Japan Inc’s earnings problems are home grown
By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
Something is amiss with Japan’s biggest names. Sony, Panasonic and Honda were three whose earnings were battered in the latest quarter, but they weren’t alone. Earnings at the 493 Japanese companies that announced results as of Oct. 31 were 57 percent short of their forecasts, according to Deutsche Bank. Excuses abound, from earthquakes to weak U.S. demand. But it’s problems at home that make them so susceptible.
Japan’s corporate titans were hit by many of the worries that plague their global cousins. Europe’s debt crisis and weak U.S. growth are hurting demand for gadgets and appliances. Floods in Thailand added a cruel twist, since many Japanese companies have cut costs by shifting some production facilities there. Some, like Honda, had only just got back up to speed after February’s earthquake in northern Japan.
A strong yen added further pain, as it edged towards a once-unimaginable rate of 75 to the U.S. dollar. But the yen’s recent rise is neither dramatic nor new. It has been steadily climbing since 2007, and in broad terms for the past 30 years. Indeed, Japanese companies have done many things right, cutting costs and moving production abroad. Profits in the electronics sector have recovered since the financial crisis to where they were six years ago, despite a yen that is 50 percent stronger, according to Goldman Sachs.
The biggest problem might be an identity crisis. Japan’s corporate managers have long focused on expanding market share at the expense of profitability, adding high-employment, low-margin business lines. Take Panasonic. Its display technology is world leading, but the company still makes low-margin appliances like portable razors and fax machines. Sony tells a similar story. Honda, while part of its supply chain is underwater remains the world leader in hydrogen-fuel cell technology.
Until recently, Tokyo supported strategies that promote revenues and employment over earnings, and shareholders have played along. Now they’re getting increasingly impatient with thin margins that can’t absorb shocks. The red ink spilled in the second quarter will hopefully serve as a wake-up call. Japan Inc isn’t broken – it just needs to shed its dead wood.