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.
Comments
spelling/missing word error*
might be somewhere Between those two figures
Good article though, who would have thought that having your currency valued at Less would be a way to make profit. I’m interested to see how this plays out.
Corrected. Thanks for the heads up.
The currency fluctuation has been something that the European automakers were trying to hedge against by building locally, since the Euro has often been valued higher than the dollar — resulting in them losing money per vehicle (after exchange rate). But the door swings the other way, as well.
This is a good article, but it is presenting only part of the picture. Specifically, for a long time, the yen was much weaker than it is now. It was only post-2008 crash that the yen gained strength for a variety of reasons. Yes, over the last couple of years the yen was very strong at around 80 yen to the dollar. But go back before 2008 and the yen was at 120 yen to the dollar. Now it’s around 95 yen to the dollar.
So people saying that the yen is weak now are not being entirely accurate. It is weak compared to the last couple of years, but it strong compared to almost any significant period before that.
Henry, what you say about the yen and its historic weakness is true, but it doesn’t change the fact that the currency has experienced a double-digit drop in value over the last several months — a rather short time frame for a drop of that size, wouldn’t you say?
Yes, I agree. I think this drop will make the Japanese companies significantly more competitive. This is because the Japanese companies had gotten used to a strong yen. Their business plans were based on a strong yen going forward, and they had cut a lot of costs based on that assumption. So they are quite lean. The new, weaker yen is like an unexpected boost for them.
If you’re a Japanese company and you’ve become so lean that you are profitable at 80 yen/dollar, then you’re seriously raking in the dough when the yen drops to 98 yen/dollar. You can afford to do the exact things you mentioned in the article: Go for more market share/lower your prices/spend on advertising/spend on adding more content to your products, etc. And that’s why the stock prices of Japanese exporters have been on fire lately, because investors are anticipating great things.
GM will need to up its game, exactly as you said.
Right on. I wonder how GM will alleviate this threat… because it can have a serious and real impact on its product offensive this year, and next — given that this continues.
Yet ANOTHER reason why americans need buy american and invest in this country again…surely the camry owner will say….” but my car was made in Kentucky” and the altima owner ” my car was made in tennessee” etc….etc….but guess what the profits go back to protectionist japan!! Numerous studies support the fact that domestics invest and support alot more than do foreign makes…..buy american in whatever product you can and lets get back to what made this country great
I agree with Henry. No one in the American auto industry was crying foul when the yen was strong. Who knows, maybe it is still stronger than it should be.
And I would have loved to have bought an American made car, but the American companies won’t make something I want to buy. If you want a truck, SUV, or sedan then you have choices. If you want a Camaro or Corvette then you are happy. But, if you want a wagon you’re SOL. If you want a hatch there’s Ford, if you can stomach the complexity of their controls, and be willing to waste money paying for things you likely don’t even want.
I’m sure for most people there is something specific that the American cars lack. For me, the bottom line was driven by the need to drill holes in the roof if I bought American. I wasn’t going to give up 10 miles to the gallon and buy a larger, poorly handling car in order just to get a roof rack. The Mazda 3 turned out to be almost perfect. I bought this year because Mazda intends to make these in Mexico next year. And despite spending a lot of time on this site, I have no idea whether GM will have a car for me in the future.
I agree with Henry.
Before saying Yen is becoming cheaper please look at 2-3 decades history of Yen. When i first came to Japan 7years ago 1 usd was around 125-130 yen. It was after 2008-2011 years event that many saw yen as safe heaven currency and yen became super record expensive untill last year November.
I think Japanese government with Bank of Japan are doing the right thing. And for sure Yen is still expensive right now. I do not understand why American and Korean car makers are crying about yen devaluation. So far Korean won was super cheap and not many raised Won issue.
Without doubt Japanese cars are the best in the world and if American and Korean car makers afraid about competitiveness then they have to improve their cars rather then crying and saying that Yen is becoming cheap…
@Murod I don’t see your point whatsoever.
1. Does the fact that the yen has fallen 23 percent in the last 5 months NOT put GM (or any other American automaker) at a disadvantage?
