Japanese Companies Recover Profitability to 90% of Before Recession

Osaka – Sunday, August 1, 2010

Nikkei, Japanese newspaper specialized in business/economy, reported today that emerging market business is driving drastic revenue and profitability recovery of listed Japanese Companies. According to financial announcements for April – June 2010 (Q1 for most Japanese companies), profit is five times that of April – June 2009, clearly showing the recovery of manufacturers such as automobile and consumer electronics supported by demand of emerging market and cost reduction. Profitability has recovered to the level of 90% before the worldwide economic crisis in 2008, and the Q1 profit is 29% of the total estimated profit for fiscal 2010.

However, there are many risks such as high yen and ambiguous worldwide economy trend; therefore, many companies are extremely cautious in their forecast of their latter 2010 performance.

1. How did Nikkei come to the conclusion?

Nikkei collected and analyzed financial data of 559 listed companies (excluding financial and new companies) that are:- a)fiscal year ends in March; b)financial announcement for 2010 Q1 has been made by July 30. These 559 companies cover 36% of total in number and 62% in market value.

2. What is the overall conclusion?

Total sales covering all industry increased by 14% from previous year (PY). This was because after the worldwide recession, companies reviewed which business to focus and initiated cost reduction, to streamline revenue structure. Then with demand increase of emerging markets their sales increased, and therefore their total profit reached 3.83 trillion yen, which is fives time that of PY, and 46% increase from Jan – Mar 2010. Compared with April – June 2008 before the worldwide recession, sales has recovered to 86% and profit to 93%.

3. How are specifics?

April – June Profit of Major Japanese Listed Companies (in billion yen)
(Source: Nikkei, translated by the author)

Industry / Company Name / 2008 / 2009 / 2010
Automobile / Honda* / 224.2 / 5.4 / 256.1
Automobile / Nissan / 82.4 / -26.1 / 155
Electronics / Panasonic* / 119.2 / -51.7 / 84.3
Electronics / Sony* / 62.9 / -32.9 / 78.9
Electronics / Hitachi* / 83.6 / -80.8 / 144.2
Machinery / Komatsu* / 92.7 / 8.7 / 50.1
Iron & Steel / Nippon Steel / 144 / -56.6 / 61.8
Trading / Mitsubishi Corp* / 181.9 / 61.9 / 180.5
Real Estate / Mitsui Fudosan / 22.3 / 28.8 / 13
Maritime / NYK Maritime / 65.1 / -27 / 38.1
* GAAP: Generally Accepted Accounting Principle

1) Sales increase: electronics

60% of total 3.7 billion yen profit recovery was contributed by consumer electronics and automobile. Panasonic’s EBITA (Earning Before Interest, Taxes and Amortization) improved by 130 billion yen because sales were strong in most businesses including digital consumer electronics such as flat panel TVs and home appliances. China sales increased by 75%.

Sony’s business in emerging markets such as of flat panel TVs and PCs increased by 40%.

2) Sales increase: automobile and parts/components

Profits of automobile and parts/components recovered by almost 700 billion yen, which made it in total profit instead of loss. Nissan’s worldwide sales increased by 30%. Small car business was strong and their sales in China increased by almost 70%.

Komatsu’s China sales of construction machinery increased by almost 80%.

3) Restructuring

Restructuring effects such as fixed and variable cost reduction is also prominent. Toshiba had cut 430 billion yen of personnel and R&D cost in 2009. Toshiba’s sales were less than 2008 but operating profit was the highest.

4) Non-manufacturers

Profit of trading companies was 2.3 times that of 2009 attributing to high resources. For maritime and container ship businesses were strong and came back to black from red. Retailers and real estates decreased their profit because of weak domestic business.

4. What is the outlook for latter half of 2010?

Asia is assumed to remain the engine of further business/financial performance recovery of Japanese companies for fiscal year ending March 2011.

1) Cautious outlook

Despite recent drastic profit recovery, it is interesting to note that many companies are cautious in their outlook for latter half of 2010 (fiscal year ending March 2011). This is even though April – June profit of many companies was over 25% of total profit estimation for the whole year, such as automobile and parts/components that reached 45.7%.

2) Reasons for cautious outlook

(1) High yen and ambiguious worldwide economy

Yen has been high; recently it was been in just over 80 yen / USD. High yen is a negative factor for Japanese manufacturers.

In addition, there is a sense of economy recession in the U.S, and Europe, and risk of change in Chinese economy. NYK Maritime executive points out there is a risk that Europe’s economy anxiety spreads worldwide and latter half of 2010 is ambiguous. Nippon Steel executive comments that prices of raw materials and steel have not been decided yet and it is impossible to make rationale estimation for latter half of 2010.

(2) Termination of government’s economy stimulant incentives

Incentives to promote Japan domestic consumers purchasing ecological cars will end in the end of September. Also, similar incentives for consumer electronics will end in the end of December. Therefore, many executives of the industry are extremely anxious that domestic sales may fall by as much as 20% – 30%.