TOKYO -- Nissan Motor Co., Japan's No. 2 automaker, posted a surprise drop in quarterly profits on Friday because of higher raw material, R&D and sales costs but kept its full-year forecasts unchanged.
Many analysts had expected a rise in second-quarter profits despite big losses from a weaker dollar as sales expanded by double digits in the important U.S. market.
"The result was a little bit disappointing," said Christopher Richter, auto analyst at Merrill Lynch. "But (vehicle) price per unit seems to have improved and that's some reason to cheer."
Rival Honda Motor Co. had a bigger-than-expected 9.2 percent rise in July-September operating profit and raised its full-year forecast. Toyota Motor Corp. is expected to report 4 percent growth in quarterly operating profit on Monday.
"At the beginning of the fiscal year, I mentioned some risks that we might have to face -- such as increased incentive battles, rising commodity prices and higher interest rates," Nissan Chief Executive Carlos Ghosn told a news conference.
"All those risks have materialized, sometimes to degrees beyond what we anticipated," he said.
Second-quarter operating profit shrank 3.5 percent to 217.12 billion yen ($2 billion), hit by higher spending on U.S. sales incentives to push out ageing models from dealers' lots. It lagged an average estimate of 231.09 billion from 10 brokerages.
Net profit fell 3.5 percent to 115.58 billion yen, even though sales grew by 10.3 percent to 2.103 trillion yen.
"The business climate in the second half is likely to remain severe as the risks are expected to continue. (But) we are maintaining our full-year forecast, supported by strong business fundamentals and the release of nine all-new models in key markets around the world," he said.
Ghosn said the discount war raging in the United States remained the biggest risk in the second half.
Along with others slugging it out in the U.S. market, Nissan faces a potential spiral of price cutting as high inventories force car makers including General Motors and Ford Motor Co. to woo buyers with discounts and giveaways.
GM and Ford reported big losses in their core automotive businesses in July-September, spending $3,800-$4,300 per car on sales incentives last month, according to Autodata.
Nissan spent $300 more per car on average during the six months to September but its incentives are still less than half the industry average.
Nissan, 44 percent owned by Renault, still expects a 4.3 percent rise in full-year operating profit to a record 860 billion yen, and hopes new models, including the Tiida Latio unveiled on Friday, will spark a turnaround in its home market.
Worldwide sales grew by 8.8 percent in April-September to 1.596 million units but slid 4.9 percent in Japan as it held off on new models until last month to try to boost volume in the year to end-September 2005, during which it has promised to sell 3.6 million cars worldwide, or 1 million more than in 2001.
It maintained its forecast for global sales to grow by 10.5 percent this business year to 3.38 million units.
Under Ghosn, Nissan has slashed costs, largely through sharing parts procurement with Renault, while laying the groundwork for future growth by launching scores of new cars.
Armed with 28 fresh models, Nissan aims to lift global sales to 4.2 million units by 2007/08 under a business plan starting next April, expanding into untapped regions and vehicle segments.
Like other global makers, Nissan is banking on China to make up for stagnation in developed markets like Europe and Japan.
While sales in China were still strong, Ghosn warned that profits were eroding faster than the industry had expected due to a double-blow of surging steel prices and falling car prices.
"I think double-digit profit margins in China is going to be difficult if you include heavy-duty trucks and commercial vehicles," he told Reuters in an interview.
He said profits in China could fall 5 billion yen short of an expected 20 billion yen for 2004/05, although he stressed the market accounted for a small fraction of Nissan's earnings.
Asked about reports that Nissan was considering deepening its minivehicle tie-up with Mitsubishi Motors Corp., Ghosn said he was talking to various automakers to pursue a bigger presence in the segment, but no decision had been made.
Mitsubishi Motors currently supplies Nissan with a commercial minivehicle model.
For the half-year to Sept. 30, Nissan's operating profit edged up 0.6 percent to a record 403.44 billion yen, net profit rose 0.5 percent to 238.81 billion yen and sales grew by 12.7 percent to 4.008 trillion yen. Profits got a lift from the consolidation of joint ventures in China, Thailand and Taiwan.