Zen and the Yen

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During this supply-constricted period, Japanese dealers made more money and improved operations. Japanese manufacturers responded to this “voluntary restraint” by building assembly plants in the U.S. Starting in 1982, and continuing through today, they have established a strong local presence with 16 assembly plants in the U.S. (vs. 27 for the Detroit Three).

Part of this was to offset the appreciation of the yen, but it also was a move to build more products where they sell them and to become more integrated into the local market. Isn’t this how global companies behave? This was a classic jiu-jitsu move, and the VER protection policy ultimately produced unintended consequences.

The infamous chicken tax was implemented for a number of reasons, one of which was to help the Detroit Three sell more small pickups and light trucks and to support the United Auto Workers union. Ironically, there are no small pickups being sold by the Detroit Three in 2013.

In another example of navigating through barriers, Toyota, Nissan and Honda now build their small pickups in the U.S. market in facilities without UAW membership. Chevrolet, Ford and Chrysler models have vanished, though General Motors now is tooling up to produce new models in Wentzville, MO. The intended outcome was protection; the actual outcome was transformed by another jiu-jitsu move that overcame an advantage given to the Detroit Three.

Additionally, Japanese manufacturers have a small foothold in the large-pickup segment with units produced in the U.S., mitigating any potential for import restraints. Domestic production extends their comfort zone into a segment dominated by GM, Ford and Chrysler.

To wit, the Toyota Tundra pulled the U.S. space shuttle on its last journey, an event that extended Toyota’s presence into the fabric of America. Are increased sales the next step? We think so. We see Toyota overtaking GMC’s new ’14 Sierra before the end of the next calendar year.

In another jiu-jitsu move, Japanese manufacturers are taking advantage of the monetary easing that has been implemented by the U.S. Federal Reserve, a move that made the U.S. dollar weaker. Japanese manufacturers have increased their share of exports to countries outside North America. Last year, their share of exports increased to 28.7%. Toyota will even begin exporting vehicles to Russia from the U.S.

Protection policies facilitated a stronger local presence for Japanese manufacturers and increased employment in the U.S. Yet, the combination of a proliferation of competitive products, and an assembly base within North America, has established the Japanese as formidable local competitors, much more than any short-term movement in the yen could do.

Did the Detroit Three take advantage when the yen was at its peak? That is, did they gain share? The data reveals a mixed bag of results favoring a negative conclusion.

Let’s examine the yen exchange rate and Detroit Three market share. Since the end of the voluntary export restraints the Detroit Three have lost share, either looking at when the yen was weak (low) or strong (peak). The average yen/dollar exchange rate has increased from 118 to 84 for the three decades ending May 2013. Correspondingly, Detroit Three share has fallen from 55% to 45.6%.

Looking deeper, during the decade of the 1990s the yen exchange rate reached a peak on two separate occasions. In both instances the Detroit Three gained share, with the result being a modest 0.6 points higher at the end of the decade. The results are just the opposite in the following decade. The yen appreciated and the Detroit Three lost share, cumulating in a March 2008 market penetration of 43.7%, a company-sized 11.3-point deterioration.

Through the financial crisis, a yen that reached a peak at 76.6 per dollar, the 2011 tsunami and the recent increase in fullsize pickup sales, the Detroit Three have clawed back some of their losses. It is also true they gained back some of that share by improving their products and dealer service.

Yet, the pressure from competitive product proliferation continues. For example, the Detroit Three have fewer vehicles in the top 15 makes today (through May) than they did when the yen was at 109.3 (August 2008).

The yen/dollar exchange rate does influence, all else equal, the cost advantage for either country. Yet, all is not equal. In the ebb and flow of the appreciating yen over the past 23 years the negative share trend of the Detroit Three is a fact, due to the many other factors that determine who wins in the share war: Product, quality and service.

Even if the American Automotive Policy Council wins their argument for U.S government intervention, it would not be a one-sided negotiation. One U.S. industry executive has declared, “Our workers and our businesses should not be disadvantaged by governments intervening in currencies,” presumably talking about Japan’s central bank.

Is not the opposite true when talking about the U.S. Federal Reserve? U.S. government negotiators have recognized this principle. The market ultimately will decide the exchange rate, and lobbying for central bank or government intervention wastes time. Overall, broad-based price cutting by the Japanese is not in the cards at a yen exchange rate below 110. Profit-building strategies will tend to dominate at rates between 95 and 110.

There are stronger headwinds looking forward. The new fuel-economy and carbon-dioxide-emissions standards will have much more influence on product strategies than the yen.

The Detroit Three should spend their time ensuring they maintain a competitive product position and less time lobbying for changes in the yen, or any other form of protection. History has shown that they don’t seem to take advantage of it anyway.

Warren P. Browne is president of WP Browne Consulting and has extensive experience in the global automobile industry. During the last 20 years, he has held senior executive positions at General Motors, including in Brazil, Poland and Russia. He currently serves as an adjunct professor of Economics at Lawrence Technological University and assists WardsAuto forecast partner AutomotiveCompass in developing new business.