Honda Rides Into Red Territory

The market expected the global recession to decimate Japanese automakers' profits, but few expected their second-half losses to be so huge. Now the question is whether whopping output and capital spending cuts will even allow them to break even next year.

Honda Motor (nyse: HMC - news - people ) looks on course to post an operating loss in the second half to the tune of at least 120.0 billion yen ($1.4 billion), on the severe demand slump and surge in the value of the yen. This would be the company's first half-year operating loss in over a decade. Japanese automakers are scrutinizing all their pipeline investments for possible delays or cancellation, slashing output and jobs, and looking to wrangle price cuts from steelmakers and other suppliers.

On Wednesday, Honda Motor slashed its full-year operating profit forecast by 67.0%, in the third such guidance cut this year. It estimates earnings for the year ending Mar. 31 to come in at 180.0 billion yen ($2.0 billion), down from a previous guidance of 550.0 billion yen ($6.2 billion). The forecast earnings represent a 81.0% plunge from last year. It also signifies a larger-than-expected loss in the second half since Honda posted a first-half operating profit of 302.9 billion yen ($3.4 billion).

"We see no sign of a recovery," Honda president Takeo Fukui said at a press conference. Honda's shares fell 108 yen ($1.22), or 5.5%, to 1,865 yen ($21.09) in Tokyo trading on Wednesday.

"The magnitude was quite a bit bigger than anyone was looking for," said Christopher Richter, Tokyo-based analyst for CLSA. "This does not bode very well for the next fiscal year." On Wednesday morning, the Nikkei reported that Honda would slash its guidance to 300 billion yen ($3.4 billion), which was already below Wall Street expectations. Instead, Honda predicted just over half that.

Honda said it expected sales to have fallen 13.0% for the year, because of a collapse in demand from the U.S. and Europe. The yen's surge to decade-highs against the dollar and euro has dealt a further devastating blow to Japanese exporters by eroding their overseas earnings. Honda said it would cut its dividend to 11 yen (12 cents) per share for the October-December period, down from 22 yen (25 cents).

"We're not expecting any of the makers to meet the forecasts they set after the first half," Richter said. "I don't think we're done with bad news for automakers."