By on November 6, 2010

Despite the riproaring profit numbers, there is trouble in Toyota City. The ever appreciating yen is gobbling up ToMoCo’s profits. Message from Toyota to the Japanese government: “Do something, or we leave.”

Reports The Nikkei [sub]: “In comments that appeared to be aimed at Japanese currency authorities, Satoshi Ozawa, Toyota’s chief financial officer, said the carmaker might move more production outside Japan if profits in the six months to March declined further than expected.”

Translation: Bring the stronger and stronger yen in check, or you’ll be writing unemployment checks instead. Koji Endo, an automotive analyst at Advanced Research Japan already says that Toyota’s carmaking business is losing money, while their financing business is bringing in the bacon.

According to The Nikkei, “the warning, delivered at a quarterly earnings briefing in Friday, will add to pressure on the government over the yen’s ascent toward a 15-year high against the dollar. Akio Toyoda, Toyota’s president, last month called the surge a “big problem” that threatened all of Japanese industry.”

Now before the contingent that hasn’t passed currencies 101 yells “currency manipulation,” here a short primer. There is “currency manipulation,” there is “quantitative easing,” and there is “central bank intervention.” Just like with terrorists and freedom fighters, it depends on which side you are on. Maybe the Japanese should ask Bernanke on how to weaken a currency. He’s quite good at it at the moment. Recently, the stronger yen was a function of the weaker dollar.

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14 Comments on “Toyota To Japanese Government: If The Yen Gets Any Stronger, We Go...”


  • avatar
    John Horner

    No country can be a net exporter forever. No country can be a net importer forever.
     

  • avatar
    Trend-Shifter

    I love how in the past everyone would say “currency valuations don’t matter” and that it was all about making a vehicle the consumer wanted.   Take right foot shoe and place on left foot.  

    Maybe the US government finally gets it that the “point of manufacturing” matters.
    QE2 is just another way to take a page out of the Asian trade playbook.   

    That said, is this an issue of repatriating profits on the books or actual manufacturing costs?  
    Japan may have a different model than say the US & China.  Japan must import a large portion of their raw materials.   With raw materials being a large portion of automotive manufacturing costs, the strong yen could reduce raw material costs. 
      
    So a little deeper analysis is required, is it really a Japan main street problem or a Nikkei problem?     
     

    • 0 avatar
      Robert.Walter

      Assuming the %-age of what was imported vs. what was exported stayed the same:

      (and this certainly is not the case because Japan has steadily been exporting component manufacturing to low-cost countries – so, in theory, japanese OEM cost structure should be decreasing, at least on the component side, which makes up nearly 70% of the cost of a new car)

      then assuming other costs have not risen out of control, one should be seeing a net increase in profit margin.  When this is not the case, then there must be other structural issues, (or issues being attributed to the currency situation) at work.

      To a certain extent, Toyota’s vertical integration and US-transplant factories may be working against them … since their US cash-flow is in USD, this would mean that as the USD declines, their variable procurement costs (for raw materials or components imported into the US) will also rise.

      If cost increases can’t be recovered via cost-downs, either internally or extracted from the supply-base (and in TMC’s case, much of the supply base is internal), or price-ups to the customer, the variable profit generated by these operations will be reduced due to margin-squeeze and further reduced when the cash is repatriated to JPY.  This might result in TMC putting this USD income to use by making major investments in the US or in locations where the USD-exchange rate is not as distorted as it is against the JPY ((but where?)).

      For the vehicles which are produced in Japan and exported to the US this issue exists as well … if the prices on the Priuses and the Lexuses are not rising in line with the exchange rate, then there has to be major margin squeeze going on there too.  (Even if TMC-japan is able to continue to wholesale these vehicles to TMC-US with the same previous margin, and if the dealer body is not raising prices (are they?) or paying higher wholesale prices and suffering reduced margin (are they?) this would mean that TMC-US is subsidizing this phenomenon by covering the squeeze out of its US-generated operating profits.  (Of course taxes and transfer pricing plays a role in this game, but is beyond the scope of my comments here.)

  • avatar
    LXbuilder

    The Japanese have manipulated the yen for years to the benefit of the Japanese auto industry.
     All the while the US auto makers get nothing but “hurdles” from the Feds. And when they do get help during this recession/depression everyone whines about it. The competition has been propped up in Japan and Germany all along and no one makes even a peep about that.

    • 0 avatar
      Robert.Walter

      And what special hurdles did the Big 3 get that were not also required of any non-Big 3 OEM?  Big 3 did get special accomodation regarding CAFE being split into car and truck requirements, also on vehicle content labelling, on restricting grey-market imports (although this also benefited importers as well.)  The lack of harmonization of neither FMVSS with Euro-crash regs, nor the EPA emissions cycle with the Euro-emissions cycle, or the Japanese cycles accrued mostly to the benefit of Detroit, same could be said of Diesel-emissions regs.

      Although today it not as extreme as it was in the past, due to the high-vertical integration of the transplant OEMs, those companies (esp on imported product) still have to more or less double design, tool, test and validate their crash and emissions performance.

