Honda, Mazda poised to expand, but face high costs in build-out

TOKYO (REUTERS) - Honda Motor Co Ltd and Mazda Motor Corp are both likely to post near-record profits this financial year as they take advantage of export-friendly currency moves, but will face a fresh challenge: high costs of expansion.

The Japanese carmakers, due to report quarterly profit figures on Friday, are cranking up the pressure on South Korea's Hyundai Motor Co and other foreign rivals.

Analysts expect Honda, the third biggest-selling Japanese automaker, to post January-March profits up by over a third, helped by strong sales of its Accord sedan in the United States (US), its biggest market.

Net profit for the year ended March is expected to have risen 87 per cent to 395.6 billion yen (S$5 billion), and now Honda wants to grow rapidly, focusing on emerging markets and small cars.

Chief executive Takanobu Ito has targeted annual worldwide car sales of 6 million and motorcycle sales of 25 million by end-March 2017, compared with last year's figures of 3.8 million and 15.4 million respectively.

To do so, Honda is expanding capacity. It is spending 44.6 billion yen to build a new car plant in Thailand that will fire up in 2015.

This year it will add an extra line at a factory in Malaysia and start operations at Yorii in Japan, then open a new works in Mexico in 2014.

These moves have required heavy capital spending and will also mean high start-up costs.

Mr Koichi Sugimoto, an auto analyst at BNP Paribas in Tokyo, estimated Honda would face an expansion bill of 20-30 billion yen this year alone.

"You could call them growing pains," said Mr Christopher Richter, a senior analyst covering autos at brokerage CLSA Asia-Pacific. "Hopefully, these things will be selling a lot of cars for Honda justifying their existence."


Honda's strategy stands in contrast to bigger rival Toyota Motor Corp, which insists it wants "sustainable" growth.

The world's best-selling carmaker, which releases its fourth-quarter figures on May 8, does not plant to build any new plants over the next three years.

Shares in all eight Japanese carmakers barring Suzuki Motor Corp have risen in 2013, helped by expectations that Prime Minister Shinzo Abe's economic policies will spark growth.

Honda is up roughly 20 per cent and Toyota nearly 35 per cent this year, while Mazda, whose shares are up almost 90 per cent, is likely to turn a net profit for the first time in five years when it releases results on Friday.

Analysts expect it to make net profit of 28.8 billion yen in the year ended March, up from a 107.7 billion yen loss in the previous year, and to post January-March operating profit of 31.9 billion yen.

Mazda, for years hammered by a strong yen because it exports about 80 per cent of the vehicles it makes in Japan, is now in a position as an export-led company to cash in on the currency shift.

Mazda is also expanding overseas. It said in January it will invest US$650 million (S$808 million) in a new plant in Mexico due to start operating in 2014, when it will produce Mazda2 and Mazda3 cars for sale in North and Latin America, as well build cars on contract for Toyota.

The yen has lost around 15 per cent of its value versus the dollar since January, raising expectations of stronger performance at Mazda, but any turnaround will not be immediate, given that the company hedges currency trades six months ahead.

"The current depreciation of the yen will really come into effect for Mazda in the second half of the year... The company is certainly benefiting from the yen, but that may not be as much as the market expects," BNP Paribas' Sugimoto said.

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