Key Takeaways
- Business risk has a greater bearing on our assessment of Japanese automakers than their financial profiles.
- The ability to secure market position in electric vehicles (EVs) and software, while remaining profitable and financially sound, will be crucial in the next three to five years.
- Our issuer ratings on Japanese automakers have trended downward over the past decade. However, their profitability and cash flow levels are improving as they strengthen products and reduce costs. This has helped ease pressure on creditworthiness.
Having weathered the COVID-19 storm, Japanese automakers now enter a crucial period in which to secure global competitiveness. Market position, profitability, and other elements of business risk will continue to determine our credit ratings on these companies more than their financial profiles.
While many will likely have stable profitability and cash flow over the next one to two years, they have not established an advantage over global peers in areas related to electric vehicles (EVs), such as batteries and software. Key to maintaining and improving creditworthiness will be how they strengthen such areas while maintaining profitability and sound finances amid fierce competition.
We assess Toyota Motor Corp. as having a strong business risk profile (BRP), reflecting our view that the company can maintain high profitability and cash flow among the world's major automakers given its high competitive edge. Our satisfactory BRP on Honda Motor Co. Ltd. is in line with that on major overseas peers. We believe the company can maintain a strong competitive position underpinned by its motorcycle business, which has high market share and profitability. Our fair BRP on Nissan Motor Co. Ltd. reflects our view that its profitability will likely remain lower than that of sector peers while it is gradually recovering under new management.
Business risk has greater impact on credit assessment outcomes than financial risk
In assessing business risk, we take into account various factors, including market share and profitability.
We assign BRP assessments of satisfactory and FRP assessments of minimal to many of the leading global auto original equipment manufacturers (OEMs) we rate. These include Honda Motor, Germany's BMW AG, Mercedes-Benz Group AG, and Volkswagen AG, and Netherlands-based Stellantis N.V.
Toyota Motor and Nissan Motor differ from this combination. Below are some of the strengths and risks we see for the major Japanese automakers we rate when comparing their business and financial risk with overseas peers.
Toyota Motor Corp. (BRP: Strong; FRP: Minimal)
In the auto OEM sector, we assess only Toyota's BRP as strong. Our assessment is based on our expectation that Toyota can continue operating stably and maintain strong profitability and cash flow due to the following factors.
- Its groupwide car sales of over 10 million units, representing the largest share of the global market at 12%-13%;
- Geographically diversified business operations across the U.S., China, and Asia with a broad range of models; and
- It has highly competitive suppliers in the group, such as Denso Corp., Aisin Corp., and Toyota Industries Corp.
Toyota's profitability is likely to remain comparable to that of BMW and Mercedes-Benz, which are highly competitive and focus on the premium segment, but it depends in considerable part on the historically weak yen. We view Toyota's relatively high export ratio as a risk factor that makes its profit vulnerable to currency fluctuations.
We assess Toyota's FRP as minimal, considering the following factors.
- Toyota has maintained a strong net cash position (excluding captive finance operations) for many years, driven by steady cash flow under conservative financial discipline; and
- Its captive finance business also maintains high asset quality.
However, a number of automakers with similar ratings share these characteristics, including BMW, Mercedes-Benz, Honda Motor, Stellantis, and South Korea's Hyundai Motor Co.
Honda Motor Co. Ltd. (BRP: Satisfactory; FRP: Minimal)
We assess Honda Motor's BRP as satisfactory, the same as BMW, Mercedes-Benz, Stellantis, Hyundai Motor, and U.S. automakers Ford Motor Co. and General Motors Co. This reflects our view that Honda generally ranks average or better relative to its peers in terms of stability of operations, business scale, diversity of markets and product mix, brand recognition, and profitability. Our rating on Honda also reflects our expectation that the profitability of its automobile business should improve. It has shifted from an expansion-oriented strategy and has benefited from business restructuring such as integration of functions in North America and the closure of production facilities.
Its motorcycle business, which has the largest global market share, maintains a strong EBITDA margin of over 15%. We see this as a strength relative to Honda's peers. The business has a market share of over 70% and solid pricing power in fast-growing economies such as Indonesia, Vietnam, Thailand, and Brazil. We believe Honda's motorcycle business is more resilient to macroeconomic downturns than its automobile business.
We view the following as weaknesses for Honda's automobile business compared with peers with the same or higher ratings.
- Its market share of about 5% (about four million units) is lower than that of Volkswagen, the Hyundai Motor group (including Kia), and Stellantis;
- Profitability remains low and slow to improve; and
- Its product range is relatively limited and it is less geographically diversified.
Our minimal FRP assessment on Honda reflects its long-term net cash position in the nonfinancial businesses, underpinned by steady cash flow under conservative financial management. The assessment also reflects the solid asset quality of Honda's captive finance business. However, a number of automakers with similar ratings share these characteristics, including BMW, Mercedes-Benz, Stellantis, and Hyundai Motor Co.
Nissan Motor Co. Ltd. (BRP: Fair; FRP: Modest)
We assess Nissan Motor's BRP as fair, which is lower than the assessment of satisfactory we assign to many global automakers. Nissan's profitability has declined more than its peers', affected by changes in the external environment amid COVID-19 while it sought to business restructuring. This restructuring involves a move away from a market share-oriented management policy and includes the elimination of excess production capacity. Nissan's EBITDA margin has remained below 6% for five consecutive years since fiscal 2018 (ended March 31, 2019). This is the lower end of the profitability range we assess as industry average.
