The automotive sector faces decreasing domestic sales due to a decrease in population and a growing share of elderly citizens as well as tax hikes.
- Domestic sales continue to decrease
- Car producers profit margins decreased in 2016
- Payments duration ranges between 30-60 days for manufacturers
The Japanese automotive sector faces decreasing domestic sales due to demographic issues (a decrease in population and a growing share of elderly citizens) as well as tax hikes implemented in 2014 (consumption tax) and 2015 (light vehicle tax). Another hike in consumption tax is scheduled for October 2019.
Japanese car makers profit margins slightly deteriorated in the financial year 2016, mainly due to a Yen appreciation lower demand in North America. That said, the EU is set to eliminate tariffs on auto imports as part of the trade agreement between EU-Japan, which will probably result in improved returns for Japanese carmakers as of 2019.
Capital requirement is high in this sector, but in general Japanese automotive businesses are not overly indebted. Due to the satisfactory business performance, banks are generally willing to provide loans with good financing conditions, which is helped by low interest rates. Additionally, the Japanese government is encouraging banks to support companies with strong financing needs.
The average payment duration in the Japanese automotive industry is around 30 days for car retailers, 30-60 days for manufacturers and 60-90 days for wholesalers. Payment behaviour in this sector has been very good over the past two years. The number of protracted payments, non-payments and insolvency cases is very low, and it is expected that there will be no deterioration in the coming months as the businesses environment is expected to remain stable and banks are willing to lend. However recently the major automotive supplier Takata Corporation went into bankruptcy (see below).
Due to the generally positive indicators, we assess the credit risk and business performance of the automotive sector as stable, and our underwriting stance continues to be very open for large manufacturers and open for car parts suppliers and wholesalers. However, in those latter segments we have adopted a more cautious approach for smaller business, which often have weaker financials than larger businesses and are more vulnerable to sudden changes in the market sentiment. We also take a more prudent approach on car retailers due to the weak performance of the domestic care market.
Additionally, caution is advised with businesses engaged with Takata Corporation, the auto-parts supplier which filed for bankruptcy in Japan and the US after being hit by safety issues with airbags that resulted in the recall of tens of millions cars in the US. Takata will continue its global recall of faulty airbags, but should their financial assets run out some automotive manufacturers and suppliers may be forced to cover the remaining expenses.