2. Yes, the yen has traditionally been weaker than the USD. Can you not see that this has partially contributed to the rise and eventual “mainstream-ization” of the Japanese automakers (hence posing an even bigger threat to US OEMs today)?
3. “Without a doubt, Japanese cars are the best in the world”…
I hope you’re being sarcastic.
gm’ s vehicles don’t have a lot of usa parts anymore so I would not think it would have as much of an impact. Honda and toyota assemble alot of their stuff in america. Companies like mazda would benefit more but I don’t see them selling like hotcakes.
@vt local manufacturing somewhat alleviates the issue… but not by much.
The point is that profits end up going to a country where they are simply worth more.
Well I guess the only thing GM can really do is try to refresh their cars and make them look more attractive than the garbage from Japan. Or they should do what they used to do best, buy independent parts companies and try to make more of their stuff in house to boost profits.
GM is “refreshing” plenty of its cars, but this isn’t all about car looks. If GM produced the automotive engineering inside my Mazda 3 the people on this board would be proclaiming it as the best in the industry. But because it comes from Japan it is “garbage.” That lack of objectivity leads to a loss in credibility.
There is another article posted today on the downsizing of skilled tradesmen positions — obviously in response to a belief that there are too many people in GM plants. Henry (above) states that the Japanese automakers have become lean and efficient. I believe that, relative to GM, Henry is probably spot on. But I wouldn’t be looking to dislodge skilled tradesmen, or limiting cuts to the plants. Those are the employees, along with knowledgeable engineers, that a company cannot quickly replace when it wants to grow again. I would be looking at the people in those towers in Detroit. Big American companies routinely create unnecessary staff positions to develop their managers and executives, then they rotate them through short term assignments to expose them to all of the elements of the business. There is a steep cost to the corporation for this. In essence, the organization becomes a development platform for the next CEO and loses sight of its true mission, which is to efficiently produce. Each person is told to work towards the cause of efficient production but collectively they tend to get in each other’s way. Ultimately the company becomes filled with generic types who lack specific skills important to design and production. And ultimately, this is how a small company like Mazda can often come up with better automotive technology than a large company like GM, and push it through to production much faster.
@VeranoHatch “…development platform for the next CEO and loses sight of its true mission, which is to efficiently produce…”
Efficient production was a company’s mission during the days of the industrial revolution. I’m sure that you already know that today, it’s no longer about just efficiency, as it is also about design, engineering (technology), support, and the overall strategy. You touched upon this in the beginning by mentioning your Mazda’s technology — but I just wanted to set the record straight.
As for the technology in your Mazda: we already know part of what’s coming in the near future from GM. The new 1.6T engine, for instance, will be one of the (if not the) most power-dense and fuel-efficient four-bangers for its size. And we haven’t even seen the naturally-aspirated next-gen Ecotecs.
We all know GM is right in the midst of revitalizing its small powertrains and compact vehicle lineup… so there’s no sense in talking about what GM has now, which is mostly hardware developed in the mid 90s and carried into the 21st century with modest (if any) upgrades. Simply look 6-12 months ahead for where GM’s small powertrains will be. Then we can talk about an apples-to-apples comparison.
And, once again, I’m reminded of the fact that non-Japanese car companies are not allowed to produce vehicles in Japan – it has been so since the end of World War II. Meanwhile, the Japanese are allowed to just keep extracting wealth from the United States.
Alex thank you for comment.
Let me explain in different way the.
Imagine you are US government and 1 USD had been around 200 Yen for about 15-20 years. Then USD suddenly began rising and within 5 years 1 USD cost 100 yen. Certainly US made goods become expensive in overseas. And US export suffers alot. So you want to involve and put the USD to its back value.
And when you start injecting billions of new printed USD into market Toyota or Honda says “hey buddy, what are you doing. This will decrease my sales”. What you gonna say? You just wanted to restore USD to its historical value 1 usd = 200 yen.
Murod That’s fine, but perhaps I’m missing something… does the recent swing in the yen’s value NOT affect GM and other American automakers versus the Japanese? Does it not put them at a disadvantage? You’ve described historic (long-term) events as it relates to both currencies — but what we’re talking about are short- and medium-run effects.
Please let me know if I’m misunderstanding you entirely.