The last time the yen dipped below 80 was in 1995, the year I started working at Nissan in NY as head of US IR. Little did I know how closely I would follow the currency (especially for my personal finance during the five years my family lived in Japan). As the dollar soared and exchange rate topped 140, Detroit CEO’s and US policy makers repeated the mantra that we needed a fair rate of 105¥/$ to level the playing field. Over this time, the J3 (Toyota, Nissan and Honda) racked up record profits as FX swung wildly. But take note, even with the collapse of the dollar over the past three years, Japan automakers weathered the global storm relatively well. The fact that they could deliver profits at rates well below the 100¥/$ level has made investors a bit complacent in my mind. I opened the Asian Wall Street Journal online this week and read the following headline:
What changed and why is the yen just suddenly the villain? Up till now Akio Toyota has been a measured guy, so what’s up? The wakeup call to J3’s over-dependence on domestic production, particularly Toyota was the March 2011 Great Tohoku-Kanto earthquake and ensuing crises.
- The FX impact on J3 in the first half of FY2012 was ¥280 bln, that’s 180bps of operating margin for a group that posted a 2.2% aggregate OP margin
- The average FX rate for the yen against the dollar was ~¥10 compared to H1 2010
- Nissan may have posted blistering H1results with a 7.1% margin, however, it announced a ¥90 bln impact from FX, mostly from the dollar. When I checked the non-operating line, there is an additional ¥30 from translation
- FX pulled Toyota into the red with ¥130 bln with the lion share dollar impact
- Honda saw ¥60 bln, with strong localization, about half of this was from translation, much higher than the 33% at Nissan
The impact from the March earthquake has been estimated to be between ¥120 and 180 bln yen and much of this has been booked extraordinary (Nissan booked ¥20 and Toyota has estimate the impact at ¥80 bln). The real impact is the change in mentality mainly in Nagoya over shifting production overseas.
Everyone knows the yen story, and no one knows where the dollar or euro are going. As yen has surged, the J3 (or more accurately Nissan and Honda) have adapted measures to mitigate the new currency paradigm. You can’t forecast the disasters and short of better risk management you can only mitigate them so much. But, if you believe the yen will stay strong (or more accurately that the US and Euro policy is shooting itself in the foot) then you can make changes, then Toyoda san’s comments are a bold call for more localization, and cover his namesake company. I also read a lot into the comments of Toshi Shiga, COO of Nissan, one certainly not prone to alarmism when he said ”it is the governments job to consider how to make up for the possible drop in the country income tax if their requests are accepted.”
The BOJ tried some measure to boost drop the yen closer to 80 than 75, but it has not been able to keep ahead of macro and political factors in the US and Europe. It was a lot easier to sell into strong dollar as part of an industrial monetary policy, but against the insanity of the US and EUR structural “race to the bottom” BOJ intervention is much less effective…but I digress.
You need to build a car where you sell it, with limited exceptions to high-mix, mid-volume products like Infiniti, Lexus, Prius, etc. Honda has historically been the most aggressive on off-shoring domestic production. Even back in 2001, they made slightly more than half their products overseas. The biggest improvement has come from Nissan as they have transformed their production base as part of the restructuring in 2000-2004. Also, the huge growth in China for these two automakers has shifted the balance. However, Toyota has not kept pace. Hence the fact that the big guy has been hardest hit and paid the biggest price in share value from the disasters.
If anything, the silver lining from these disasters could be the hastening of production diversity, particularly for Toyota. Two things to look at:
1) Site changes for new Toyota products and increase in output in Asia (post Thai flood) particularly China.
2) Stability of US$ and Euro. If we look beyond the looming fiasco of the US Congressional Super-committee and the “next” Euro debt crisis (Spain) the yen could react better to BOJ intervention. Operating profit FX sensitivity: Toyota ¥40bln, Honda ¥20bln and Nissan ¥18bln.
Nissan’s profile and strong performance explain why investors are so much more comfortable with the share. Honda suffers from the dynamic change like Nissan has exhibited, but the real question here is whether you have the stomach to chance that Toyota can make the changes.
Just for fun, I added back into the margins for margins and FX rate of ¥80/$ and backed out the impact from recent disasters (taking each automaker at their word on the impact) and while Toyota is still the big winner, gaining 4.4% of margin (Nissan 3.0% and Honda3.6%) they still have an anemic 4.0% margin compared to Honda’s 5.7% and Nissan’s 10.1%. I’ll be the first to admit that these comparisons are not realistic, the market is more dynamic than that, but it does point out that Toyota has room to improve, and I believe they have been awakened. Now they need to deliver.
Oh yea, and don’t expect US execs and policy makers to remember that ¥105/1$ is “FAIR!”