Toyota Motor Corp. (7203), which last year overtook General Motors Co. (GM) to become the world’s largest automaker even as its profit margins lagged behind the industry, is riding a weakening yen that has Detroit executives concerned.
The yen has fallen 17 percent against the dollar since Oct. 31 as Shinzo Abe, who became Japan’s prime minister in December, advocated for the decline to improve his country’s economy. The currency’s slide gives Toyota and other Japanese automakers a financial gain on every car, which they can use to cut prices, boost ads and improve products. Morgan Stanley estimates the currency boost at $1,500 per car, while the Detroit automakers contend the figure is $5,700 per vehicle.
“We’re concerned about what the long-term ramifications are,” Joe Hinrichs, Ford Motor Co. (F)’s North American chief, said last month at a Cleveland engine factory the automaker is expanding. “Our workers and our businesses should not be disadvantaged by governments intervening in currencies.”
Asked about the swooning yen last week at the Geneva Motor Show, Sergio Marchionne, chief executive officer of Chrysler Group LLC and Fiat SpA (F), told Bloomberg Television: “We didn’t need this, to put it bluntly. It’s going to make life tougher.”
The yen’s impact is already falling to the bottom line. Toyota last month raised its profit forecast by 10 percent for the fiscal year ending March 31, to 860 billion yen ($9 billion), a five-year high. That would more than double the previous year’s profit and signal a complete comeback from the global recalls and 2011 Japanese earthquake that shook Toyota’s standing as a leader in earnings, sales and quality.
“Ever since the new government took control, it feels as though Japan is filled with the spirit for economic revival,” Toyota Senior Managing Officer Takahiko Ijichi said Feb. 5, the day the company boosted its forecast. “Some say that they can’t feel any real substance in the whole ‘Abenomics’ phenomenon, but as a result, it’s weakened the yen and boosted stock prices.”
Toyota has risen 58 percent since Oct. 31, as Japan’s currency began weakening, and closed at 4,855 yen yesterday, down 2.9 percent. The shares closed at 5,000 yen March 11, the highest since Aug. 19, 2008; that was before Toyota had to recall 10 million vehicles worldwide for suspicion of unintended acceleration and before it reported a $4.36 billion loss in the 2009 fiscal year, its first annual loss in 59 years.
Toyota’s currency tailwind comes as Detroit is experiencing its own surge. GM, Ford and Chrysler are expected to sell about 6.76 million cars and trucks in the U.S. this year, the most since 2007, according to the average of six analysts surveyed by Bloomberg. An overhauled lineup of sedans will drive Detroit’s share of the U.S. small and midsized car market up to 33 percent next year, from 26 percent in 2009, according to researcher LMC Automotive.
Detroit automakers say they fear that it’s like the 1990s and 2000s all over again, when a weak yen enabled Japanese automakers to offer cars loaded with extra features at prices the U.S. companies couldn’t match. It took government-backed bankruptcies at GM and Chrysler in 2009 and a wrenching restructuring at Ford (F) to get their costs in line with Toyota. Now, Detroit’s gains are being eroded, Adam Jonas, auto analyst with Morgan Stanley, said in an interview.
“This is, without a doubt, the biggest change affecting the global auto industry,” he said. “The dollar versus the weak yen will make the Japanese automakers richer and they can use those profits to target more-aggressive growth. Ford and GM are in their bulls-eye. This is a real threat.”
Most to Gain
Toyota has the most to gain because it exports more than 2 million vehicles from Japan annually, which now become more profitable when sold in the U.S. or Europe, according to a Feb. 27 report from Deutsche Bank entitled “Re-rising Sun?” About 27 percent of the models Toyota sells in the U.S. are imported, compared with 10 percent by Honda Motor Co. (7267), Deutsche Bank said.
“We see Toyota as having the most to gain from a weaker yen with improved profits on exports of over 2 million units driving net margins from a lagging to leading position,” wrote Deutsche Bank analysts Jochen Gehrke and Kurt Sanger, who see Toyota’s net profit margin topping 6 percent next year, up from 1.5 percent in the year ended March 31, 2012.
Toyota’s net margin in its latest fiscal year was the worst among global automakers with a market value of more than $10 billion, according to data compiled by Bloomberg. Honda had a net margin of 2.7 percent in the year ended March 31, 2012, while GM’s net margin was 4.1 percent in its fiscal year ended in December, the data show.
By certain measures, investors haven’t changed their perception of Toyota since Abe became prime minister in December. Shares of Toyota are now valued at 13.3 times estimated earnings, compared with 14 times at the end of December, according to weekly data compiled by Bloomberg. Toyota now trades at a 55 percent premium to GM, compared with a 91 percent premium at the end of last year, the data show.