      I really would like to know where Detroit has been hobbled except by it’s own insularity, hubris and denial of reality.  Had they not fought much of the FMVSS/EPA regs, they would have been world leaders on the technology, and it would have served as a major barrier to entry to foreign competition…

      Currency manipulation aside, the US-market was opened to the japanese and the germans so as to encourage economic and political stability after their defeat in WW2 and as a hedge against the rise of communist interests … regardless of the open market policy, neither the japanese nor the germans would have gained more than a toe-hold had Detroit taken them seriously (as Detroit spoke derisively of “rice burners”, etc., (even when on the defensive and ceding market-share), the japanese were talking “kaizen” and both the japanese and the germans were moving steadily upscale from success to success.)

      (And these harsh words come from a native Detroiter, with deep emotional and financial ties to H.Pk./A.Hls and Dearborn.)

    • 0 avatar
      OldandSlow

      Yep Japanese manufacturers benefited from currency manipulation, just as Chinese manufacturers are benefiting today – they didn’t rest on their hind ends with regard to what they were producing
       
      By the late 1980′s, the Toyota and Honda built some very dependable subcompact and compact vehicles versus the Detroit 3.  The second tier Japanese car manufacturers, Nissan, Mazda, etc. had to work at staying competitive with Toyota.
       
      By the middle of the 1990′s – Japan’s big two were building some very desirable vehicles and taking on the Germans in some cases.  Meanwhile their US competition built small cars that usually rated as good enough for North America versus world-class.  This when the Civic and Corolla seemed so much more refined than their Detroit rivals.
       
      While there is no question that the Japanese companies benefited from an artificially low Yen to Dollar exchange rate and lower legacy costs with regard to labor,  they improved their offerings.
       
      It is ironic that once they increased their market share to near Ford and GM levels – the Big 2 from Japan became complacent.  Witness Toyota having to play the incentive game in North America at a time when the Yen has appreciated against the US Dollar.
       
       

  • avatar
    Robert.Walter

    “…Toyota’s carmaking business is losing money, while their financing business is bringing in the bacon.”

    This is how it was in Detroit … some actually joked, some were serious, that Ford or GM might as well get out of the car-making business to focus on banking and finance … problem was that these captive banks had little experience in retail, investment, or financing anything other than car sales.

    But even when FMC and GM made forays into these other banking areas it did not work out all that well … Ford bought and sold The Associates to what end?  Had to pump IIRC 6-700M USD into FMCC… And GMAC was laid low by its experiments into residential mortgage (as well as subsidizing vehicle leases.)

  • avatar
    L'avventura

    There is very little substance for Toyota’s threats, primarily because they have already been carried out.  Setting up large scale factories overseas isn’t a spontaneous decision, and Toyota already has factory plans spanning to 2015 (eye on Mexico and South East Asia).  Who knows where the yen will be by the time the factories are built.
     
    Expanding Japanese capacity has long been dead, they’ll keep their existing capacity, they’ll lower the amount of Japanese temporary workers (which is a large portion of their mfg workforce), but they won’t layoff their union workers.  Japanese made cars will remain Japanese focused vehicles and cars higher on the value chain.  This is how they’ve been for a long time.
     
    The fact is Japan has little they can do with the yen, they can intervene in the currency market, and they too can do a massive round of QE.  But none of that will have lasting effects as competitive devaluation means it’ll be a race to the bottom as much larger countries like the US and China are moving a lot more money then Japan.  All parties lose in the end.  And its an expensive move that will ultimately yield very little.
     
    The yen will stay strong as the US stays weak, and any currency intervention will not happen until it is discussed at the upcoming G20 meeting in Seoul.  In October Japanese firms acquisition of foreign companies have jumped 20%, the Japanese have been buying out billions in foreign assets.  The Japanese are finally building up their global supply chain, but this can’t continue forever.   No country can survive long in a world where every country is jumping over-themselves to devalue their currency.
     
    What Toyota, and the rest of Japanese business, really care about isn’t the high-yen.  They are pushing for the US-led Transpacific Partnership (TPP), which will be a free trade agreement for pacific region as well as the US.  This is the biggest FTA in memory and Japanese businesses, via the Keireidan, are pushing this issue HARD.
     
    Summary:
    Currency fluctuations are an inevitability as developing nations grow, weakening the yen will only be a temporary solution for Japan.  A weak yen won’t keep manufacturing in Japan in the long-term, and Japanese companies are already building up their mfg capabilities globally using the strong yen to protect themselves from regional instabilities.  Japanese companies are pushing for more FTA agreements to make this global supply chain run efficiently.

  • avatar
    AaronH

    Print and Spend…Print and Spend…………

    A race to the inflation bottom…What the political terrorists and their voting parasitic retards don’t steal in taxes they will steal in inflation. The global monetary system is just one big counterfeit racket.

  • avatar
    UnclePete

    Just as an aside, it probably would have been more apropos to use one of those old Toyota chassis U-Haul trucks for the picture!

  • avatar
    Jerry Sutherland

    Here in Canada the Liberal government managed to keep the dollar artificially low in the 1990s.It was PM Jean Chretien’s strategy to keep Canadian manufacturing humming along.It worked for the rest of the 90s, but now we have grossly inefficient  productivity thanks to the huge lag in technology that was allowed to occur during this vote buying safari.


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