By on September 20, 2011

When we went on the plane this morning for the some 600 mile trip to see a Nissan plant in Kyushu, the southernmost of the four main Japanese islands, we asked ourselves: Why?

After all, the plant had been there since 1975. What’s new? We soon should find out: Nissan CEO Carlos Ghosn went on a full frontal attack against the high yen, threatened several times that Nissan and most of the Japanese industry would pack up and leave, and delivered an ultimatum: “If six months down the road we are still in this situation, then this will provoke a rethinking of our industrial strategy.”

The Kyushu plant was the perfect venue: It sits halfway between Yokohama and Shanghai. South Korea, the land of the cheap Won, is some 150 miles across the water.

The Nissan plant struts into the water like a huge ship that is ready to sail. Nearly half of Nissan’s Japanese production rolls off the lines in the Kyushu plant, and the lion’s share rolls right into huge car carriers, docked at Nissan’s private deep-water port. 57.4 percent sailed across the Pacific last year , and on to North America.

Soon, this port will see incoming traffic: As a first step to ward off high yen denominated costs, Nissan will increasingly import parts and components from South Korea and China.

Carlos Ghosn tried his best to make this choice palatable for local dignitaries and a sometimes fiercely nationalistic press:

“Importing from China does not automatically mean that we stop buying from our Japanese suppliers. Many Japanese companies have plants in China. What is better than Japanese supplier? It is Japanese suppliers with the benefit of competitive production.”

A few sentences later, it was no longer that clear-cut:

“We will also use our Japanese suppliers in China – or Chinese suppliers, and we will use Japanese or Korean suppliers from South Korea.”

In this case, the high yen makes the imported parts cheaper. But cheaper parts are not enough to withstand the “strong headwinds” that Ghosn mentions again and again as he winds up to the real topic of the day: the obscenely high yen.

“This exchange rate is abnormal.”

Ghosn says this again and again, as if we aren’t talking about foreign exchange, but something that belongs on a list of sex offenders.

“Two months ago, we were fighting the yen at 90, and we were asking for a more reasonable rate. Instead of the rate becoming more reasonable, then yen went to 85 against the dollar, and then 80, and now 77. Common sense tells us what we are seeing today is abnormal.”

After saying several times that the rate is deviant, Ghosn signals what will happen if the currency won’t go where it belongs: In the past, he had committed that a million cars will be built in Japan. That is less than a quarter of what Nissan makes worldwide. But even that will change if the Yen won’t get cheaper:

“This exchange rate is abnormal. If I thought that the exchange rate would remain the way it is today, there would be a lot of decisions made at Nissan today that would be unfavorable to locating car production in Japan. I don’t think this is sustainable for the economy, I don’t think it is sustainable for Japan, I don’t think it is sustainable for the industry. I know how much we are struggling, and how much our competition is struggling, and I don’t think it is going to last. The only question is how long the pain is going to be endured. We are still in the mood of saying that it is going to correct. We are making investment decisions based on faith. But if the exchange rate will remain at this level for a very long time, a lot of decisions will be reversed. We stick with one million cars in Japan because we believe in common sense and we believe that at the end of the day nothing abnormal will remain abnormal, and long-term trends will prevail.”

Ghosn wants to see this change fast:

“Given the choice, we stay in Japan, This is our home, this is our base. If we go, then because we are forced out. If in six months down the road we are still in this situation, then this will provoke a rethinking of our industrial strategy. Personally, I don’t think this will be the case – but  I may be wrong.”

Toyota finds itself in a much more precarious situation. Toyota makes nearly half of its global production in Japan, and committed to 3 million units made at home. Spokespeople at Toyota had no fresh comments and referred to past statements by their executives.

At the August 2 financial results press conference in Tokyo, TMC’s Senior Managing Officer Takahiko Ijichi said that 76 yen is extremely difficult and might exceed the limit for domestic production. He had mentioned the importation of parts, but was wary of the quality of the product Toyota gets from suppliers.  At the May 11 full year financial results conference, TMC’s CFO Ozawa said that Toyota could break even with 6.6 million units at 85 yen to the dollar.

Today, a dollar bought 76.5 yen, far away from what Toyota needs to make a profit, and far away from what Ghosn thinks is normal. Let’s pray it will change soon.




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38 Comments on “Carlos Ghosn: The Yen Is Abnormal, And We Won’t Live Much Longer With That Deviant...”

  • avatar
    DC Bruce

    I sympathize with Mr. Ghosn’s problem, but why does he act as if the Japanese government has much — if any — ability to solve it? The policies of the US Fed and the administration have been to drive the dollar down — just look at what the dollar now buys in commodities — oil, gold, etc. Or look at the dollar vs. the Euro, the Canadian loonie, the Australian dollar, etc.