The yen may help the automaker achieve Chief Executive Officer Akio Toyoda’s goal of selling 10 million cars and trucks globally by mid-decade. Last year, Toyota sold a record 9.7 million vehicles worldwide, overtaking GM, which sold 9.2 million cars and trucks globally.
“Our M.O. as a company is to do our best to reduce currency fluctuations by localizing” production, Curtis said. “Whether it’s a greenfield plant that came online a year and a half ago in Mississippi or the expansion of our component plants or the expansion of capacity for Highlander, across the operations in North America, that’s the way we’ve approached this.”
Yet even Toyota’s North American production benefits from a weaker yen, according to Deutsche Bank. Citing data from the National Highway Transportation Safety Administration, Deutsche Bank said 15 percent to 35 percent of the parts in Toyota’s North American-built models actually come from Japan.
The weak yen may motivate Toyota to build more cars in Japan in order to keep a closer eye on quality, said Kevin Tynan, auto analyst for Bloomberg Industries.
“Toyota feels like the production and quality process got away from them during the global recall,” Tynan said. “They felt like they got burned by the idea of chasing margin or chasing the bottom line because of the yen and having to move production because that’s what the investor base wanted. This allows them to keep production closer to home.”
Toyota’s new pricing and profit power is putting Detroit on edge, said Jonas, who visited with top executives at GM and Ford late last month.
“When we asked Ford what are people talking about, the first thing they said was, ’The yen’,” Jonas said. “They said, ’We’re watching it very carefully, but we don’t see any signs yet of any aggression.’”
Toyota typically doesn’t discount as deeply as Detroit automakers, Jonas said. So rather than waging a price war, Toyota may show a delayed yen effect. It’s replacing 60 percent of its lineup by 2014 and now can afford to appoint those models with more lavish interiors and high-tech features, Jonas said.
The result is almost certain to cost Detroit market share.
“You’d be foolish to think it would not cost them share,” Jonas said. “We could see the Japanese gaining a couple points of share in the U.S.”
Last year, Toyota’s U.S. market share rose to 14.4 percent from 12.9 percent in 2011 and sales soared by 27 percent as the Camry remained the top selling car in America for the 11th consecutive year. In this year’s first two months, Toyota’s U.S. share expanded to 14.5 percent as its sales jumped 14 percent. The lift from the yen is occurring as some Toyota mainstays, such as the Camry, face intensified competition. Camry sales fell 9.5 percent last month.
Detroit’s Washington lobbyists are crying foul over what it sees as an unfair advantage Toyota and other Japanese automakers are gaining from Japan’s retreating currency.
“This enables them to reduce the price of their products in the U.S. or in other markets where we’re competing with them not because of the cost of their products, but because of their currency manipulation,” Matt Blunt, president of the American Automotive Policy Council backed by GM, Ford and Chrysler, said in an interview. “Japanese automakers have a $5,700 per car advantage because of their currency manipulation.”
Blunt, the former Republican governor of Missouri, has urged President Barack Obama to press Japan to open its market to U.S. autos and ease its currency intervention. While Obama discussed Japan’s auto market in a Feb. 22 Washington meeting with Abe, the president didn’t say they discussed the yen.
Federal Reserve Chairman Ben S. Bernanke endorsed Abe’s currency policies in Congressional testimony Feb. 26, saying it was “mutually beneficial” if major economies take steps to boost demand and eliminate deflation.
“We don’t view monetary policy aimed at domestic goals as being a currency war,” Bernanke told the Senate Banking Committee. “It’s not like putting tariffs on your imports, so that you can beggar-thy-neighbor to the benefit of your domestic industries.”
It would have been hard for Bernanke to argue otherwise since the monetary policies of the U.S. central bank have depreciated the dollar while trying to stimulate the economy, said Sanger of Deutsche Bank.
“While the companies in Detroit have rushed to call for action, you will notice that the U.S. government itself in a recent meeting of heads of state did not make such complaints,” Sanger wrote in an e-mail. “How could they?”
Abe’s policies are already yielding results: Last week, Japan reported its economy returned to growth in the fourth quarter as the yen fell to a near 3 1/2-year low against the dollar.
The yen’s slide follows a period when it became “oddly strong” as the U.S. and Europe weakened their currencies, Sanger said. The yen rose 17 percent against the dollar from the end of 2009 through Oct. 31, 2012, the largest gain of any currency. By historical standards, the yen remains strong. It is trading at about 95 to the dollar now; for previous 10 years, its average was 100.73.
“From the Japanese perspective, it is more like the playing field has been leveled,” Sanger said.
That’s not how Detroit sees it.
“As all these countries struggling with a global economy that just isn’t working quite as strong as what everybody would like it to, you could see competition among ’my rate’s weaker than your rate’,” Bob Shanks, Ford’s chief financial officer, said last week on an investor call organized by Jefferies & Co. “So the Japanese weaken, and then the Koreans will weaken, and somebody else will weaken. We’ve already seen a bit of that.”
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