The en, Again

Even after 20 years of enduring heated competition from the Japanese auto makers on their own turf, there are some things the Big Three just haven't been able to swallow. Today, the yen-dollar exchange rate once again has reared its ugly head, causing renewed friction between old foes.

Officials from Toyota Motor Corp. and Nissan Motor Co. Ltd. are growing increasingly intolerant of accusations levied by the Big Three, which charge that Japan's manipulation of the yen gives the Japanese auto makers an unfair advantage in the U.S. market.

The yen has buckled under a weak Japanese economy, falling to ¥130 to the U.S. dollar. That, says Gary Cowger, president of General Motors Corp.-North America, at the Chicago Auto Show, has given Japanese makers a 30% cost advantage.

But the accusations, the Japanese makers imply, amount to nothing more than sour grapes. The Big Three are not benefitting from the currency exchange rates and also are watching their market share slip to the Japanese auto makers, which are weathering the current recession better than the domestics without succumbing to the incentive wars.

Japan's offerings come at ultra-competitive prices, further fueling ill will and leaving the Big Three baffled as to just how their competitors can pull it off.

The Toyota Matrix rings in hundreds below the Pontiac Vibe, although the two both essentially are the same vehicle. Toyota dropped the price of the new-generation, '03 Corolla by $850 to $1,050, depending on the trim level, even though content has remained comparable and the vehicle has grown in every dimension.

And if some were skeptical when Nissan last year announced it would build the 350Z — which it billed as a $50,000 sports coupe — for under $30,000, just imagine the surprise one year later when Nissan announced it would base its eye-catching offering at $26,269, considerably below the already aggressive target.

“The charge that the current dollar-yen exchange rate provides Toyota an unfair advantage is absurdity on stilts,” Jim Olson, senior vice president of Toyota Motor North America, tells WAW.

“We don't base our business plan on the yen,” says Jed Connelly, senior vice president — sales and marketing for Nissan North America Inc.

The Japanese auto makers are responding to charges levied last month by the Big Three, which in a rare, unilateral move petitioned President George W. Bush to pressure Japan into stabilizing the yen-dollar exchange rate. Japan, suffering from its fourth recession in a decade, is seen as having manipulated its currency in order to bolster its slumping economy.

It's worth noting that the yen-dollar exchange rate is the only foreign currency fluctuation with the power to rile up the domestic makers, although existence of the euro may give the Big Three something new to worry about.

The President failed to take up the cause on his recent trip to Japan, and Secretary of the Treasury Paul O'Neill has brushed off the U.S. auto industry's currency complaints, in effect saying that unexpected currency crises are part of doing business in a global environment.

This is cold comfort for the Big Three, whose worst nightmare is that the Japanese auto makers, with the cushion of a weak yen, will chop the price of their vehicles by as much as a few thousand dollars per car and wring out even more market share from Detroit's Big Three. No Japanese auto maker has ever dropped the price of its U.S. vehicles as a result of currency fluctuations, officials at Nissan and Toyota insist.

DaimlerChrysler Corp. President and CEO Dieter Zetsche groused about the price advantage during a recent speech at the Economic Club of Detroit.

What he calls a “deliberate manipulation” of the yen gives the makers as much as a $1,200 to $1,400 per-vehicle cost and price advantage that they can pump right back into their product.

“This is an interesting turn of events, mainly because the Japanese auto manufacturers have proven to be hard-nosed competitors with excellent business acumen, who can do very well on their own merits,” he says. “It appears that they certainly don't need any help to compete.”

“We are especially concerned that the government of Japan is causing the yen to go downward to create a competitive advantage for its industry during a protracted recession at home,” he says.

Japanese makers are outraged by the accusations, and the implications that they somehow are or intend to be participating in less than savory business practices. Instead of taking advantage of currency fluctuations, they have been working to isolate themselves from them, they insist.

“Global companies learn to cope with exchange-rate variability, not complain about it,” Olson says. “We didn't complain in 1995 when a U.S. dollar was worth ¥85.”

