The Yen Is Not To Blame

Auto Focus: The Yen Is Not To Blame
MiBizWest • January 28, 2002
by Jim Gillette

The opening of this year’s Detroit Inter­ national Auto Show was overshadowed by Ford’s gloomy announcement that it was eliminating 35,000 jobs worldwide and closing five plants. The company claims overcapacity is the problem.

No, overcapacity is the re­sult, not the problem. The problem is that Ford is short on competitive product, and they are not alone.

The Big 3 can’t stop market share loss

In spite of the unprecedented use of incentives, the Big 3 managed to lose market share once again in 2001, falling 2.3 percentage points from 2000 to 64.8 percent of the U.S. light vehicle market. Only GM was able to hold steady at 28.3 percent while Ford shed 1 point to end at a 22.9 percent share and Chrysler dropped 1.2 points to 13.3 percent. At least GM has its new trucks!

Two things are especially disturbing about the share loss. First, the domestic carmakers continue to focus on price as their competi­tive advantage. It doesn’t seem to be help­ing. Income statements suffer, balance sheets suffer and, of course, automotive suppliers suffer as the car companies struggle to cut costs by taking it out of suppliers’ hides.

On the other hand, Honda, which didn’t go hog-wild with incentives, ended the year gaining 0.4.points of market share, 0.2 gained by the Honda brand and 0.2 by Acura. Toyota, which offered zero-percent financ­ing on only selected models and changed­ over its popular Camry model mid-year, gained a whopping 0.9 points of share. Only 0.1 point of that came from Lexus.

With both companies, profitability is not a problem. The product speaks for itself.

The other disturbing point is that the do­mestic Big 3 (which includes the Chrysler division of DaimlerChrysler) can’t seem to stop looking outside of their own houses for someone else to blame. In fairness, Ford Chairman William Clay Ford does admit to taking his eye off the competition, but we wish we were convinced that the entire orga­nization has experienced the same epiphany.

Don’t blame the weak yen

At the Society of Automotive Analysts’ annual forecast meeting in Detroit on Jan. 8 (which is held each year at the Detroit Auto Show), economists from GM, Ford and the Chrysler division of DaimlerChrysler all com­plained loudly about the weakening yen. (Do I detect the stench of protectionism here?)

One economist went so far as to imply the Japanese government has launched a cam­paign to purposely drive the value of the yen downward in order to stimulate its domestic economy. Whether true or not, since Japan’s economy has been a disaster zone for the past 11 years, I would hope its government would be doing something. It is certainly within the rights of a sovereign nation to manage its monetary policy for the benefit of its citizens.

Devaluation of a currency has its pluses and minuses. A weak currency principally benefits exporting industries. It also raises the value of overseas investments in terms of the home currency. Since Japan’s economy is heavily dependent upon inter­national trade, it is not surprising that the government would follow a policy of self-interest.

A weak currency, however, car­ries with it a slew of negatives that usually far outweigh more nar­rowly focused benefits.

  • Domestic inflation is fueled.
  • Facing weakened price com­petition from abroad, domestic companies lose an incentive to operate efficiently in order to keep costs under control.
  • The cost of borrowing in­creases due to higher inflation risk premiums.
  • The cost of equity also in­ creases as foreign investors shy away from purchasing assets priced in a weakening currency.
  • Potential destabilization of the entire Asian regional economy.

 

In any case, whether the weakening of the yen is a result of an insidious plot or just a result of a complex web of economic conditions, no government can artificially manage its exchange rate for an extended period of time. (Witness Argentina today or Thailand in 1997.)

Fix the problem, not the blame

Ford is losing share everywhere it sells and builds vehicles including Europe, South America, and Australia and the yen has nothing to do with it. The yen is weakening vis-a-vis the dollar, but the facts show that this is progressively less the cause of the Big 3’s competitive problem in North America.

Sure, sales of light vehicles imported from Japan increased by 1.7 percent in 2001, but Japan’s share of the total imports declined by 3 percentage points. The big sales increases are being driven by Japanese-brand vehicles built on this side of the Pacific. It started with Honda back in 1982 and will continue into at least the near future. Com­panies with new plants either just opened or soon to open include Honda (Alabama), Nissan (Mississippi) and Toyota (Mexico). Expansion to accommodate new product is occurring at Toyota (Canada and Indiana) and Mitsubishi (Illinois).

With more engines and transmissions be­ing manufactured in North America, the per­centage of total North American content is beginning to challenge that of the traditional Big 3. All of this dramatically lessens Japa­nese car companies’ exposure to yen/dollar exchange rates and certainly takes away any advantage a weak yen may have provided.

The Big 3 have had the wrong focus anyway

As noted above, when it comes to the bulk of their product, the Big 3 must develop a competitive advantage other than price. Interiors that match or exceed Audi’s and powertrains comparable to those of BMW, for example, command price premiums. For a long while, nobody built trucks like the Big 3, and they were rewarded with fat profit margins. Even that is now being eroded.

Price sensitivity is greatest at the lower end of the market, where the South Korean makers are winning, for now at least. U.S. sales of South Korean brands gained 30.6 percent in sales and 0.9 percentage points of share during 2001. Combined sales of Hyundai, Daewoo and Kia product went from 16.5 percent of all U.S. imports in 2000 to 20.1 percent in 2001.

Economists at the Big 3 would far better serve their companies (and their companies’ stakeholders including suppliers and employees) by spending their time helping to design and launch cars and trucks whose value to consumers exceed the cost rather than staying up late at night writing briefs to ask Congress to meddle in the affairs of Japan.

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