Weak yen is bad news for the Detroit Three

Toyota LogoBIZMOLOGY — GM, Chrysler, and Ford have come a long way since the dark days of 2009. All three are in the black. They’ve gotten labor costs under control, they’ve closed the quality gap, and they’re building cars folks actually want to buy. All three have successfully cracked the code on the small-car market — a money loser in Detroit for years. However, despite their successes one problem looms large — the weak yen.

Against the dollar, the yen has fallen 16 percent since October 31. That currency gap raises per-car operating profits for Japanese automakers by a considerable margin. Morgan Stanley pegs the figure at about $1,500 per car; carmakers in Detroit argue it’s closer to $5,700. Even at the low end of that spectrum, the weak yen gives Detroit’s Japanese rivals a huge advantage in the marketplace.

Toyota stands to gain the most from the yen’s weakness against the dollar. Of all the Toyotas sold in the US, more than 25 percent of them are imported compared to Honda’s 10 percent. The weak yen also increases profits on Japanese cars assembled in the US as they contain parts imported from Japan.

What Detroit fears most is a repeat of the 1990s and 2000s when the weak yen allowed Japanese carmakers to load cars with bells and whistles at price points GM, Chrysler, and Ford just couldn’t match. Analysis by Morgan Stanley suggests that despite its currency advantage Toyota isn’t a deep discounter, so it probably won’t wage a price war. It is more likely to invest increased profits in lush interiors and technology-laden features for the 60 percent of its product stable that’s slated for replacement in 2014. Detroit would have a hard time competing with such a tactic and might have to fall back on the incentives and deep discounting that led to black eyes and red ink during Toyota’s rise to supremacy.

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Photo by Dion Gillard, used under a Creative Commons license.

James Bryant

James Bryant is a writer and editor for the First Research team at Hoover's.

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