Denso Corp, Japan's No.1 car parts maker, will likely review its earnings outlook around late October for a possible upgrade after a strong first quarter eased worries about the impact of the yen's strength, its president said.
Nobuaki Katoh also said Denso may expand its output capacity in Thailand to meet growing demand in Asia, while it remains committed to production in China despite a likely rise in labor costs following a wave of strikes and a shift in Beijing's policy in favor of a stronger yuan.
Denso, which is based near the headquarters of its top shareholder Toyota Motor Corp and depends on the Toyota group for half of its revenue, also aims to boost sales to other carmakers such as South Korea's Hyundai Motor, he said.
First-quarter results exceeded our plans, which were a bit conservative, in terms of both sales and profits. I hope to make an upward revision to our annual forecasts though I have not made up my mind, Katoh told Reuters in an interview.
Demand in North America, China and southeast Asia in particular topped Denso's targets, raising the chances of the company raising its outlook despite the euro's dive below the 130 yen mark, which Denso has assumed as the average rate of exchange for the financial year to March, he said.
Every one-yen change in the value of euro slices 600 million yen off Denso's operating earnings, and a cut in Denso's euro rate forecast by 20 yen to 110 yen would trim the company's annual operating profit by 12 billion yen, Katoh said.
The outlook for the Japanese car market after scrap incentives end in September is another risk along with the European debt crisis, but prospects for the rest of the year should be clear enough for a possible upgrade by late October when Denso reports first-half results, he said.
Denso, a maker of car air-conditioners and powertrain control systems, is forecasting an operating profit of 138 billion yen ($1.6 billion) for this financial year, well below the consensus for a 164 billion yen profit in a poll of 14 analysts by Thomson Reuters I/B/E/S.
Denso is looking at adding capacity in Thailand and making Thailand, which now mainly supplies local car assembly plants, its second export base after Japan to meet growing demand in India and broader Asia where carmakers are gearing up production, Katoh said.
If we are to position Thailand as an export base, we need to have our capacity there ready within the next two to three years, before I step down, he said, referring to the possibility of adding capacity in Thailand.
Denso, which competes with German giant Robert Bosch in China and elsewhere, remains committed to production in China after a recent labor strike that paralysed production at a Denso plant as well as Toyota's assembly plant, in Guangzhou for days, he said.
Even if wages and the yuan become more expensive, there will also be enormous demand. Production in China is a must in order to supply to Chinese clients. There is no change in our policy to strengthen operations in China, he said.
Katoh said he has asked the heads of Denso's Chinese units to improve communications with their employees and take the needs of the staff into consideration to avoid any more labor disputes.
As for other emerging markets, Denso is studying the Middle East and Africa as the next promising markets after the so-called BRICS -- Brazil, Russia, India and China -- while it is also studying the possibility of starting production in Russia, he said.
Denso aims to expand sales in emerging markets so that these markets account for 10-20 percent of its global revenue in the future, up from 7 percent now, Katoh said.
Denso, traditionally a Toyota-dependant supplier, also seeks to expand sales to Hyundai, whose share of the global car market is on the rise, by marketing a wider variety of products, initially in South Korea and then globally, he said.
We currently make meters, motors and engine parts at the two manufacturing units we have in South Korea. We want to add fuel economy and safety-related products as well as air-conditioners to our production line-up if Hyundai would buy them, Katoh said.