Suzuki Smartly Retreats from U.S. Car Market

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After years of losing money in the U.S., the Japanese vehicle manufacturer Suzuki Motor Corp, which has significant representation in the First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ), has decided to leave the country’s auto market while its American subsidiary is preparing to file for chapter 11 bankruptcy under a pile of $346 million debt, half of which it owes to its parent, against assets of $233 million.  The company recorded a net loss of $15.8 million in the U.S. in its previous year from a sale of just 26,000 vehicles, as opposed to Toyota’s (NYSE: TM) American subsidiary, which sold 1.6 million vehicles in the same period. Suzuki always struggled in the U.S.  Even a shift towards bringing in their own vehicles (versus the old strategy of rebranding others' cars), which garnered positive press and customer satisfaction could not overcome a market that, regardless of 2012’s results, is simply not that strong. 

Even at its 2008 peak, Suzuki had just 0.6% market share, but the financial crisis, which was followed by slow growth in the U.S., along with the strong Yen and poor brand image, made things even more difficult for the company. Moreover, several consumer reports had already identified Suzuki’s lack of safety features, and it also lost a lawsuit in this regard, which forever tarnished the company’s image. However, it will continue to sell its popular motorcycles, ATVs and marine boats in the U.S.

Being the fourth Japanese vehicle manufacturer in the U.S. nets you a market share of just 0.2%. On the other hand, its peers such as Toyota, Honda (NYSE: HMC) and Nissan not only have a much larger share in the U.S. market, but their sales numbers have increased by 30%, 22.5% and 10.5% respectively in the first ten months of 2012 as compared to last year. Suzuki, on the other hand, saw its sales numbers diminish 4.7% in the corresponding period. 

Suzuki’s decision should surprise no one.  Its customers can take some relief in knowing that the company aims to honor all product warranties, in spite of the bankruptcy.  But Suzuki’s strength has never been the U.S. but rather emerging markets and Japan, particularly in Southeast Asia where its cheap small cars are incredibly popular. Its Indian operation, Maruti Suzuki, is its biggest overseas business unit. In its recent earnings release, amid the growing labor unrest that caused the temporary shutdown of two facilities, the company posted a 5.4% year-on-year decline in quarterly profits to $42 million.

Given the labor unrest and the hike in fuel prices, the analysts were expecting poor results, but Maruti Suzuki remains the number one car manufacturer in India and was therefore able to post better than anticipated results. Similarly in Pakistan, where it operates as Pak Suzuki Motor Company and has 63% of the local market share, it posted a 75% increase in profits for the period of January to September 2012 to $12.26 million from a sale of more than 127,000 units.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Suzuki</strong></p> </td> <td> <p><strong>Toyota</strong></p> </td> <td> <p><strong>Honda </strong></p> </td> <td> <p><strong>Nissan</strong></p> </td> <td> <p><strong>CARZ</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>18.34</p> </td> <td> <p>13.2</p> </td> <td> <p>12.95</p> </td> <td> <p>16.95</p> </td> <td> <p>9</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>1.22</p> </td> <td> <p>6.04</p> </td> <td> <p>2.35</p> </td> <td> <p>1.02</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>0.84%</p> </td> <td> <p>1.70%</p> </td> <td> <p>3.10%</p> </td> <td> <p>N/A</p> </td> <td> <p>0.74%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>3.59%</p> </td> <td> <p>2.31%</p> </td> <td> <p>2.43%</p> </td> <td> <p>3.03%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>6.01%</p> </td> <td> <p>7.96%</p> </td> <td> <p>7.88%</p> </td> <td> <p>11.15%</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

 

Since the beginning of 2012, Suzuki’s stock in Tokyo has risen by 12.5% while CARZ is up 3.3%. Toyota has enjoyed a banner comeback year in the U.S. and has regained the lead from GM (NYSE: GM) as the world’s largest car maker by volume.  However, the situation unfolding in China is cause for concern for all Japanese automakers.

Out of the four firms, Nissan has the highest exposure to the Chinese market, followed by Honda where sales of Japanese cars have plummeted because of the islands dispute. Both companies have reduced their annual profit forecast by as much as 20%. On the other hand, Toyota is in recovery mode after its facilities suffered shutdowns following the Japanese earthquake and tsunami. Unlike Nissan, Toyota has upped its year end forecast to $9.7 billion despite the falling sales level in China.

Suzuki, by excising the failing U.S. market, strengthens the company to stave off growing competition in the markets where they are stronger, namely India, where Honda has big plans, and can shift resources to improving their position in the sub-compact segment of fast-growing markets like Indonesia and Thailand.  

 


PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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