching the level of 7 years ago. This is because the degree of cost reduction such as of fixed cost was not in line with the drastic reduction in sales attributing to worldwide bad economy. It is said that the performance of manufacturers are beginning to improve, but since increasing sales is difficult companies will need to further cut costs to improve break even point ratio. This implies that there will be further job and/or salary cuts meaning tough job market continues.

This finding is based on the Nikkei’s survey in which data of 1009 manufacturers listed whose metrics can be compared on the consecutive basis were collected and analyzed. The most critical reason for the deterioration in break even point ratio is reduction in sales, which was minus 10.7% vs. 2007 for 2008.

Looking into more details, it can be concluded that companies were unable to cope sufficiently with drop in sales. This is because variable cost such as cost of raw materials was minus 9.7% vs. 2007 for 2008, i.e. the attrition rate is smaller than that of sales. On the other hand, fixed cost was plus 1.5% vs. 2007 for 2008 although personnel cost was minus 2.9% vs. 2007 for 2008. This is because companies had been aggressively investing until the first half of 2008 leading to depreciation being plus 7.6% vs. 2007 for 2008. It is estimated that consolidated sales for the year ending in March 2010 would be minus 13% vs. previous year and cost reduction would be the key for performance improvement.

Looking into more detail by industry, break even point ratio for automobile that has dropped sales drastically in the U.S. and Europe reached 96.2% which was increase by 23% from 2007, and this figure is serious because it had not surpassed 90% since 1995. Other industries whose drop in the figure was serious include oil (71 points), nonferrous (8 points), precision machinery (16 points). Food was the only industry whose figure improved among 17 industries.

Break even point ratio of over 100% means cost is bigger than sales thus the company going in red. Break even point ratio of Advantest Corporation whose sales of semiconductor test equipment reached 150% resulting in consolidated operation loss of 49.5 billion yen. Therefore, the company is planning to decrease fixed cost by job and salary cut in order to decrease the amount of loss. It is likely that other companies would take the same measures to improve their break even point; therefore, the job market is likely remain tough for the time being.

* Break Even Point Ratio: break even point of a company is the sales when the cost and sales is the same. Dividing this by the actual sales is the break even point ratio. Below 100% means the company is in black and over 100% means the company is in red. The smaller the break even point ratio, the more resistant to drop in sales thus better profitability.