Published: July 29 2009 22:56 | Last updated: July 29 2009 22:56
Chinese car-buyers are helping Japan’s automobile industry to absorb some of the impact of the worst downturn in decades, quarterly results from Honda Motor and Nissan Motor suggested on Wednesday.
Honda, Japan’s second-biggest carmaker, cited faster sales growth than expected in China as it reported a surprise profit for the three months to June and raised its forecast for the financial year to next March by 38 per cent to Y55bn ($578m).
Nevertheless, Honda saw net profit for the three months to the end of June slump 96 per cent to Y4.17bn, although analysts had expected the carmaker to fall into loss.
Honda’s more optimistic outlook came even as it cut its sales projections for North America, its biggest market, and took a more conservative view of the yen’s exchange rate.
Nissan, meanwhile, said its net loss shrank to a smaller-than-expected Y16.5bn in the quarter from Y277bn in the previous quarter, as Japan’s third-biggest car producer was helped by aggressive cost-cutting and 28 per cent combined volume growth in China for its Nissan and Infiniti brands.
Nissan announced plans for a Rmb5bn ($732m) expansion of the passenger vehicle plant it operates in Guangzhou with its Chinese partner, Dongfeng Group. A new production line is to begin operating in 2012 and will boost the plant’s output from 360,000 vehicles a year to 600,000.
Overall vehicle sales in China surged 18 per cent in the first half of this year to 6.1m, pushing the country past the US to become the world’s biggest car market.
The expansion has helped other foreign carmakers with big operations in the country, such as Volkswagen and General Motors, as well as the Japanese producers.
The carmaker’s Japanese sales held steady in the quarter due to government incentives to buy environmentally friendly vehicles. Honda’s Insight petrol-electric hybrid, reintroduced this year after a three-year production hiatus, was the best-selling full-size passenger car in the country in April.
Honda upgraded its Japanese sales forecast for the full financial year from 555,000 vehicles to 665,000. For China, it raised its projection from 775,000 to 840,000 vehicles.
In contrast, Honda said it now expected North American sales to decline by an additional 500,000 vehicles this year to 1.3m, compared with last year’s total of 1.5m.
Koichi Kondo, executive vice-president, said: “I’m not very optimistic about the US market. We’re already into July and I had thought it would have recovered more by now.”
Both Honda and Nissan expressed doubts that the US government’s “cash-for-clunkers” trade-in subsidy would do much to boost demand.
Referring to the scheme’s $1bn budget cap, Toshiyuki Shiga, Nissan’s chief operating officer, said: “We had been hoping for something on a larger scale. We don’t have big expectations.”
Toyota mulling liquidation of Fremont NUMMI venture
NEW YORK (Kyodo) Toyota Motor Corp. said Friday it will consider liquidating New United Motor Manufacturing Inc., a Fremont, Calif.-based joint manufacturing venture with General Motors Corp.
Toyota revealed the plan following GM's announcement the same day that a "new GM," now majority-owned by the U.S. government, has emerged from the bankrupt GM by taking over the best assets of the Detroit-based automaker, including Cadillac and Chevrolet.
The joint venture, NUMMI, which has been in operation since 1984, is not included in the assets the new GM has inherited. As Toyota itself has excess production capacity, the automaker will probably look to liquidate the venture.
Toyota said it must mull the liquidation given the current business environment.
"We have not yet made a formal decision, but it is very difficult to turn a profit by continuing to operate the factory on our own," a senior Toyota official said in Aichi Prefecture.
Another senior official said it may take some time to liquidate the plant even if the automaker decides to go ahead with the plan because its closure will impact area communities and auto parts suppliers.
At present, the joint venture produces the Pontiac Vibe compact for GM as well as the Corolla car and Tacoma pickup truck for Toyota.
About 460,000 Pontiac Vibes were produced between 2002 and the end of this May at the venture.
On June 29, struggling GM said it would discontinue producing the Pontiac Vibe at the venture in August.
Troy Clarke, president of General Motors North America, said at that time in a statement that GM "has decided that its ownership stake in the New United Motor Manufacturing Inc. joint venture with Toyota will not be a part of the new GM.
