Nissan (7201) US Challenges - Further Deterioration in NA Profitability Expected

Key Points  
Nissan is facing increasingly difficult market conditions in the US, as demand for passenger cars is shrinking, used car prices are falling and interest rates are rising. When looking at the details of Nissan’s OP in North America (NA) over the last years, it strikes us that the company is more vulnerable to a downturn in the US than many of its competitors. This is because:

• Auto sales growth has been achieved via high incentives; net of selling expenses, there have been no positive contributions to OP coming from volumes. In a weaker sales environment, Nissan is set to use incentives even more, making additional volume growth unprofitable. 
• Nissan’s high fleet sales and high cash incentives could scare off auto buyers concerned about lower residual values.  
• Production cost savings have been one of the main profit drivers in NA over the last few years: while the new platform (CMF)-based cost savings should continue to positively contribute, we think that other saving opportunities, such as in manufacturing and procurement, are exhausted. 
• The positive impact of the business expansion in Mexico (an important profit contributor in FY15, less so in FY16) is waning, as Mexico sales are slowing.  
• Financial services have become an important earning source for Nissan: We expect OP in this division to decline in FY17 and FY18, due to rising provisions for residual losses (high fleet sales and cash incentives), a shrinking lending balance, and higher loan losses.