Indeed, this is not the first time currency has been a major issue in the struggle between the domestics and the imports. The Japanese auto makers as recently as two years ago endured the situation in reverse. Unprecedented boom years for the U.S. auto market proved painful for the Japanese makers doing business here, which were gouged by higher-than-expected exchange rates.

All of Japan's auto makers cited the robust yen — which made an unanticipated 14% surge to an average of ¥112 against the dollar — for less-than-stellar financial results for the fiscal year ended March 31, 2000. The auto makers had based early forecasts on an exchange rate of ¥120 to the dollar.

In 1999, the Japanese auto makers saw U.S. sales soar, compensating for poor sales in Asia, which was adrift in financial crisis. The end result: Though sales were strong, profits fell far below targets. Some companies were hit harder than others; Mazda Motor Corp., which then exported some two-thirds of its Japan-made vehicles, saw its 1999-2000 operating profits plunge 60%, largely due to unfavorable exchange rates. Honda Motor Co. Ltd. saw a 27% drop in group profits, with exchange rates taking the blame. Nissan in the 1999-2000 fiscal year saw the negative impact of the strong yen amount to a $75 million loss.

The heavy losses prompted Japanese makers to change business practices and shift production to the countries in which they sell their cars.

Japanese auto makers ever since have continued to expand production capacity in North America.

Nissan's forthcoming SUV, pickup and minivan plant in Canton, MS, was a result of a directive by Carlos Ghosn to build more products in local markets — a decision largely motivated by the CEO's desire to isolate the company from currency fluctuations, Connelly says. Nissan also is expanding capacity at its plant in Smyrna, TN, to 500,000 units in January 2003, when Nissan shifts Maxima production there from Japan. Soon after its new plant is finished, Nissan will exceed 1 million units of North American capacity.

Nearly two-thirds of all Toyotas sold in the U.S. are built in North America using parts primarily sourced from the auto maker's 500 North American suppliers, Olson says. “Our Kentucky-built Camry is as American as any car built by the Big Three, and our investment in North America will continue to grow,” he says.

Only officials from Honda Motor Co. Ltd., who have been outspoken about the yen being too weak, have said that a prolonged weak yen could prompt them to reevaluate their practice of building in local markets. Despite the pronouncements Honda recently opened a manufacturing plant in Lincoln, AL, and also builds at a large complex in Ohio as well as in Ontario.

Toyota agrees that the yen is too weak — for reasons differing from those of the Big Three. It's an indication of just how serious the recession is for Japan, where car sales and transaction prices have been sliding down a precipitous slope. And Japan, Olson reminds, is still the auto maker's largest market.

A better level, and the level used by the Japanese auto maker's internal assessments, is in the ¥110 to ¥120 range. Still, this is higher than the ¥100/$1 level deemed appropriate by Ford Chief Operating Officer Nick Scheele — a level stronger even than it was two years ago, when the industry was calling the yen “too strong.”

The Japanese car makers admit that there are benefits from the current exchange-rate situation, but insist they are temporary. Gains from the yen fall to the bottom line of parent-company Toyota Motor Corp. back in Japan, rather than to subsidize incentives or lower prices on vehicles in the U.S. market.

Connelly says that although the current yen advantage has allowed Nissan to invest more in plants, equipment and research, it has had no impact on the way the auto maker has gone to market.

“Businesses that bank on one-time factors get into trouble,” Olson says.

So how can Japanese cars be priced so competitively? Officials from the Japanese auto makers agree that their advantage stems from their product-development process and their relationship with domestic suppliers.

Brand strength and business practices, Olson says, have allowed Toyota to price vehicles competitively. Cost-down programs, for example, resulted in a 20% to 30% cost savings between the current and prior generations of the domestically made Camry and Corolla models.

Nissan says marketplace demand for its products have allowed the auto maker to cut incentive costs by $1,200 per vehicle.

“It's really all about the product,” Connelly says. “Altima is selling above plan with zero incentive dollars on it. That's the secret of our success — not the yen.”