"After extensive analysis, GM and Toyota could not reach an agreement on a future product plan that made sense for all parties," the statement said.
Toyota began producing cars jointly with GM in 1984 as a way to ease the auto trade friction between Japan and the United States.
Production by NUMMI currently accounts for about 20 percent of Toyota's overall car output in North America. The joint venture employs some 4,500 local workers, with about 270,000 vehicles assembled in 2008.
To this gaijin, Japan looks prosperous, clean, highly functioning. At Takashi-maya, the high-end department store atop the central train station in Nagoya, shoppers line up in orderly queues before the 10 a.m. opening. But Japan seems to be in the midst of an existential crisis—in the first quarter it shrank at an abysmal 15.2 percent annual rate. In 10 days traveling through the country, I couldn't find anyone who thought the ma-laise would end soon.
Japan's rise literally from rubble into an industrial powerhouse is one of the greatest economic stories of the 20th century. But a slow response to the bursting real-estate and stock bubbles of the 1980s consigned the country to a decade of economic slumber from which it has yet to fully awake. The first great wave of globalization was kind to Japan. But the second wave, dominated by China, which is set to surpass Japan this year as the world's second-largest economy, poses a serious challenge. The unemployment rate has spiked to an unthinkable 5.2 percent, and Japan seems to have reconciled itself to decline. Twenty years after the publication of The Japan That Can Say No, a manifesto of self-assertion co-written by Sony chairman Akio Morita, we seem to have The Japan That Can Grow Slow. And part of it is because Japan, like the baby boomers in America, is mellowing as it gets older.
Japan still retains its lead in engineering. A showroom at Panasonic's headquarters displayed a heated, multifunction toilet seat that conserves energy. (Wouldn't leaving the seat cold conserve even more?) The sleek Shinkansen bullet trains roll up to their appointed spots on time. TKX, an 87-year-old Osaka-based company that makes abrasives, has adapted its expertise to cutting silicon ingots into wafers for solar panels.
But social engineering is proving more challenging. Japan's population peaked in 2004 at about 127.8 million and is projected to fall to 89.9 million by 2055. The ratio of working-age to elderly Japanese fell from 8 to 1 in 1975 to 3.3 to 1 in 2005 and may shrivel to 1.3 to 1 in 2055. "In 2055, people will come to work when they have time off from long-term care," said Kiyoaki Fujiwara, director of economic policy at the Japan Business Federation.
Such a decline is cataclysmic for an indebted country that values infrastructure and personal service. (Who is going to maintain the trains, pay for social benefits, slice sushi at the Tsukiji fish market?) The obvious answers—encourage immigration and a higher birthrate—have proved difficult, even impossible, for this conservative society. In the U.S., foreign-born workers make up 15 percent of the workforce; in Japan, it's 1 percent. And, official protestations to the contrary, they're not particularly welcome. One columnist I met compared the standard Japanese attitude toward immigrants to that of the French right-winger Jean--Marie Le Pen. In the 1990s, descend-ants of Japanese who had emigrated to South America early in the 20th century returned to replace retiring factory workers. Now that unemployment is on the rise, Japan is offering to pay the airfare for those who wish to return home.
Japan doesn't particularly want to import new citizens, but it doesn't seem to want to manufacture them, either. It's become harder to support a family on a single income, and young people are living at home for longer. And Japan isn't particularly friendly to working mothers—pre-K day care is not widely available, and the phrase "work-family balance" doesn't seem to have a Japanese translation. (The directory of the Japanese Business Federation, a showcase of old guys in suits, makes the Republican Senate caucus look like a Benetton ad.) The upshot: a chronically low birthrate. Too often, demographic change was described to me as a zero-sum game—rather than being seen as potential job creators, women and immigrants are often seen as taking jobs from men.
Chalk it up to age, or to culture, but Japan strikes me as strangely passive about the huge changes it is facing. I heard plenty of bromides about the need for new policies toward both immigration and work-family issues, but no real policies. "The ongoing issues of the lower birthrate and the aging society have been going with such speed that the national design of how to respond to that has not caught up yet," said Yuriko Koike, a television reporter turned politician (Japan's first female defense minister) and one of the most prominent women in public life.
