TOKYO -- A new word has crept into the Japanese business lexicon that will strike a chord with denizens of Detroit: Hollowing. As in the hollowing out of Japanese manufacturing.
The phenomenon, called kudokan or “empty hall” in Japanese, is the buzzword of business leaders and politicians as the yen hovers at 15-year highs against the dollar.
As the currency's climb pressures Japanese automakers to move production offshore, it also is triggering fresh debate about how the export-driven companies can protect profits and payrolls.
Toyota Motor Corp., the self-styled guardian of Japan Inc., is the latest to waver.
President Akio Toyoda has said repeatedly that the nation's largest automaker will do its best to keep factories and jobs in Japan. But when the company announced its latest quarterly earnings, it hinted that surging foreign exchange rates finally might force it to move some production overseas.
“If the exchange rate remains at the current level, keeping this profit level and still maintaining the base production capacity in Japan will be extremely difficult,” Satoshi Ozawa, Toyota's executive vice president in charge of finance, said at a news conference last week.
To keep Toyota's current level of domestic capacity at 3 million vehicles a year, he said, the company needs to earn an operating profit of ¥60 billion ($717.3 million) in the second half of the current fiscal year, which ends March 31.
“Otherwise, we will have to reconsider our production system,” Ozawa warned.
Toyota's stark assessment underscores the dilemma facing all Japanese automakers as they struggle with the yen's 10 percent surge in value against the dollar in the past year. Nearly every domestic carmaker outlined plans during the latest earnings season to source more parts from overseas, cut the costs of local production and consider more offshore assembly.
Some are already doing it. Nissan Motor Co. has shifted production of its March compact car to Thailand from Japan. And Mitsubishi Motors Corp. says it won't build its upcoming global small car in Japan because it's too expensive to make low-cost cars in the home market.
Yet Japanese automakers, bound by a tradition of lifetime employment, loathe the thought of cutting workers at home -- and the political outcry it would unleash.
“It is a difficult decision because we have to consider the hollowing out of Japan,” Mazda President Takashi Yamanouchi said about the possibility of shifting production from Japan to the United States to help blunt the blow of the rising yen.
Toyota's outlook sees it booking a ¥61 billion ($729.2 million) operating profit in the second half to deliver a full-year operating profit of ¥380 billion ($4.54 billion). The result would be more than double last year's operating profit of ¥147.5 billion ($1.76 billion).
As Toyota embarked on its rapid global expansion in the early 2000s, it kept adding production capacity at home. It was a more expedient alternative to building plants overseas. But when sales collapsed with the global financial crisis, Toyota was saddled with excess domestic capacity.
Toyota's domestic production peaked at 5.12 million vehicles in 2007. This fiscal year, the company expects to manufacture 3.2 million cars and trucks here and export 1.8 million of them.
How to keep domestic output falling further is the big question.
Ironically, many Japanese automakers -- including Nissan, Honda Motor Co. and Fuji Heavy Industries Ltd., the maker of Subaru vehicles -- raised their full-year profit forecasts even as they revised their exchange rate assumptions to account for a much more expensive yen.
Toyota was among those lifting forecasts and revising its foreign exchange assumption. It now sees the dollar at ¥85 for the year, instead of 90.
The rosy outlooks in the face of the rising yen suggest that regardless of the nationwide howling about hollowing out, reports of the death of Japanese manufacturing are greatly exaggerated.