Toyota Feels Exchange-Rate Pinch as Rivals Gain

TOKYO — For all the turmoil over Toyota’s wave of recalls, the company, the world’s largest automaker, may face a bigger problem: the surging yen.
With the yen at 15-year highs against the dollar, a 9-year peak versus the euro and still near recent heights against the won, Toyota is finding that its cars have become too expensive to compete in the increasingly cutthroat global auto market. That has created inroads around the world for its non-Japanese rivals, like Volkswagen of Germany, Hyundai of South Korea and the Detroit automakers, all of which are benefiting from relatively weaker currencies.
Hyundai is rapidly increasing its share in major markets, including the United States and China, using record profit to offer aggressive sales incentives that Toyota is struggling to match.
Volkswagen continues to dominate in Europe and across much of the Asia-Pacific region. Its chief executive, Martin Winterkorn, has said the automaker aims to be the world’s largest in sales by 2018, up from its current third place.
Analysts say the yen, which started soaring as a refuge currency in late 2008 in response to the global financial crisis, has highlighted a flaw in Toyota’s global production setup. The problem, they say, is that the company depends too heavily on factories and suppliers in its high-cost homeland. Although Toyota is taking steps to improve the ratio, about half of its cars are still assembled in Japan, many of them then shipped overseas.
“Before the yen’s surge, Toyota got by with exporting lots of cars, even though it was aware that posed a big currency risk,” said Takashi Akiyama, vice president at SC-Abeam Automotive Consulting, based in Tokyo.
“They held out for as long as they could, but now they’re seeing the consequences of stalling,” Mr. Akiyama said.
Other big Japanese exporters, like Honda, Nissan, Sony and Canon, feel the yen’s burden, too. The country’s export growth slowed for the fifth consecutive month in July, weighed down by the strong yen. But because they have moved more of their production overseas in recent years, those companies suffer much less from currency imbalances.
The difference is laid bare in a startling statistic: For every yen that the Japanese currency gains in value against its assumed dollar rate of ¥90, Toyota says, it loses ¥30 billion, or $357 million, in operating profit. If the exchange rate stays at the current ¥84 to a dollar, Toyota’s operating profit for its financial year ending next March, which the company forecasts will reach ¥330 billion, could fall by half.
By that same measure, Nissan says it loses only half as much for each yen’s gain against the dollar — about ¥15 billion yen. Sony loses but ¥2 billion.
The unfavorable foreign exchange has probably damaged Toyota more than its series of safety recalls has, by bringing margins to razor-thin levels, and a further rise in the yen raises the specter of operating losses, said Christopher Richter, a senior analyst for the automotive industry at the brokerage firm CLSA.
“Fixing the problem takes a lot of time,” Mr. Richter said. “But given how fast the yen has strengthened, time is not Toyota’s friend.”
Over the years, of course, Toyota has set up manufacturing operations outside Japan, including the United States, where it makes cars at four assembly plants, helping to buffer the effects of swings in the dollar-yen exchange rate.
Still, many of the cars Toyota sells in the U.S. market are made in Japan, especially after the automaker shuttered a plant in Fremont, California, earlier this year that had made its popular Corolla compact sedan. A total of 35 percent of the cars Toyota sells in North America are imported, compared with 10 percent for Honda.
Toyota is well aware of the need to move production closer to the consumer. Next year, Toyota plans to open a plant in Blue Springs, Mississippi, to build Corollas.
“Our goal is to produce cars where they’re sold,” said Paul Nolasco, a spokesman for Toyota in Tokyo. “Who knows when, and 100 percent might not be possible, but the idea is to try to make as many cars locally to increase local content,” he said. “That just makes business sense.”
Perhaps nowhere does Toyota need to localize production and cut costs more than in emerging markets, where its vehicles are easily undersold by competitors. Take China, now the world’s biggest auto market, where sales of the Yaris compact have fallen far short of expectations since its introduction in 2008. Although Toyota assembles the Yaris in China to take advantage of that country’s much cheaper labor, many of the parts still come from Toyota suppliers like Denso and Aisin.
That helps push the Yaris’s price tag to more than 100,000 renminbi, or almost $15,000, making it hard to compete with the likes of the new Verna subcompact sedan from Hyundai, priced as low as 73,900 renminbi, or the popular Buick Excelle from General Motors, which carries a slightly higher price tag than a Yaris but has a larger, sleeker body — delivering more bang for a buck, analysts say.
