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Honda, Nissan Beat Expectations

In recent weeks, Honda (HMC) and Nissan (NSANY), Japan's biggest carmakers after Toyota (TM), have been doing a pretty good job of looking to the future. On July 13, recently anointed Honda President Takanobu Ito confirmed that the Tokyo-based company will launch two new hybrids in 2010 and said it is developing a new gas-electric system for larger models. Nissan chief Carlos Ghosn, meanwhile, shows a zeal for electric vehicles unmatched in the industry. On Aug. 2 the company will show its much anticipated first EV.

While those bets may pay off in time, the here and now remains undeniably challenging. The global economy is in recession, auto sales are tumbling in most large markets, and the strong yen is making exports from Japan less competitive. The continuing impact of the global financial crisis was writ large in both companies' quarterly results, which were released July 29 in Tokyo. (Toyota announces its results on Aug. 4.)

Honda was the first to reveal its numbers. At a press conference, the company said that for the three months ended on June 30, sales slumped 30%, from $21.1 billion. Net profit dropped 96% from a year earlier, to $78.9 million. Nissan, which released its numbers a couple of hours later, said its revenue dropped 35% for the three months, to $15.6 billion, while it posted a net loss of $158 million, compared with a $540 million profit a year earlier. "The global economic outlook continues to be challenging and filled with uncertainty," Nissan Chief Operating Officer Toshiyuki Shiga told reporters.

As bad as all that sounds, the worst of the crisis appears to be over. Honda surprised analysts, regaining profitability—it lost $1.96 billion in the three months through March—earlier than expected. What's more, Honda raised its profit forecast for the full year and now expects to earn $579 million through March 2010, 35% more than an earlier forecast made in April.

Could Have Been Worse Nissan is still to return to profitability and isn't planning to raise its annual forecast. But its net loss for the quarter was smaller than expected. UBS (UBS) had expected Nissan's quarterly loss to be three times higher, at $484 million.

One thing that carmakers have going for them: The industry outlook today is brighter than it was six months ago. While the global economy shows few signs of returning to the rapid growth of recent years, demand in some markets is perking up. China, in particular, is experiencing strong growth and government subsidies for green cars in other markets are encouraging car buying.

China's market has been a bright spot for Japan's carmakers. Honda's sales in the Middle Kingdom increased 21% in the three months through June. Nissan, which has sold more cars in China than in Japan so far this year, said today that it plans to add a new assembly line at its Huadu plant in Guangzhou, raising output at the plant by 240,000 cars, to 600,000, by 2012.

Help from "Cash for Clunkers" Government spending on green tech is helping, too. In Japan, customers buying the new Honda Insight and other gas-electric hybrids qualify for government subsidies aimed at promoting eco-friendly cars. In the U.S., which has traditionally been the biggest source of profits for Honda and Nissan, carmakers hope to benefit from the "cash for clunkers" scheme.

The carmakers are also benefiting from the hard decisions they made months ago to cut back. After the collapse of Lehman Brothers hammered the global car market, Japanese manufacturers quickly reduced output and looked for new ways to save on costs. At Honda, former CEO Takeo Fukui delayed a new flagship plant in Yorii, outside Tokyo, and a minicar plant in western Japan, and pulled out of Formula One racing. The company has dropped a plan to release the Acura luxury marque in Japan in 2010 and axed the development of the successor to the NSX sports car, scheduled to have been equipped with a new V10 engine.

Nissan took similar measures. CEO Ghosn said the company would cut capital expenditures by 21% and slash labor costs in line with falling sales. He also revealed plans to trim the workforce by 20,000, to 215,000 employees worldwide, by March 2010. Ghosn, in a statement today accompanying Nissan's results, said "2009 continues to be a tough year, but we are beginning to see positive results from the measures taken under our recovery plan."

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