Yen a soar spot for Japanese
Carmakers retool to absorb hit from exchange rate losses
Hans Greimel
and Mark Rechtin
Automotive News -- August 23, 2010 - 12:01 am ET


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TOKYO -- With the yen hovering at a 15-year high against the dollar, Japan's automakers are moving quickly to limit the damage from currency exchange losses.

Companies are adjusting production plans, reviewing price strategies and taking a fresh look at the wisdom of exporting small cars from Japan. They also are trying to engineer cost out of vehicles exported from the home country.

The yen has climbed 7 percent this year to ¥85 to the dollar, a level not seen since the mid-1990s. The exchange rate was about ¥95 to the dollar a year ago and about ¥110 in August 2008.

The strong currency is undercutting the value of profits sent back home and could lead Japan's automakers to raise prices on cars made in Japan. A car that earns $20,000 was worth ¥2.2 million two years ago. Now it is worth only ¥1.7 million. But it costs the same to make.

In the most recent quarter, all Japanese companies reported improved earnings from a year earlier. But they took big hits from foreign exchange losses and warned that things could get worse.

In the April-June quarter alone, foreign exchange losses trimmed ¥30 billion ($338.4 million) from Toyota's net profit. For the full year, Toyota predicts a ¥120 billion ($1.35 billion) blow.

Toyota is considering price adjustments and looking at changing the product mix, said Senior Managing Director Takahiko Ijichi, who did not give specifics.

Atsushi Niimi, Toyota's global production chief, said it no longer makes sense to build small cars such as the Yaris in Japan for export.

Nissan quit making its March compact in Japan and now ships the cars to Japan from Thailand. Nissan's decision to produce offshore a mass-market car for the home market was billed as a first in Japan.

Nissan COO Toshiyuki Shiga called for the Japanese government to slow the rise of the yen.

"I am concerned the stronger yen may begin eroding our earnings from exports," Shiga said at a press conference this month.

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Toyota production chief Atsushi Niimi: Building small cars in Japan for export no longer makes sense.


Japan's carmakers have been down this road before. When the yen last reached these heights, the financial damage to Japanese automakers was severe. In the fiscal year that ended March 31, 1995, exchange rate losses accounted for $3 billion in lost revenue globally for all the companies combined.

But for the most part, sticker prices didn't rise in the United States to make up that revenue. That led to charges from such Detroit 3 executives as David McCammon, then-Ford vice president of finance, that Japan Inc. was dumping its cars onto the U.S. market.

This year, both the dollar and euro have been falling against the yen. It is not so much because the Japanese economy is strong but because the U.S. and European economies are so weak. Concerns about a double-dip U.S. recession are sapping the dollar's strength, while the euro has been torpedoed by the Greek debt crisis.

"There is no instant remedy for foreign exchange," said Tatsuo Yoshida, an auto analyst at UBS Securities Japan. "Raising prices is the only effective short-term measure, but that depends on the market and the competition.

"And right now, the U.S. market is very soft, so doing that runs the risk of losing volume."

Toyota's Ijichi said that over the medium term, the company will try to develop vehicles that can be profitable even if the dollar stays at ¥85 to ¥90 to the dollar. But he did not provide specifics on how that would be done.

Some more vulnerable


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Instead of building the Prius hybrid at its new plant in Blue Springs, Miss., Toyota will build the Corolla there. The small car's low margins make it costly to export to the United States, given the rising yen.

Some companies are more vulnerable than others. Toyota exports about half its Japanese production; Nissan, 53 percent; and Honda Motor Co., 30 percent. Especially vulnerable is Mazda, which exports about eight in 10 of its Japan-made cars.

Toyota's Niimi told Bloomberg this month that the expensive yen made it hard to build small cars in Japan profitably.

"Given the current exchange rate situation, it isn't feasible, in terms of a business model, for us to produce Corolla or Yaris in Japan and export them," he said. "We're working very hard to reduce costs to maintain the appeal of these cars."

The need to offset such exports is one reason Toyota recently revived its delayed plan to open a new plant in Blue Springs, Miss. Instead of building the Prius hybrid there, as planned, Toyota will build the low-margin Corolla.

The Corolla used to be built at Toyota's NUMMI plant, but production was partially shifted back to Japan after the California plant was shuttered.

All together, imports have accounted for about a third of Toyota's total U.S. sales this year.

"It used to be that we'd support local production with exports from Japan to bridge local demand," Niimi said. "From now on, our overseas plants will have to move toward having the autonomy to handle local demand and risks by themselves."

The strong yen prompted Toyota's recent decision to consolidate production of its Highlander crossover in Princeton, Ind. The company had been importing from Japan about a fifth of Highlanders sold in the United States.

In Japan, Toyota aims to make its factories more cost-efficient. The company wants to trim capacity by combining lines and producing similar vehicles in the same plants.

Toyota also wants to make more lines flexible enough to simultaneously handle production of body-on-frame trucks and SUVs and unibody vehicles. The Indiana plant is currently the only Toyota factory capable of that, Niimi said.

Said Toyota Division boss Bob Carter: "When the currency goes one way, you hit it out of the park. When it goes the way it is now, you just have to suck it up and do better."

Carter said Toyota Motor Sales U.S.A. doesn't plan to go beyond its existing cost-cutting measures to deal with exchange rate pressures.

"You need to take a medium- and long-term view of these things," he said. "You can't let these short-term things affect your strategy."


Still expanding


Nissan COO Toshiyuki Shiga wants the Japanese government to slow the rise of the yen.

Honda expects the foreign exchange pendulum to swing the other way.

"The vehicles that we make in Japan at ¥85 to the dollar are not economically feasible," Honda CFO Yoichi Hojo told reporters recently. "I don't think it will last. It's just impossible for [the yen] to stay at these levels in the long term."

Honda plans to buy more components overseas but continues to expand at home. In July the company announced it was resuming plans to build an assembly plant for hybrid cars that will open just north of Tokyo in 2013.

Yoshida of UBS Securities said a slight bump up in prices could occur during the next round of annual pricing this winter. But he said removing content or making standard items optional is too risky because it takes value out of the vehicle.

Yoshida said Japanese carmakers are better positioned than they were in 1995, mainly because they have expanded U.S. production. They also have made big strides in cutting costs and manufacturing efficiently.

Honda's North American production accounted for 68 percent of U.S. sales in 1995. Now the figure is 90 percent, so the company is more insulated from the impact of a strong yen.

Yoshida thinks Japanese automakers can remain profitable even if the dollar slumps to the ¥80-to-¥85 range.

Said Yoshida: "It's amazing that Japanese automakers are still able to break even when the dollar is under ¥90. It used to be they couldn't break even at ¥100.