Are the 1990s back?
The Detroit Three could only wish that everyone was talking about the return of flannel shirts and ripped jeans. Rather, it’s the comeback of the falling yen that’s turning up the stress these days in Auburn Hills and Dearborn.
For American carmakers, a strong Japanese currency is the business equivalent of Godzilla trolling the backyard. Many will remember the last yen shock and the impact it had on Detroit.
Back when Nirvana was king, a weak yen solidified Japanese presence in North America as automakers such as Toyota and Honda won the masses with loaded extras in their vehicles at unprecedented prices. General Motors, Chrysler and Ford were left scrambling — with their products and profits.
It took years of consumer backlash and the Great Recession to set the Michigan companies back on track. In the last couple of years, the Americans have been settling into a comfortable groove of desirable cars and growing revenue but the yen’s continuing slide could bring all of that to a screeching halt.
The yen began to weaken against the dollar in earnest last year and has so far fallen by more than 20 per cent since June 2012. A quantitative easing program announced by the Japanese government this month will most likely lead to further inflation in the Japanese economy and resultant currency devaluation.
Chrysler CEO Sergio Marchionne best summed up the gathering threat. “We didn’t need this, to put it bluntly. It’s going to make life tougher,” the Toronto-bred executive told Bloomberg in a recent interview. Ford CEO Alan Mulally and GM North America president Mark Reuss have both expressed similar concerns.
So how tough will it be? Japanese manufacturers had it pretty rough prior to the second half of 2012 because the yen was on the rise at that point. Combined with supply chain issues and safety-related issues, even the mighty Toyota, which locally produces about 60-to-80 per cent of the cars it sells in North America and is thus far more cushioned from currency upheavals, went for a tailspin. At that point, many auto manufacturers were being bullish about moving production out of Japan to increase profitability.
Now that market conditions have flipped, competitors can expect some aggressive business moves from the Japanese to make up for lost time and dollars.
A weak yen allows Japanese automakers to make more profits from selling cars in the U.S. and Canada, particularly those manufacturers that export most of their products from Japan.
The purported financial gains vary – depending on who you ask. Morgan Stanley estimated that Japanese car companies could be making about $1,500 extra per car while Detroit lobby groups peg the competitive edge at about $5,700. My own assumptions are closer to Morgan Stanley’s, at about $2,500.
Whatever the amount, the extra cash can be a double-barreled weapon. First, it can be funneled back toward research and development efforts, which can lead to quicker and relevant product updates.
For instance, Toyota may not gain a lot from North American sales because of high local production, but the two-million-plus vehicles it exports to other regions of the world from Japan could add a significant heft to their overall cash flow.
The automaker has been eyeing a major overhaul of its vehicles by 2014, and the added dough will allow them to equip their cars with more bells and whistles, which might deal a strategic blow to North American competitors.
Second, a higher margin cushion can translate to more marketing dollars and deeper discounts at dealerships, setting off a price war.
Although Toyota Canada president Seiji Ichi has previously stated that he is not into “crazy incentives,” smaller Japanese brands such as Mazda are passing on their operational gains to their customers by slashing lease and finance payments on select models.
Mazda, which imports all its Canadian vehicles from Japan, is already reaping dividends. Thanks to the yen’s downward march, the company was expected to turn a profit last quarter for the first time in five years. Toyota Motor Corp. also raised its profit forecast for the year ending March 31 by 10 per cent.
Despite these uncontrollable market forces, I think the Detroit Three are better equipped to ward off the threat this time. These companies are in top financial shape, their product lineup is strong and, most importantly, they have a historical point of reference to build effective counter-strategies.
All we can hope, to quote Kurt Cobain, is that they are “not over-bored and self-assured.” Otherwise, it will be the 90s all over again.
Kumar Saha is a Toronto-based automotive analyst with the global research firm Frost & Sullivan. email@example.com
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