TOKYO -- The yens recent surge against the dollar is chopping billions off the profits of Japans automakers. And its sure to start raising the prices of some Japanese cars in the United States.
Take Honda Motor Co.s dilemma in the United States as it tries to set the sticker price for the much-anticipated Insight hybrid, to be launched in April.
President Takeo Fukui has only announced a yen-denominated price: below ¥2 million. When first revealed, that was around $19,000. But now it is closer to $23,000.
Thats a bad trend for a car whose key selling point is supposed to be affordability.
Norio Ano, who heads Hondas global Civic, CR-V and Insight programs, calls the new hybrid a big headache for me right now because it will be built only in Japan. Its chief engineer, Yasunari Seki, says the U.S. pricing decision will be delayed until right before its launch.
Its very uncertain what exchange rate we should base its price on, Seki said.
Small wonder, then, that Fukui is among the more vocal Japanese executives calling for their government to intervene to bring the yen down to more export-conducive levels.
Its an old refrain but still the wrong foreign-exchange fix. The best hedge for any carmaker is to build where it sells. And Japans recent exchange rate woes show not that the industry needs protection. Rather, Japanese brands need to produce more overseas.
The yen is hovering at 13-year highs against the dollar, and the increase has been abrupt.
In August, Japans car companies were booking ¥110 for every dollar they made in the United States. Now, they are making ¥88. The pain cuts deep.
Toyota is estimated to lose ¥40 billion ($455 million) in operating profit each time the dollars value falls by one yen. Unfavorable exchange rates are seen lopping about $9.81 billion from Toyotas earnings this year, handing the automaker its first operating loss in seven decades.
Toyotas not alone. All Japanese carmakers are suddenly rushing to contain exchange rate risks.
Hondas Fukui said last month that options include importing more cars into Japan, taking r&d facilities overseas and -- in the extreme -- even moving headquarters offshore.
Nissan Motor Co. is another company considering looking outside Japan for relief. Japans No. 3 carmaker plans to shift production of its March small cars to Thailand, partly so it can reimport them to Japan, according to the countrys Nikkei business daily.
The goal is to cut costs 30 percent through massive local procurement.
Yet for all their problems, Honda and Nissan are still better positioned than Toyota.
Nissan and Honda import only 20 percent of the cars they sell in the United States. But about 44 percent of all Toyotas sold stateside are made in Japan.
Not surprisingly, Honda is estimated to lose only $204 million when the dollar drops by one yen, while Nissan loses $165 million -- much slimmer losses than at Toyota.
A top task for Akio Toyoda, Toyotas next president, will be to limit his foreign-exchange risk. Analysts say that as a hedge, Toyota needs to bulk up production in such places as the United States.
If Japans automakers move out en masse, the political ramifications cant be overlooked. With thousands of jobs already being cut from the countrys beloved auto industry, the government is unlikely to sit still while more are canned for the sake of new foreign factories.
That may be just enough to spark an old-fashioned currency intervention.
But the red ink spilled during this earnings season only proves how dangerously export-reliant Japans automakers are -- and that building more product overseas is the best long-term safety net.