    All of this, of course, relates to an undeclared currency war against China by the U.S. The Japanese and the Europeans are just caught in the crossfire, so to speak.

    • 0 avatar

      If you wanted to compare the value of the currencies through commodities, then you should have picked two more stable than gold or oil. Both are notoriously driven by speculators, gold especially so. If you look at the value of the dollar in terms of stable commodities, there has been some decline in value but not to the extent commonly believed.

    • 0 avatar

      The fact that China undervalues its currency– in effect, a government subsidy– is NOT what I would an “an undeclared currency war against China”– if anything, the Chinese have declared economic war against the US, by selling products below cost, in order to smash American-made products, and thus, make the US a colony of China.

    • 0 avatar

      Agreed – there isn’t much the Japanese government can do about the value of the yen, they have been printing money for over 20 years, at this point there just aren’t any bullets left in the gun.

      The US has become much more competitive of late, thanks to the rapid devaluation of the dollar.

      I expect that bulky items such as cars will either be made in the markets they serve, or in “cost to market” locations nearby. For North America, this would mean the US, Canada or Mexico.

      I just can’t see the point of building mainstream high volume cars for export in Japan these days. Nissan isn’t a premium brand, and they don’t have enough pricing power to charge a huge premium for their badge. How many people would pay more for a Nissan over a Ford or Hyundai, assuming all products were otherwise equal?

  • avatar

    The plant is next to the water – directly subject to a tsunami?

  • avatar

    I too sympathize with Mr.Ghosn, but I really feel for the wokers in the plants.

    It is what it is.

    Here in Canada the Loonie and the Greenback are around par. Ontario has Toyota,Honda,GM,Ford and Chrysler plants. At one time we were one of the biggest suppliers of parts, and vehicles in North America. Today?….not so much.

    Can you imagine the reaction were Canada to manipulate our currency?

    • 0 avatar

      We don’t need to ‘manipulate’ the loonie. Every time it gets worth too much, Jim Flaherty steps onto a podium and announces to the world media that ‘a strong Loonie is hurting the Canadian economy’ aaaaand BINGO. The loonie drops in value against the greenback for a month or so. Then it creeps up again and Flaherty makes the same statement again… ad infinitum.

  • avatar

    Bertel, did you shoot those photos? If so, great job. Those gestures of Ghosn’s are crying for captions.

  • avatar

    In a previous life, I was the Japanese desk officer for the U.S. Treasury Department. Believe me when I say that the Japanese can control the value of the yen. The easiest way is to lower interest rates, causing foreign investors to sell Japanese bonds. The proceeds would then be converted to a non-Japanese currency, reducing the value of the yen. The problem here is that Japan’s central bank interest rate is already zero. A second way is for their Treasury to sell yen and buy dollars. Japan owns $914.8 billion in U.S. Treasuries, second only to China’s $1,173.5 billion. However, you’d really have to drive the yen to 130 to even hope to compete with Korea. Meanwhile, the Koreans are looking over their shoulder at the Chinese.

  • avatar
    Da Coyote

    I hope the Japanese do whatever is necessary to keep those cars coming…because I’m not ever again looking at a UAW product.

    • 0 avatar

      To each his own, I suppose. Personally I will buy whatever appeals to me and is available at a price I am willing to pay.

      Do you buy goods made in Communist China? Would you consider a product made by Government owned VW / Audi? Are you aware that many Japanese plants are unionized?

      Sometimes it’s best not to think about how the sausage is made…

      • 0 avatar

        “government owned VW/Audi” HUH?

      • 0 avatar

        According to wiki, 20%+ of VW is owned by the State of Lower Saxony, and 17% is owned by the Emirate of Qatar. The majority (~51%) is owned by Porsche Automobil Holding, which again has the Emirate of Qatar as a major shareholder, along with the Porsche family.

        Less than 10% of VW stock is widely held.

        It seems to me the “Government Motors” label fits here…

      • 0 avatar

        “government owned VW/Audi” HUH?

        In the future, you might want to do a bit of research prior to posting.

        Shareholder structure (of Volkswagen AG):

        Current voting rights distribution (as at June 30, 2011)

        50.73% – Porsche Automobil Holding SE, Stuttgart
        2.37% – Porsche GmbH, Salzburg
        20.00% – State of Lower Saxony, Hanover
        17.00% – Qatar Holding
        9.90% – Others

  • avatar

    @Da Coyote…..UAW product?…News to me. I always believed that the UAW was an organization that represented automobile workers.

    Have they expanded into car manufactoring now?

  • avatar

    Nothing can stop the Japanese to print Yen and buy the US$ with it. In un-limited quantities.
    Nothing can stop any determined government that can print its own currency to drive that currency to zero if they really want to.
    Zimbabwe did it and the Japanese could too.
    The Japanese simply want to have the cake and eat it too.

