While investors focus on the improving fortunes of U.S. automakers, their Japanese counterparts are poised for a rebound of their own. Car manufacturers Nissan (NASDAQOTH:NSANY), Honda (NYSE:HMC), and Toyota (NYSE:TM) will likely benefit from the overall improvement in U.S. auto sales. However, by penetrating emerging markets and developing alternative-powertrain vehicles, these firms also intend to position themselves one step ahead of the competition.
Partnership and regional growth
The Japanese car manufacturer Nissan is one of the largest in the region, with annual sales of approximately 3 million units. In 1999, the firm entered an alliance with Renault, which saved it from financial ruin. This partnership has been beneficial for both companies. By sharing development costs in the electric car segment and collaborating to open up new markets, such as in India, the group has turned into the fifth largest automaker in the world.
Cost-sharing arrangements between both firms have resulted in beneficial economies of scale. By integrating the engineering and purchasing sectors of both firms, Nissan was able not only to reduce costs, but also to increase its global reach . This allowed the Nissan-Renault group to expand into the BRIC countries, turning the partnership into the second-largest car manufacturer in Africa. In China, the Dong Feng-Nissan joint venture is responsible for the Venucia D40 and D50. And in Russia, the collaboration between Renault-Nissan and AvtoVAZ is already making progress on launching vehicles under the Datsun brand.
Although some consider it a risk factor, Nissan's investments in the all-electric car segment are proving to be successful. As U.S. market preferences demand ever more fuel-efficient vehicles, the firm's all-electric Leaf could experience significant sales growth.
Currently trading at 12 times its trailing earnings, Nissan also offers a small price discount to the industry average . Looking forward, the firm's potential for growth in emerging markets, its alliance with Renault and the projected sales of electic vehicles in the U.S., are all good signs.
Looking to the U.S. market
Originally founded as a motorcycle manufacturer, Honda has become a global player in the automobile industry. The firm's main markets are Europe and North America, though it's currently focusing more on the latter. The recovering U.S. auto market, which has seen demand for light vehicles rise steadily, suggests a good outlook for the company.
Honda will be looking to take advantage of the rising vehicle demand in the U.S., particulary in the fuel-efficient vehicle segment, which has shown considerable growth as of late. As the U.S. market shifts away from SUVs and pickups, toward light vehicles, the firm is one step ahead of local manufacturers General Motors and Ford.
Anticipating the change in cosumer demand, cars made up 57% of the Japanese automaker's U.S. sales mix, compared with Ford's 34% and GM's 40%. Honda is looking to increase its advantage in the fuel-efficient segment by releasing several new hybrids with better gas mileage in 2015.
Honda is trading at 19.4 times its trailing earnings, which means that purchasing the stock entails a considerable price premium relative to the industry average . The price premium is just about the only thing that tells me that shareholders should hold on this stock.
Elevated demand for fuel-efficient and hybrid vehicles in the U.S. is generating a very profitable sales environment for Honda. Also, with the Acura brand set to begin production in China by 2016, the firm can take further advantage of that country's burgeoning market.
Emerging markets, new platforms, and hybrids
Toyota is the world's largest car manufacturer by volume, a title disputed by General Motors and regained in 2012 when sales reached 9.75 million. This was achieved in spite of the 2011 earthquake in Japan. With its eye set on global expansion, the company seeks to increase its presence in the emerging markets while maintaining a strong position in the U.S.
In order to obtain a larger share of emerging markets, the firm plans to introduce eight new light vehicles by 2015 in countries such as Brazil, China, India, and Indonesia . By manufacturing and procuring 100% of the necessary components locally, the company will be able to reduce costs significantly. This will translate to lower prices per unit. This comes as part of an overall strategy to move production away from Japan, where sale only represent 25% of total sales.
The Toyota New Global Architecture, or TNGA, is intended to further reduce the company's costs. The company will be producing 50% of its vehicles on the same three front-wheel-vehicle platforms by 2015. The firm's cost-cutting initiatives are part of the current strategy to stay ahead of the Detroit Three. The U.S. market is very important for Toyota because of its hybrid business. The Prius model is responsible for 67% of all hybrid sales in the U.S., an advantage the Japanese auto manufacturer intends to maintain.
Advantages in the U.S. hybrid market, global expansion toward emerging markets, and the introduction of the TNGA are all important factors when evaluating prospects. Also, since the firm is currently trading at 16.9 times its trailing earnings, its stock carries a small premium relative to the industry average .
A combination of the three
I think that Toyota represents the best investment option of the three. Not only does the firm have a strong presence in the recovering U.S. market, but its expansion into emerging markets is also well under way. Additionally, the firm's early entry into the alternative power train vehicle segment has been very beneficial, particularly in the U.S.. The TNGA will allow costs to be reduced further, which could also improve Toyota's margins.
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