As befits a nation riven by geological faults, the focus seems to be on planning to use technology to manage the impact of unstoppable events rather than averting them. In Toyota City, where robots do 90 percent of the welding work on Priuses at the Tsutsumi plant, I asked a city official how demographic changes would affect the delivery of health care. He responded, only partially in jest: "Maybe the robots will take care of us."
The biggest emerging economies are rebounding, even without recovery in the West
THE inaugural summit of the BRICs—Brazil, Russia, India, China—came and went in Yekaterinburg this week with more rhetoric than substance. Although Russia’s president, Dmitry Medvedev, called it “the epicentre of world politics”, this disparate quartet signally failed to rival the Group of Eight industrial countries as a forum for economic discussion.
But that should be no surprise: to realise how disparate they are, consider that Russia and Brazil are big commodity exporters, whereas China is a big commodity importer; China is a proponent of the Doha trade round, India a sceptic; India and China vie for influence in the Indian Ocean, Russia and China compete in Central Asia.
Instead, the really striking thing is that four countries first lumped together as a group by the chief economist of Goldman Sachs chose to convene at all, and in such a high-profile way. And that when they met, they discussed topics such as reforming the IMF; their demand for more say in global policy-making; and, in the case of China, Brazil and Russia, a plan to switch some of their foreign-currency reserves out of dollars and into IMF bonds.
All this reflects growing self-confidence. The largest emerging markets are recovering fast and starting to think the recession may mark another milestone in a worldwide shift of economic power away from the West. Estimates for their national incomes in the first quarter were better than expected. In the year to the end of March GDP rose by around 6% in China and India. The two accounted for no less than half the world’s increase in wireless-technology subscriptions in that period. In Brazil gdp fell slightly in the first quarter but it is growing faster than the Latin American average and most economists think growth will return to its pre-crisis level as early as next year. In contrast, output in most large industrial economies is still falling. The exception in the BRICs is the host: dragged down by plunging oil prices last year, Russia’s economy shrank by 9.5% in the first quarter, the worst performance in the G20 after Japan.
The fortunes of the others mark a sharp rebound since the turn of the year. Then, it seemed, the largest emerging markets faced being overwhelmed along with everyone else. Chinese exports in January were 18% lower than they had been a year earlier. Industrial growth fell by two-thirds in November and December. And around 20m migrant workers were wending their way back to their villages, jobless after the collapse of construction and export booms in coastal cities. The notion of “decoupling”—that emerging markets were no longer mere moons revolving around planet West—suffered a severe setback.
So what should one make of the turnaround? Might there be something to decoupling after all? Why are the BRICs recovering? And what are the implications for the rest of the world?
Decoupling means not simply that emerging markets tend to grow faster than rich industrial ones, although that is certainly true; it also implies that to some extent the two groups dance to different tunes, with emerging markets growing or shrinking autonomously, not just under the influence of rich ones. A study last year by Ayhan Kose of the IMF, Christopher Otrok of the University of Virginia and Eswar Prasad of Cornell University gave some support to this idea.
You would expect less decoupling as a result of globalisation. The cycles of output, consumption and investment should become more closely aligned in countries engaged in world trade. Yet when the authors looked at these indicators, they found something different. The cycles of output, consumption and investment did indeed become more closely aligned in rich countries. And the same thing happened in emerging markets. But when the authors compared the two groups, they found they were diverging. The business cycles of America and Europe converged. The business cycles of India and China converged. The business cycles of rich and emerging markets had decoupled.
When this study came out in mid-2008 the worldwide crash seemed to render it instantly obsolete. Yet the sheer size of the meltdown may temporarily have swamped deeper trends that are now reasserting themselves as the initial shock recedes. In 2000 developing countries accounted for 37% of world output (at purchasing power parities). Last year their share rose to 45%. The share of the BRICs leapt from 16% to 22%, a sharp rise in such a short period. Almost 60% of all the increase in world output that occurred in 2000-08 happened in developing countries; half of it took place in the BRICs alone (see chart).