Nissan's annual car sales dropped below 4 million units in fiscal 2023 from 5.7 million units in fiscal 2017. As a result, its business scale and production efficiency compare unfavorably with that of makers that focus on the popular price range. However, Nissan's wide model lineup and geographically diversified operations are strengths compared with France-based Renault S.A. and Ford Motor, which have similar ratings, in our view.
We assess Nissan's FRP as modest despite its net cash position. This is due to the company's history of posting negative free operating cash flow (FOCF), which has significantly eroded its financial buffer. The company is likely to maintain its net cash position for the foreseeable future. In our credit assessment, we view this as a strength for Nissan over Ford Motor and GM.
Chart 2
Chart 4
Profitability, finances, and competing in new fields
The major Japanese automakers we rate are likely to maintain stable profitability and cash flow over the next one to two years, even under challenging business conditions. We expect the performance of makers including Honda Motor Co. Ltd., Toyota Motor Corp., and Nissan Motor Co. Ltd., to remain solid, supported by modest demand growth and continued efforts to cut costs. We also believe the weak yen and strong demand for hybrid vehicles (HVs), for which profitability has improved, will ease downward pressure on earnings.
Japanese automakers lag U.S. and European peers in expanding their model ranges and production of EVs. Pressure on their market positions and our ratings on them could increase in the second half of the 2020s as they look to strengthen EV businesses and face competition from overseas automakers. We have so far incorporated this into our credit analysis only to a limited extent due to the following factors. First, Japanese automakers are likely to enjoy strong sales, especially of gasoline-powered vehicles and HVs for the time being. At the same time, they have strong financial bases thanks to accumulated profits. Second, we believe that their competitiveness going forward will depend on their actions over the next three to five years. In our view, it is increasingly important to provide competitive HVs, plug-in HVs (PHV), and battery EVs (BEV), responding to varying demand in different markets, given increasing uncertainty over the pace of EV adoption.
In our view, Japanese carmakers' global competitiveness and ratings will come under pressure if they fail to strengthen in EV-related areas including batteries and software over the next three to five years. We will place greater emphasis on efforts related to technology, production efficiency, brand recognition, and sales strategies in such fields as customer needs shift toward EVs.
Demand for EVs has stuttered, but we expect the share of EVs as part of total sales to increase in the medium term. Japanese automakers will likely face fierce competition not only from traditional auto majors, but also from EV-specialized manufacturers and new market entrants from other industries such as information technology (IT). Given the limited size of the domestic market, they also face a heavy burden of complying with policies and regulations in key markets in Europe, the U.S., and China. The ability to gain share of the EV market, while maintaining profitability and financial soundness, will be one of the key factors in our assessment of competitiveness.
Ratings on automakers set to stabilize after decade-long slide
Having trended downward over the past decade, our issuer ratings on Japanese automakers could stabilize. The downtrend has partly been due to difficulty in maintaining profitability and FOCF at the levels we initially expected, in our view. For the industry as a whole, cash flow was depressed amid the COVID-19 crisis and there is a heavy investment burden to develop next-generation technologies, including electrification and autonomous driving. Business restructuring has weighed on the creditworthiness of Honda and Nissan. These two makers have been moving away from expansion-oriented strategies, implementing measures such as plant closures. Profitability and cash flow levels are now improving as automakers strengthen product capabilities and raise cost efficiency. We believe this has eased pressure on creditworthiness in the short term.
Chart 5
Ratings Transition
Our rating on Toyota Motor has declined one notch in the past 10 years but remains consistently the highest in the auto sector (auto OEM). We believe this shows Toyota's market position, profitability, and financial base have been stable at relatively favorable levels.
We downgraded Honda by two notches and Nissan by four notches over the same period. Both carmakers saw their market positions and operating performance deteriorate due to changes in external conditions amid COVID-19 while they restructured, including the closure of production facilities, to shift from market share-oriented toward profit-oriented management policies.
Nissan's operating performance took a long time to improve. We attribute this in part to its former chairman's misconduct and conflict-of-interest transactions, which came to light in 2018. This damaged the brand and led to unstable management and business operations, often involving its alliance with Renault, in our view. Profitability of both Honda and Nissan is gradually improving as their efforts to reduce fixed costs bear fruit. Such efforts include closing production bases and reducing the number of models they offer.
Related Research
- Industry Credit Outlook 2024: Autos, Jan. 9, 2024
- Most Rated Asian Automakers Should Steer Through Demand Volatility, EV Strains, Oct. 11, 2023
- Global Auto Sales Forecasts: The Pricing Party Is Coming To An End, Oct. 9, 2023
- An Impending Electric Shock For Japanese Autos?, May 17, 2023
- Glimmers Of Winners Emerge In Asia's EV Push, May 14, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Yuta Misumi, Tokyo +81 3 4550 8674; yuta.misumi@spglobal.com |
| Secondary Contacts: | Hiroki Shibata, Tokyo + 81 3 4550 8437; hiroki.shibata@spglobal.com |
| Satoshi Tanaka, Tokyo 81-3-4550-8774; satoshi.tanaka@spglobal.com |
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