A yen for profit

Return to glory days may elude Japan's automakers

The weakening yen is good news for Japan's automakers. The more than 20 per cent drop in the currency's value against the dollar since early October will boost profit from overseas sales - and probably market share, too. A return to the glory days of 2006, though, is likely to prove elusive.

Back then, Toyota's market value was greater than the combined worth of its eight major western rivals - Ford, General Motors, Fiat, Renault, Peugeot, BMW, Daimler and Volkswagen. Though the yen may be heading back towards 115 to the dollar, as it was then, virtually everything else has changed.

Seven years ago, Chrysler, GM and Ford were a mess. Now all three companies are back on the road, the first two with the help of a government bailout. They are earning decent money after slashing costs and cranking out better vehicles. The strong yen of recent years also prompted Japan's big three automakers to shift more production overseas. Some two-thirds of the cars that Nissan and Toyota sell in North America are now made there, while for Honda the ratio is 90 per cent. That reduces the benefit of being able to export Japanese-made cars at a lower exchange rate.

The weakening currency still provides some fillip. At 100 yen to the dollar, Japanese automakers' top lines will receive a $2,000 boost for each car they sell in the United States, according to Morgan Stanley. How the manufacturers use this benefit will be crucial. Simply allowing it to accrue to the bottom line would flatter earnings, but may tempt executives to put efforts to cut costs on hold. Offering discounts to US buyers would risk starting a price war which would hurt American carmakers' bottom lines, but carry no guarantee of a market-share shift. Using some of the currency benefit to add more features to cars could be more effective, though it may take several years for the effects to show in market share and profit.

The final option is to boost dividends or investment. Expectations of increased largesse have already sent Japanese auto stocks up some 70 per cent since October. Absent another big drop in the yen, though, there doesn't seem to be enough horsepower left to take Toyota up by another third to its 2006 high.