January 18, 2019 / 11:20 AM / 3 months ago

Japan Inc profits under siege from China slowdown

TOKYO (Reuters) - Two prominent Japanese electronics and equipment makers warned of profit declines over the past week due to the impact of the U.S.-Sino trade war, stoking worries of widespread cuts to corporate earnings forecasts and a hit to economic growth.

FILE PHOTO: Nidec Corp's logo is pictured at an earnings results news conference in Tokyo, Japan, July 25, 2018. REUTERS/Kim Kyung-Hoon

Nidec Corp (6594.T), whose tiny motors are found in phones, PCs, cars, and robots, slashed its annual operating profit outlook by a quarter on Thursday, saying the trade war and a slump in smartphone demand is discouraging manufacturers in China from spending. And Yaskawa Electric Corp (6506.T), maker of robots used in factory automation, also lowered its annual operating profit outlook for the second time in three months on Jan. 10 because of the trade war.

Japan sends around a quarter of its electronics and heavy machinery exports to China, so it is heavily exposed to the current bout of weakening demand in the world’s second-largest economy.

And because companies quickly cut employee bonuses and capital expenditure when sales fall and inventories start piling up, the potential blow to Japan’s growth is significant, economists say.

“I suspect a lot of economists will downgrade Japan’s growth forecasts for the first quarter of this year, because downside risks have clearly increased,” said Norio Miyagawa, senior economist at Mizuho Securities.

“Electronics and capital goods drive Japan’s manufacturing, but China is slowing, and we cannot be optimistic.”

Washington’s attempt to lower the U.S. trade deficit has triggered tit-for-tat tariff hikes with Beijing that has put business leaders and policymakers on edge.

China’s economy is taking a big hit as exports slow, factory activity drops off, and consumers’ demand for the latest tech gadgets evaporates.

China’s woes are now rippling across the globe, triggering warnings on sales or profits from Apple Inc (AAPL.O) to Samsung Electronics 005630.KS to Taiwan Semiconductor Manufacturing Co (2330.TW).

HIGH INVENTORIES

Nidec’s output of parts for autos and home appliance manufacturers in China tumbled by 30-40 percent in November and December as these customers adjust for high inventories, which could last for another six months, said Nidec chief executive Shigenobu Nagamori who founded the company in 1973.

“In my long management career I have never seen a downturn like we’ve seen in November and particularly in December,” Nagamori said. But he ruled out changing business plans for now.

There are many Japanese companies who make goods for similar customers and are now in the same position as Nidec. Around 37 percent of Japan’s exports are made up of either electronic parts or manufacturing equipment, which leaves it vulnerable to fluctuations in global demand.

Japan’s overall exports slowed to a crawl in November as shipments to China weakened, finance ministry data showed. During the same month machinery orders, a leading indicator of capital expenditure, also stalled as manufacturers cut their orders.

Amid the weakening data, some Japanese electronics makers remain optimistic that they can offset declining sales by tapping demand for parts used in electronic vehicles and self-driving cars.

One example is parts maker Alps Electric Co (6770.T), which derives around 60 percent of its revenue from its auto business.

“We are a little worried about China,” said Takashi Sogo, group manager of public and investor relations at Alps Electric.

“However, our products in the auto segment tend to go to luxury cars, and we think this business will remain stable.”

Reporting by Stanley White and Yoshiyasu Shida; Editing by Muralikumar Anantharaman

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