Toyota had only 5.2 percent of China’s auto market last year, trailing Hyundai, General Motors and the Chinese market leader, Volkswagen, whose Jetta family car starts at about 75,000 renminbi and is pervasive in the big cities.
In another big emerging market, India, Toyota plans to introduce the Etios compact car later this year, which analysts expect will be priced about 500,000 rupees, or $11,000 — significantly higher than the most popular models in India like the Alto from Maruti Suzuki, which starts at 323,000 rupees, or the Hyundai i10, which sells for 350,000 rupees.
Much of that pricing is deliberate: analysts say Toyota wants to build an upmarket image in India. Still, Toyota has much to learn from the market leader Maruti, a subsidiary of the Japanese automaker Suzuki that builds cars in India and procures almost all of its parts locally. Though Toyota also builds cars in India, many of its parts are from outside the country, adding to production costs. Toyota currently commands only 2.5 percent of the Indian car market, far behind Maruti Suzuki’s 40 percent.
Toyota’s slim market shares in India and China are worrisome to the company because emerging markets are expected to make up for most of the growth in the global auto industry. According to the Englewood, Colo.-based research firm, IHS Automotive, car sales in emerging economies like China and India will surge 81 percent - from about 25.8 million units in 2009 to almost 47 million units in 2016. During that time, sales in industrialized economies will grow at half that rate, from 31.7 million to 45.3 million, or an increase of 43 percent, according to IHS Automotive.
To capture a bigger part of those burgeoning markets, Toyota says it is seeking to increase local production and its use of locally supplied parts in both India and China. But it takes time and sizable investment to set up local production networks, analysts say.
“Toyota already knows that it must shift more production overseas, and it must make a push into emerging markets,” said Masatoshi Nishimoto, senior manager at IHS Automotive. “But it isn’t an easy task to build supplier networks overseas,” he said. “Then there’s the question of what to do with the excess capacity in Japan.”
The challenge demonstrates how Toyota is paying for not moving more production to lower-cost countries during a manufacturing boom in the mid-2000s, when Toyota enjoyed record profits. The yen stayed weak during that time, helping to make Toyota competitive and fueling the company’s global expansion.
Toyota held back from shifting production away from Japan and procuring components from overseas parts makers, analysts say, partly because of its traditionally strong relationship with many Japanese suppliers.
Toyota’s smaller compatriot, Nissan, has been more aggressive in shifting production overseas. This year, it transplanted the entire production line for its popular March minicar to Thailand, for example, and now imports cars even for the Japanese market from its Thai factory — an unprecedented move for a Japanese automaker. But the shift makes sense: Personnel costs at its main factory in Oppama, Japan were 10 times those in Thailand.
It is non-Japanese global automakers like General Motors, Volkswagen and a new rising star, Hyundai, that are poised to benefit most from Toyota’s troubles.
Volkswagen, of Germany, was an early entrant into the Chinese market and enjoys an almost 20 percent market share there — the highest among foreign automakers. And Volkswagen continues to dominate in Europe, where Japanese automakers have recently been shut out by a prohibitively high exchange rate.
Meanwhile, Hyundai, of South Korea, is reaping the rewards of a weak won, which has bolstered its competitiveness alongside its Japanese rivals. In China, it leads Japanese automakers with a 6.2 percent share in 2009, and has also garnered 14 percent of Indian market, where it plans to bring out a car that costs as little as $5,000 by 2012.
In the United States, the weak won has allowed Hyundai to offer much more aggressive sales incentives than Toyota, allowing it to chip away at Toyota’s market share, which fell to 15.2 percent in August from 16.6 percent at the start of the year.
Ford, Nissan and Volkswagen, by contrast, have added market share in the United States.
Still, Toyota is in a tough spot. Moving production overseas would inevitably mean cutting capacity — and jobs — in Japan, something the automaker has hitherto avoided. Exporters are under immense pressure to keep jobs in Japan; however, government hesitation against taking steps to weaken the yen through intervention or monetary policy is adding to exporters’ frustrations.
In a Japanese government survey of 102 exporters, released last week, 39 percent of companies said that they would transfer their factories overseas if the yen stayed at current levels.
Some analysts say that it is a good chance for Japan to get over its obsession with manufacturing, move production overseas, and make a long-awaited move into services.
“It would be a tough transition,” said Kazuki Ohara, a senior management consultant at the Tokyo-based Nomura Research Institute. “But instead of trying to curb the strong yen or ride it out,” he said, “it would be better for Japan to build an economy that thrives on a strong currency.”