“Producing in Japan will remain extremely difficult as long as the conditions don’t change,” said Akio Toyoda today, and appealed to the Japanese government to “level the playing field.” Toyota did some leveling of its own. In a big board meeting, Toyota leveled swaths of corporate structures.
There are people who know that the Toyota Group, Toyota Motor Corporation, and Toyota the car brand are different animals. Some may be aware that Toyota, Daihatsu and Hino belong to Toyota Motor Corporation. Drawing an org chart of the subsidiaries and factories surrounding and connecting the various Toyotas however would be akin to mapping an anthill. That task will get a little bit easier in the future.
In a hastily arranged press conference (as in “drop everything and be there by 4, we are so sorry”) that took place in Nagoya, Tokyo and Tohoku at the same time via videoconference, it was announced:
“Toyota Motor Corporation (“Toyota” (President: Akio Toyoda)) and subsidiaries Toyota Auto Body Co., Ltd. (“Toyota Auto Body” (President: Takuji Amioka)) and Kanto Auto Works, Ltd. (“Kanto Auto Works” (President: Tetsuo Hattori)) have reached an agreement with respect to the conversion of Toyota Auto Body and Kanto Auto Works to wholly-owned subsidiaries of Toyota through share exchanges (expected January 2012). In addition, Kanto Auto Works, Central Motor Co., Ltd. (“Central Motor” (President: Toru Kuzuhara)) and Toyota Motor Tohoku Corporation (“Toyota Tohoku” (President: Masami Sugiyama)) have reached an agreement to begin discussions for the proposed merger and integration of the three companies (targeted July 2012).”
You got that? Now, close your eyes and repeat.
What is happening is that TMC is streamlining its operations at home. Toyota Auto Body and Kanto Auto Works, currently separate companies that are traded separately at the Tokyo stock exchange, will come under the TMC fold. Central Motor and Toyota Motor Tohoku will most likely follow.
The re-org will allow the business units to be involved in the development of the cars they produce. Toyota expects higher efficiencies and lower costs from that measure. Asked whether jobs will suffer, Toyota’s photogenic executive vice president Atsushi Niimi said that Toyota plans to protect full-time jobs. Meaning: Temporary workers, your time may be up. How about the 3 million cars Toyota wants to produce at home, asked a reporter. “We will try to maintain the 3 million unit level,” answered Niimi.
“Three million units would be the minimum that would allow us to maintain employment,” added Toyoda. “We will try to maintain that.”
In other words: Less than 3 million cars produced at home, and permanent workers will also stay at home.
There is only so much that can be achieved through cost cuttings. To keep producing 3 million Toyotas in Japan, more than half of that needs to be exported. The yen gets stronger by the day, and it turns into a fight against the windmills of the foreign exchange.
“What level of exchange rate can you withstand? I think you had mentioned 82 to 83 yen to the dollar a while ago,” said a reporter from The Nikkei and suggested: “Will you be able to make a profit at 75 yen to the dollar?”
Niimi did not take the bait: “At the current exchange rate, frankly speaking, it is very tough. You mentioned 82 to 83 yen to the dollar. We would rather have 85 yen to the dollar.” The 75 yen suggestion remained uncommented.
The re-org has nothing to do with the earthquake and tsunami, said Toyoda, and he reminded everybody that the discussions had started in May of last year. If there was a tsunami involved, then it was a wave of yen buying. Last May, a dollar bought around 93 yen, and that was considered dangerous at the time. Today, a dollar fetches around 79 yen.
I just don’t understand why Yes is soaring while Japan has so much economic problems.
The earthquake/tsunami has caused a lot of Yen invested outside of Japan to flow back into the country, strengthening the Yen position. Someone smarter than me could explain it better.
The Yen is actually not strong, it just that every other currency is incredibly weak at the moment. Currency exchange is a practice in relativity.
The US dollar is weak due to QE measures(aka printing money), and what this current debt ceiling debate is about. The Euro is weak because of the sovereign debt crisis in Greece, Portugal, Spain, and Ireland. Then there is competitive devaluation, where countries devalue their currencies to help exports; China is tied to dollar, South Korea, Vietnam, and Thailand have all devalued their currency. The result of which has created massive inflationary problems in those countries. Both S. Korea and China have been in the news recently due to their inflation problems.
Toyota, and the Keireidan, wants the Japanese government to intervene and more seriously devalue their currency. They have after the quake, with the blessing of US and European governments, but while that may help in the short-term, it won’t help Japan’s long-term prospects. Its expensive when you need to compete to devalue your currency.
The other issue is that Japanese household investors, the “Mrs. Watanabes”, are massive investors overseas. Japanese domestic investment have very little return, banks give little to no interest rate and Japanese bonds have minuscule returns. So Japanese household income is usually invested overseas (the big thing right now is Brazilian Government Bonds). There is also something called the “Carry Trade”, where you borrow money in yen, with a favorable exchange rate, at an insanely low interest rate, and invest that money overseas. So there is a lot of Japanese money overseas at any given moment, meaning that when economic uncertainty strikes (like a massive quake) all that Japanese money is brought back home (thus strengthening the yen).
So Japan’s options right now, outside of outright devaluing their currency by using QE tactics, is to wait it out. As the debt-ceiling talks have shown, the US has very little room to expand their money supply beyond the currently planned QE2. China, S. Korea, Vietnam, and Thailand are having massive inflationary issues, meaning that they too will have little room to expand their money supply as well.
