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Business trends

Japan automakers race past rivals in profit margins

Toyota, Nissan and Honda catch up with Germans on standardization

Toyota, like its Japanese peers, has been racking up healthy profit margins. (Photo by Maho Obata)

TOKYO -- Japan's top three automakers are scoring far wider profit margins than their big foreign rivals, thanks to streamlining at various stages from design to production.

Toyota Motor, Nissan Motor and Honda Motor, all of which had released their fiscal 2017 results by Monday, had a combined net profit margin over the past five years averaging 6.2%, far outpacing German and American counterparts.

Nissan reported Monday a net profit increase of 13% to a record 746.8 billion yen ($6.81 billion) despite a scandal last year. It was revealed that unqualified workers were inspecting completed vehicles at factories, which cost the company 90 billion yen for recalls and equipment replacement. As a result, shipments were stopped in October and November, and operating profit declined 23%. "Sales slowed down," conceded CEO Hiroto Saikawa.

But Nissan was able to absorb some of the impact by cutting costs through parts and material standardization with French partner Renault, among other measures. Tax changes in the U.S. also helped the bottom line.

Toyota and Honda also booked record net profits for the year ended March. The three companies' combined net profit jumped roughly 40% on the year.

Net profit margins of the three companies have risen robustly for the past few years, while margins at German and U.S. automakers have stagnated.

In the five-year average of net profit margins, the Japanese surpassed U.S. automakers General Motors and Ford Motor in fiscal 2015, and the German big three -- Volkswagen, Daimler and BMW -- in fiscal 2016, according to Nikkei group's QUICK and FactSet. And their lead widened in fiscal 2017.

Toyota, whose margin stands around 8%, has been working to transform design operations since 2015 through its Toyota New Global Architecture initiative. The company will narrow down the basic structure of its vehicles to standardize more parts for each vehicle size.

Honda has been reducing production capacity to match its global unit sales of around 5.2 million and to lower fixed costs. "Production efficiency is certainly improving," said Seiji Kuraishi, executive vice president, at the company's earnings briefing on April 27. Re-examining every phase from development and purchasing to production is now showing results.

Volkswagen, while expanding its luxury offerings through aggressive acquisitions, standardized vehicles and parts ahead of its rivals. Its net profit margin reached 11% in 2012. But when the German auto giant was found to be falsifying data on diesel emissions in 2015, it tumbled to a net loss. VW had to put efforts to boost profitability on a back burner as it scrambled to revisit business strategy and downsize staff.

Japanese automakers have traditionally been successful at cutting costs in individual parts. But they are also learning how to standardize parts and materials in sync with a product cycle of several years -- a strength of German automakers.

For the current fiscal year that began April 1, the business environment is uncertain. The key U.S. market is showing signs of a slowdown, and a possible increase in automobile tariffs -- floated by President Donald Trump -- is also a concern. Honda surprised the market by predicting a 46% plunge in net profit for fiscal 2018.

With next-generation technologies like autonomous driving requiring heavy investments, margins are expected to narrow at the major Japanese players. In these fields, automakers must compete with rivals from other sectors, such as U.S. tech giants Apple and Google.

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