If this pattern of growth were resuming, it would be good news: nearly half the world economy would be bouncing back. And there are one or two signs that the benefits of growth in the BRICs are being felt farther afield. Anecdotal evidence suggests “south-south” trade and investment by richer emerging markets in poorer ones continued to rise even as global capital and trade flows fell. One example of this is the “land grab” in which China and Gulf countries are buying millions of acres of farmland in Africa and South-East Asia. China overtook America to become Brazil’s largest export market in March and April; it is also now the largest exporter to India. China is using its $2 trillion of foreign reserves to invest in other emerging markets: for example, putting $10 billion into Petrobras, Brazil’s state-run oil company.
China’s appetite for raw materials to fuel resurgent growth probably explains the 36% rise in industrial raw-material prices since the start of this year, benefiting exporters of things like copper—though how long this will last is an open question. If it comes from the boom in Chinese investment spending, then the boom could continue. If China is merely filling its stores temporarily after a period of destocking, then prices could fall again.
But the resilience of China, India and Brazil cannot offset the dire state of the rest of the world economy. While the three giants recover, developing countries as a whole are mired in recession. The giants seem to be decoupling not only from the West but from many of their smaller emerging brethren, too.
A series of reports confirms how badly things are going there. A review of ten poor countries by the Overseas Development Institute, a think-tank in London, concludes that they were worse hit than anyone expected, with sharp declines in remittances, employment and revenues and widespread balance-of-payments problems. As the study’s author, Dirk Willem te Velde, points out, the differences are often striking. In some countries—Indonesia, Kenya, Bangladesh—foreign direct investment has held up reasonably well; others—Ghana, Nigeria and Zambia—are facing sharp declines. Cambodian textile exports have been hit harder than Bangladeshi ones. But because import demand, capital flows and the need for foreign workers declined precipitously in the West, almost all developing countries are suffering.
In its most recent assessment, the United Nations says at least 60 poor and emerging markets will this year suffer falls in income per person. The UN’s forecasts for eastern Europe and sub-Saharan Africa are especially dark. For eastern Europe, Russia and its neighbours, the body predicts a fall in output of 5%. Arvind Subramanian, an economist at the Peterson Institute for International Economics, a think-tank in Washington, DC, argues that the recession in eastern Europe sounds the death knell for one of the two main growth strategies of the past 20 years—capital-account liberalisation (growth through exports is the other). The east European countries threw their financial sectors open to the world. In 11 of the region’s countries, foreign banks account for over 60% of bank assets. The flood of foreign-currency borrowing destabilised their economies and left them vulnerable when Western banks reduced lending.
In Africa, the UN predicts, output will now fall by 0.9%. That might not sound too bad but only two months ago the IMF was forecasting a rise of 1.7% and at the start of the year the UN had projected a 4.8% increase. To return to pre-crisis growth, says the African Development Bank (AFDB), would require the continent to attract $50 billion of new money this year. Africa is nowhere near those levels because world capital flows are falling. The latest forecast by the Institute of International Finance says total net flows will collapse from $890 billion in 2007 to just $141 billion this year.
The AFDB fears that “a growth crisis” may be turning into a “development crisis”, leading to sharp increases in poverty and malnutrition. By the end of 2009, says the UN, there will be between 105m and 143m more people in poverty than if growth had continued at its pre-crisis levels (see article). The main exception is in smaller East Asian countries, where industrial output is rebounding and GDP growth is likely to resume in the second quarter.
At the moment, then, recovery in the BRICs is coinciding with recession in the developing world as a whole. If this does not point to any change in global economic conditions, what does it reflect?
Partly, that the BRICs depend less on exports than do many emerging markets. In Brazil and India exports are less than 15% of GDP. China, too, exports less than many people think. Though exports were 34% of GDP in 2008, these included “processing exports”—goods imported into China, processed and exported without much value having been added. All three were thus less affected by the slowdown in world trade than most.
The BRICs were cautious in liberalising their financial systems, so have been less affected than, say, eastern Europe, by the West’s financial heart attack. And their recoveries have been boosted by governments which have dramatically loosened monetary policy and increased government spending. But many other countries are relatively closed to trade and finance. Smaller ones like Chile and Taiwan have had a large fiscal stimulus. But few have done so well. Something more is needed to explain the recovery of the giants. A plausible explanation is size.
