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On March 11, 2011 an earthquake and Tsunami struck Japan. The devastation to human life was something many will never forget. The impact on the country will take years to recover from. The auto sector was particularly impacted, and while Japanese cars are still selling, to this day they are hampered by production issues that have carried a lasting impact.

As investors in Sirius XM (NASDAQ:SIRI) know, car sales are an integral part of the satellite radio business. With the closing of Q2 sales numbers it is a good time to re-examine the impacts of the disaster in Japan.

In this piece, we will look at the Japanese manufacturers sales figures for 2011 and in particular, the sales drop-off that these same manufacturers experienced in the last three months.

Toyota
(TM)

Is the biggest of the Japanese manufacturers. Of the first 6 months of 2011, the peak month for Toyota was March. The company sold 176,222 units in the month of the disaster. This should not be a surprise, as the company had existing inventory to draw from for normal sales to continue. In April, we saw an expected decline to 159,540 units, as the industry began to asses what exactly the impact would be. The real pain started in May, as sales plummeted to 108,387 units. This stark drop-off is the first time we began to get an idea of the true impact the March disaster had. June saw a slight recovery, with sales coming in at 110,937 units. It may be that for Toyota the bottom was experienced in June.



If we consider that Toyota would have at least maintained sales of 176,000 units, then Q2 delivered 149,136 less than what would be considered normal. If we further consider that 60% of those cars are satellite radio equipped, then the unpaid promotional subscriber pool was impacted by 89,482 units.

This may seem like a big negative to Sirius XM. It will carry an impact, but we also need to consider that other manufacturers received sales that otherwise might have gone to Toyota. Another thing to consider is the subcategory that Toyota fits in. Because Sirius XM receives no money for these subscriptions, they are never counted in the subscriber numbers during the promotional period. The only time that Toyota cars are counted is when/if the consumer elects to keep the service when the unpaid promotional period ends.

In essence, the pipeline that supplies potential subscribers to Sirius XM has received a disruption. Think of it like your garden hose getting a kink in it. Until you un-kink the hose, the bucket is not filling up.

A car sold April 1st would come up for conversion on July 1st. With April being only slightly off the pace, the impact from Toyota in July would be minimal. Shift to a car sold on May 1st and you can see when the Toyota impact begins to take real shape. It happens in August. A car sold June 1st will come up in September. In essence we will see the impact from Toyota happen in Q3. How long that impact keeps happening will be determined by the sales figures and production.

Honda (HMC)

Honda is the second largest Japanese player, and has delivered perhaps the biggest short-term impact on Sirius XM. Honda had their sales peak in March as well when the company reported car sales of 133,650 units. April saw a small decline to 124,799 units, but the real damage began to unfold in May and June.

If we conduct the same exercise with Honda and consider that about 130,000 units would have been normal, then this manufacturer dropped about 91,000 units. At 60% penetration for satellite radio, Sirius XM would see an impact of 54,600 promotional subscribers.

Unlike Toyota, Honda provides paid subscriptions for satellite radio. Honda is a manufacturer that fits into the Point-Of-Sale category. This means that the promotional subscribers are counted at the time the vehicle is sold. Again, while Honda sales did drop off, we need to consider that other manufacturers made up for at least part of the difference.

The impact from Honda will be felt in Q2. Thus, the impact is a 54,600 units less than we would have otherwise seen from this manufacturer.

Nissan (OTCPK:NSANF)

Nissan is the third largest Japanese manufacturer. Similar to Toyota, Nissan fits into the Trailing category. This means that the impact from Nissan will be felt in Q3 and Q4 of this year. Nissan had a sales peak of just over 121,000 units in March. If we consider about 120,000 as what the company might have done, then Nissan gave up 145,000 units


Like Toyota, Nissan fits into the trailing category. Once again, this means we will see the impact in Q3 and Q4 of this year. The 145,000 units Nissan lost translates into 87,000 satellite radio equipped cars.

This is yet another kink in the proverbial hose, and these numbers add up. Savvy investors will understand this dynamic as the year progresses.

Mazda (OTCPK:MZDAF), Subaru, and Suzuki (OTCPK:SZKMF)

These three manufactures have similar impacts, though the numbers are substantially less. Suzuki has seen the least impact, but only sells about 2,000 cars per month.

The bottom line is that the biggest impact will be felt in Q3 and Q4 from Nissan and Toyota. Honda will impact the Q2 numbers. Sirius XM did cut an interesting deal with General Motors (GM) regarding used cars from any brand. These used cars will be a new hose in the trailing category. This will help ease the pain in Q4 of this year. At this point, the biggest impact seems to be Q3 of this year.

If we assume that half of the lost sales were made up by other manufacturers, and that the GM deal will absorb any Q4 lost sales then we would see the following impacts:

Q2
Honda - 27,000 units less than the company would have otherwise seen

Q3
Toyota - about 75,000 less potential subscribers
Nissan - about 44,000 less potential subscribers

If we estimate that Nissan and Toyota offer up a conversion rate of 40%, then the company would lose 47,600 subscribers that would have potentially been on the rolls.

While the prospect of 27,000 units less than what otherwise might have been in Q2 seems bad, consider that overall in Q2 there were over 250,000 more cars sold across the board than in Q1. This will more than offset the impact from the Japanese manufacturers and investors should feel comfortable with a subscriber number north of 400,000 for the quarter.

Disclosure: I am long SIRI.

Source: The Impact of Japanese Automakers on Sirius XM