As General Motors transitions to launching what is possibly the biggest and most comprehensive product and brand offensive in its history, Japanese rivals have recently gained a significant (yet little-known) advantage that might work against GM’s progress in earning back market share, mind share, and, ultimately, more money.
Specifically, the advantage surrounds currency fluctuations: since October 1, 2012, the yen has fallen 23 percent against the U.S. dollargiving Toyota and Honda a notable financial advantage on each model sold, especially for those models that are made in Japan and exported to the U.S.
Toyota exports over 2 million vehicles from Japan annually; some of those vehicles are destined for the U.S. or European markets, and are significantly more profitable for the Japanese automakers if the yen is worth less than the dollar.
According to a Morgan Stanley analysis, the devalued yen gives Toyota and Honda a $1,500 financial advantage per car sold. And according to a Fool.com report, “Detroit believes [the advantage] to be much more significant”, pegging the upper hand at $5,700 per vehicle. While the real number might be somewhere between those two figures, the fact of the matter is that the new advantage might result in GM selling less cars, or selling the same amount as it does currently, but at a diminished profit.
How GM is affect by Toyota’s and Honda’s newfound advantage will depend on how the two Japanese companies utilize their newfound exchange-based financial upper hand. They could…
- Force a price war by using the increased per-vehicle margins to discount their vehicles, effectively buying market share
- Force a price war by boosting the feature content of their vehicles
- Do nothing to the product or pricing, and increase advertising
Given that Toyota is planning to refresh nearly 60 percent of its vehicles over the next two years, the advantage could derail GM’s product-focused surge to new buyers and increase its competitiveness in the marketplace. The reality of the situation is that GM may not be able to afford to engage in a price war with Toyota or Honda in any fashion.
“This is, without a doubt, the biggest change affecting the global auto industry”, said Morgan Stanley analyst Adan Jonas. “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.”
So, what can The General do to combat, or at least mitigate this looming threat from the Land of the Rising Sun? Unfortunately, it doesn’t look like it has too many options. Some lobbyists in Washington are crying bloody murder, but the efforts aren’t gaining tangible results. Meanwhile, the U.S. government can’t really call out Japan for currency manipulation.
What GM (and Ford) might hope for is for politicians to put some pressure on Honda and Toyota, or give them incentives to produce in North America, a move that would remove most of the currency-related financial advantage. And it just so happens that Toyota and Honda are already producing some models locally. However, as the money made in North America will likely be taken back to Japan, and be worth more there, local production by the Japanese automakers won’t eradicate the disadvantage faced by The General (and by The Blue Oval).
Perhaps the best solution is for the American people to buy less imported vehicles when it comes at the expense of local jobs, especially shady currency-related manipulation might be involved.
For its part, GM enthusiasts should probably keep a close eye on a few things, including:
- The value of the Japanese yen
- How Japanese use the exchange-related advantage
- How GM executives and the U.S. government work to mitigate the newfound disadvantage
Let’s see what happens in another month. For now, what would you do if you were GM? Talk to us in the comments.