    • 0 avatar

      Exactly. The Japanese government wants their currency to stay strong because they want to move away from a manufacturing economy towards a more American-style “service economy”. This, uh, might not be that great of an idea.

      • 0 avatar

        The Japanese government wants their currency to stay strong because they want to move away from a manufacturing economy towards a more American-style “service economy”

        No, it’s the opposite. Japan maintains quasi-mercantilist policies, i.e. it endeavors to run a trade surplus. So it combines an export-driven economy with domestic policies that it make it costly and cumbersome to import goods.

        The problem with that strategy is that nations that run trade surpluses should also expect to have strong currencies. If it maintained a freer market, Japanese consumers would predictably respond to the strong currency by buying more imports, which should be increasingly cheap for them to buy. But given the constraints, that doesn’t happen as one would expect if the barriers weren’t in place.

        Japan needs to decide whether it prefers to have a weak currency or a protected market. It may want both, but it can’t have both.

  • avatar

    separated at birth?

  • avatar

    C’mon Ghosn, try and compete with the exchange rate and government against you, for a change.

    (Do you always get a free jacket when visiting an assembly plant?)

    • 0 avatar
      Jack Baruth

      Since I work in an assembly plant, I can answer that question: anybody who might touch a car has to have their buttons covered, and the easiest way to do that is to temporarily issue them a long plant-approved shirt with covered buttons.

      Real assembly-line workers have “C-2” fire-resistant outfits.

  • avatar

    Let’s pray it will change soon.

    Screw that!
    Having my livelihood linked to manufacturing, I welcome the new devaluation of the US dollar. If it continues, outsourcing to China will be a dirty thought amongst execs. Sure, everyone’s 401(k)’s and hidden piles of money aren’t magically increasing in value like they were in the 90’s, but the further along we go with globalizaiton (spread of wealth), the more secure our domestic manufacturing will be.

  • avatar

    Let’s pray it will change soon.

    Completely agree with your sentiment but I think Bertel is goofing on the picture as it looks like Ghosn is praying.

  • avatar

    You are right. Toyota’s problem with the strong yen are four fold compared to Nissan. Toyota produces four times as many cars in Japan. In 2010, Toyota made 4.04 Million cars in Japan, nearly 50% of the global total, 8.55 Million Units. Lets not forget that the Yen has appreciated a lot against the Euro and GB pound as well. So exports to NA are not the only ones losing money. For every one yen rise against the dollar, Toyota loses 30 Billion Yen($400 Million) a year in operating income. The yen has gone up from 83 in Jan to 76.35 now. That’s more than $2.5 Billion wiped off their books.

    At today’s rates, I doubt if Toyota can export anything profitably to the United States, except for a few Lexus models. The losses should be catastrophic especially for low margin cars like the Yaris, Corolla, Prius, Camry, ES and IS. The Japanese Govt. efforts to devalue the Yen have fallen short. The last round of devaluing was effective only for a couple of days. With the Swiss, the only other safe haven currency after Japan, deciding to peg their Franc to the Euro, we can all expect the yen to rise further – some are predicting 70 Yen to the Dollar before the end of this year. Toyota can neither raise prices nor cut content to make up for the losses, in this market where the competition has never been this good. Toyota no longer competes only with Honda in the US market.

    • 0 avatar

      They must be losing money on every Yaris sold, here in Canada they were offering a pretty sweet deal:

      “The Camry offer is nice and expected. Less so is the offer on the 2011 Toyota Yaris grocery getter: $1,250 in cash or a $750 rebate that can be combined with 0.0 per cent financing for six years. Six years of free money!”

      I’ll bet transaction prices are *much* higher for the new Fiesta, but I wouldn’t be surprised if manufacturing costs for the made in Japan Yaris are as high or higher than for the made in Mexico Fiesta.

      • 0 avatar

        Correct, the average transaction price on the Fiesta is much higher than the Yaris. The Fiesta actually transacts more than the Corolla and Civic. Similarly the new Focus is commanding prices higher than the Camry.

        From TTAC

        “the new Fiesta is fetching $3,000 to $4,000 above its $14k base price, because buyers are happily taking them loaded with options. The result is that average transaction prices for the Fiesta are higher than Honda Civics and Toyota Corollas. And the Fiesta is a class smaller. The small cars-can’t-be-sold-profitably-by-Detroit curse has finally been exploded. “

    • 0 avatar
      Jack Baruth

      The Lexus ES is a low-margin car? Not sure I can agree with that :)

  • avatar

    I lived there at 76 y back in the 90s. I know what it feels like to visit America from a country with weak currency.

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