We caught an interesting headline a couple of days ago from Just-Auto.com “Strong yen makes small car exports Ëœunfeasible.'”Â It caught our attention because the lessons from GM have taught most of us that most (or all) of the profits for some auto manufacturers at least come from SUV’s or larger vehicles and trucks. Small cars are among the lowest margin. So it should come as no surprise that Toyota, the largest exporter of cars to the US according to Just-Auto, has begun considering whether it can produce small cars such as the Yaris and Corolla profitably in the US as opposed to producing them in Japan and exporting to the US.
The dollar is at a 15-year low against the Japanese Yen currently trading at 85.57 yen to the dollar. And as this article from the Economist suggests, weak US economic data has driven the dollar to new lows. The article goes on to say that the Fed believes the recovery will probably be slower than hoped for (MetalMiner has been saying this for quite some time now). The Fed, through a number of actions, has continued to implement a loose monetary policy characterized by low interest rates and a reinvestment of maturing mortgage bonds back into government bonds.
There are other factors at play besides US monetary policy in the relative strength (or weakness) of the US dollar. The Economist goes on to say that falling prices in Japan (over a number of years) “mean the real effective exchange rate is below its average since 1990. In other words, lower wages and prices mean the Japanese Yen can withstand higher appreciation than say other currencies and Japanese produced goods can still maintain export competitiveness.
But that conclusion does not appear to be supported by the evidence – particularly in the case of Japanese small car exports. Which raises another question given the recent currency volatility or average exchange rates between the USD and the Japanese Yen and the dollar against the Euro (see chart below):
Source: Thompson Reuters
How does a manufacturing organization like Toyota make decisions on where it should produce which of its products given the degree of currency volatility witnessed during this past year? After all, just earlier this year, the dollar looked to be gaining strength. Not that we have any great advice but low margin products sound like a good place to start.