Detroit Is Getting Sideswiped By The Yen

Japan's carmakers have cut prices--and could go even lower

In late 1993, the Big Three auto makers were reveling in an average price advantage of $3,000 per car over Japanese models. The rising yen was well on its way to a mid-1995 peak near 80, and Japanese carmakers were facing big losses in the U.S. as a result.

Now, it's payback time. The yen has plummeted to 114 per dollar, and economists say that it could sink as low as 130. Detroit's price advantage is rapidly evaporating, just as consumers are worrying more about the affordability of new cars and economists are fretting that auto sales are in danger of a slump. Worse still from Detroit's standpoint, Toyota Motor Corp. and Honda Motor Co. dramatically improved efficiency costs while the yen was strong, designing models so they could be profitable even at 80 or 85 yen to the dollar. When it comes to cutting product costs, says Deloitte & Touche auto consultant Randall Miller, "the Japanese have a two- to three-year head start on the Big Three."

MILD IMPACT. Will a weaker yen send Detroit into a fatal skid? Hardly. U.S. auto makers are more efficient and their cars are much better than a decade ago. And since Japan has transplanted more manufacturing to U.S. soil, the yen-dollar gyrations won't have as sharp an impact as they once did. Last year, just 1.2 million vehicles were shipped to the U.S. from Japan vs. 3.4 million a decade ago.

Still, Japanese car companies have cut prices by 1.1% for the 1997 model year while Detroit has hiked them 2.8% on average, calculates auto consultant Susan Jacobs, president of Jacobs & Associates in Rutherford, N.J. Analysts say lower prices could start to nudge Japan's U.S. car market share up from its longtime level of 30%. Says Ford Motor Chairman Alexander J. Trotman: "The Japanese pricing has been quite challenging, and that certainly does increase the competitive heat."

Japan's strength shows especially with new models engineered during the strong-yen, slash-costs era. Toyota's 1997 Camry family sedan, built in Georgetown, Ky., is priced $550 to $1,750 below comparably equipped 1996 models. And the new Lexus ES300 low-end luxury sedan, which is imported from Japan, is priced at $30,395, $2,500 lower than the model it replaces.

Detroit is vowing to fight back. Already, General Motors Corp. and Ford are using more rebates and other financing incentives to lower prices. For the long term, Detroit is pushing to design lower-cost cars. The Big Three have also been lobbying the Clinton Administration. Detroit is irate that Washington isn't discouraging Japanese bank intervention to weaken the yen, especially since those moves undermine U.S. auto makers' hopes of making inroads in Japan. "There isn't any question that it erodes our competitiveness to export, and thus it costs American jobs," says Chrysler Corp. Chairman Robert J. Eaton. But with Big Three profits running high, their protests seem to fall on deaf ears.

To the Japanese, Detroit's complaints have crybaby overtones. Says Richard D. Recchia, executive vice-president of Mitsubishi Motor Sales of America Inc.: "Any time there's any little blip in historical patterns in the automobile industry, the Big Three say that the yen is the cause of the problem."

GLOBAL EXPANSION. Still, there's no denying that the weaker yen is a profit windfall for Japanese auto makers. A move from 95 to 115 yen to the dollar translates into more than $6 billion in additional operating income for Japan's auto, makers, according to Christopher Redl, an analyst with ING Barings Ltd. Flush with this cash, Toyota and Honda are raising spending on product development from about 5% of sales to around 6%.

Japan is also using that money to fund international expansion, such as Toyota's new $700 million pickup truck plant in Princeton, Ind. Nissan Motor Co. on Oct. 22 announced plans to move assembly of its Sentra small car to an underutilized Mexican plant from Smyrna, Tenn., clearing the way for Smyrna to build a new vehicle, probably a sport utility. The move will boost North American annual production by nearly 150,000 units over the next three years, Nissan says. No doubt that's a scary prospect for Detroit. But at least Nissan and Toyota will not be making those vehicles in Japan. The way the yen has been going, that's a plus for Detroit.

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