Size matters when world trade is falling because large economies have millions of domestic consumers to turn to when foreign markets fail. China is the best example. Small economies need trade to specialise, but the pressure of selling into a big domestic market helps companies in large economies remain competitive even without a lot of competition from imports. Big economies also tend to be diversified. India, for example, exports not just garments and cheap electronics—characteristic of many countries with similar levels of income per head—but ships, petrochemicals, steel and business services. Being diversified means little when markets all fail at once. But it is a big advantage when recovery begins since you are more likely to be in a business in which demand is rising.
Size and variety may also help the economic stimulus programmes of China, India and Brazil. In general, one of the commonest problems of government reflation is that the benefits leak out beyond your borders because the programme sucks in imports. Giant economies do not face this problem so acutely because even when trade has been liberalised, imports naturally tend to be a lower share of GDP.
The other challenge is to ensure that government stimulus programmes are broadly based. This could be more difficult in small economies which specialise in relatively fewer sectors. A handful of big companies may be able to use political clout to grab the benefits of spending for themselves. In principle, giant countries such as India or China have more companies competing to manipulate the government for a share of the spoils. That is speculation, but the fact is that the stimulus programmes in the big emerging markets have been, mostly, large and effective.
China’s stimulus package was the earliest and best-known example of fiscal shock and awe. But it is only part of the story. The government is using the state-owned banks to pump out loans at astonishing rates. According to Josh Felman, of the IMF’s Asia research department, state banks and others issued 5.5 trillion yuan ($800 billion) of new loans in the first quarter—more than in the whole of 2008. This is producing a spending splurge on steroids. Excluding SUVs, almost as many cars are being sold in China as in America. In 2006 Americans bought twice as many.
Brazil and India are following suit, albeit more modestly. Brazil reduced reserve requirements and gave banks and its deposit-insurance fund incentives to buy up the loan portfolios of smaller banks. These measures injected 135 billion reais ($69 billion) into the domestic credit markets, according to Otaviano Canuto of the World Bank. Domestic credit rose sharply between September 2008 and January 2009 and consumer confidence is rebounding.
The source of India’s resilience, argues Mr Subramanian, was “goldilocks globalisation”: neither too dependent on foreign capital, like eastern Europe, nor too reliant on foreign customers, like parts of East Asia. Foreign capital dried up in the crisis, so India relied on domestic savings, which amounted to almost 38% of GDP in the year to March 2008. Companies thus turned for loans to India’s unfashionable state banks, which hold almost 70% of bank assets, rather than borrowing overseas or raising money on the stockmarket.
India’s growth was also shored up by government outlays, such as a generous pay rise for state employees, the cancellation of small farmers’ debts, and the expansion of its rural-workfare scheme. Announced before the crisis struck, this spending was fortuitous. It left the public finances deep in the red, even as it helped the government to a decisive election victory. So far, this political triumph has boosted confidence in India more than the budget deficit has dampened it.
State of triumph
The question is whether such splurges are efficient and how long can they last. Consider China’s investment (see article). According to the IMF’s Mr Felman, in early 2008 all the contribution of investment to growth came from non-state-owned enterprises, mostly the private sector; since December 2008, more than half has come from state-owned enterprises. Something similar is happening in Brazil. Between last September and this January credit from foreign-owned and domestic private banks rose by 3%; credit from public banks rose by 14%. The beneficiaries seem to be large firms, where loans are growing four times as quickly as at small ones.
It is not clear how far, in the long run, the BRICs will be affected by a big rise in the size of the government and large state-owned firms. But that rise is probably inevitable. China and, to a lesser extent, Brazil and India, benefited hugely from America’s appetite for imports in 2000-08. That appetite has fallen and is likely to remain low for years, as American consumers adjust their spending and savings habits. The rise may also be difficult to reverse: the experience of the West has been that the public sector expands relentlessly until it reaches between 40% and 50% of GDP. But if the BRICs cannot export their way out of recession, the expansion of government is the main alternative to the slump being endured in those other big capital exporters, Germany and Japan. It is part of the price China and others are paying to clamber out of recession before everyone else.
said Friday it will consider liquidating New United Motor Manufacturing Inc., a Fremont, Calif.-based joint manufacturing venture with General Motors Corp.
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