So the yen is expected to weaken by the end of the year as the US and China in particular eases their expansion of their money supply. But you never know what will happen, Europe’s debt situation could suddenly worsen, the Chinese economy has some VERY serious point of concern at the moment as well. If something bad transpires then the yen will strengthen again.
The Chinese yuan is no longer pegged to the dollar.
@ L’avventura
Excellent summary and analysis.
In theory currency valuations resulting from actual market forces should work to rebalance trade.
That said, China’s control on their currency exchange rate is really distorting the world trading system. Quantitive easing 1 & QE2 would not have been necessary if the Chinese Yuan had significantly strengthened. US exports could have taken up some slack while QE1 & QE2 were failures.
Since QE1 & QE2 weakened the dollar significantly it also weakened the Chinese Yuan against other currencies since it is valued against a “basket of currencies”. (stealth USD peg)
That puts Japan at a trade disadvantage with China and pushes strong Yen investments into China. In turn this puts more pressure on Japan to focus on the Yen-Dollar relationship.
So yes, currency valuations do matter and it is influencing the “point of manufacturing” decisions that affect worldwide local job markets.
Sidebar:
I don’t see any more comments from that group that would say “currencies don’t matter, just build better cars”. The shoe is now on the other foot.
@Bertel
The RMB is most definitely “pegged” to the dollar. Yes, China has said that they would allow their currency to gradually appreciate versus the dollar, its moved a total of just ~0.30 dollar to yuan since that announcement, but it isn’t a freely traded currency.
The RMB exchange rate is not determined by the market, its determined by the Chinese government, for this reason it still is “pegged”. They are just no longer pegged to a constant number, but a variable number of their control.
As we’ve seen with the current inflationary concerns in China, the yuan has not appreciated more than the dollar has weakened over that same time period. So we should see the government further allowing the yuan to appreciate in value.
@ Trend-Shifter
Let’s keep in mind that the single major influencer of global currency is the US dollar because the US is the single largest market economy. Right now, most intervention in the currency market globally is happening as a reaction to the falling value of the US dollar.
The forex market can involve a lot of discussion of geopolitical issues. And in this regard let’s also be cognizant that the US used to be one of the primary critics of QE tactics, a stance they took until the US needed to resort to QE after the housing bubble burst.
When looking at the politics of exchange rates all sides look hypocritical. However, the “us versus them” mentality is self-defeating, especially in view of China and Japan, especially in the view of the automotive market.
@L’avventura – excellent analysis! Agreed that the strong Yen has everything to do with the flight to perceived safety. Also, after 20 years of printing money I don’t see that the Japanese can do much to devalue the Yen at this point.
@Trend-Shifter – Re: “Sidebar: I don’t see any more comments from that group that would say “currencies don’t matter, just build better cars”.”
Building “better” cars in a high cost environment works for the Germans to some extent because they sell a premium product for a premium price. Toyota makes a good product, but it is a mainstream brand and has to be priced competitively with other mainstream products. Even though Toyota enjoys a good reputation, most mainstream customers will not pay a huge premium for a Toyota badge. Some people (like jj99, no doubt) will pay a premium for the badge, but likely not in numbers Toyota needs to stay profitable. To make matters worse, the former basket cases from Korea and Detroit are now churning out some pretty competitive products, and as true delta shows us, most mainstream brands are pretty decent nowadays – so “Toyota quality” is not the differentiator it once was.
I just don’t understand why (the yen) is soaring while Japan has so much economic problems.
Partly, it’s dollar weakness. Partly, trade surpluses usually strengthen currencies, even if they aren’t necessarily great for the economy as a whole.
Japan runs massive trade surpluses, and it’s no coincidence that the yen has strengthened over time, while the same surpluses contribute to recessionary pressures. A strong currency and a sluggish domestic economy are not mutually exclusive.
The Yen is actually not strong, it just that every other currency is incredibly weak at the moment
That isn’t accurate. The yen is relatively strong, as is the Swiss franc and the commodity based currencies such as the Aussie and Canadian dollars. The euro is also strong compared to most of these currencies (in my opinion, overvalued), despite the PIIGS crisis.
China is tied to dollar
To clarify, China is tied to a basket of currencies, which includes the dollar. And it’s a managed floating peg, so the yuan-dollar exchange rate is not at a fixed amount.
Maybe it’s that the dollar is falliing?
It really doesn’t matter which it is, really: if the Yen is strong relative to the currency in the country that Toyota is trying to export to, it’s harder to sell a car there at a profit, because you paid Yen to build it and are getting a weaker currency buying it from you. Whether the cause is the dollar, euro, and renminbi all falling at once or the yen getting strong doesn’t change that, it’s the relative change between the two that’s the problem.
While I don’t understand the why’s of Yen/$ value, I do understand the issues of running a business that involves planning around exchange rates.
Plan: 95% utilisation $.82/Euro
Actual: 80% utilisation $1.20/Euro*
Company being German owned. Apply the same to (let’s say toyota’s tundra plant). They are being squeezed from both sides and other than Yen intervention it’s jobs at home**, I don’t know if Japanese have ability to control the Yen anymore, especially while it seems that the US will continue to QE (Japan has been doing it for decades now, only so much of the juice).
*being the simple (US) controller I requested to hedge operating leases that were in Euro, was told no (apparently the CFO had tried hedging once in the 70’s and it backfired), difference in exchange (which happened in months) meant $130k/month became $240k/month.
**or making products faster/cheaper, Toyota already did that one and it GMed on them.