Peter7777

The dollar has fallen about 5% versus the yen within the past week. I'm hoping that this will have a very limited effect on the MSRP of the '04TL since the car is manufactured domestically. I seem to recall reading that the only major component manufactured in Japan is the transmission. Does anyone know whether that is correct?

fdl

The USD has been falling like a rock for more than just the past week, so I'm guessing its down alot more than 5% since they decided what to price the car at. I doubt it will have much effect anyways. Certainly not this year.

Peter7777

Not really. The dollar's high point during the past 6 months (versus the yen) occurred about 45 days ago when it hit 121 yen. It closed today at around 112. That's a 7% drop. It had been just over 117 as recently as a week ago.

http://cbs.marketwatch.com/tools/quo...2Fintchart.asp

I doubt that they priced the car very long ago. In fact I wouldn't be surprised if they have yet to decide on the price. There may not be much currency risk but that doesn't mean that it's non-existent.

fdl

OK, well I am only going by what I know vs the CND dollar. Anyways...I dont think it will make that much of a diff this year...certainly the last week wont make a diff. But if the USD keep falling next year could be diff story.

larchmont

I agree that they may not yet have made a final decision -- in fact I would guess they haven't. And this exchange-rate factor could be something that will play a role -- it may tend to make them inclined to put the price somewhat higher than they otherwise would have.

But most likely this factor will get lost in the shuffle. Obviously they'll price the car according to what they think the market will bear at the time, which I don't think will have anything to do with this, certainly not in any direct way.

fdl

Well you know, this is a pretty complex issue I think. Currency will fluctuate all the time, will it make a difference? If it does, that mean thats Honda is banking on a continued weak US dollar. All investors have not thrown in the towel on the USD just yet...so who knows what they are thinking. Given the fact that the dollar has dropped so recently (within last year)...its a tough call and I dont think its something that they would decide just by simply looking at the days exchange rate.

But who knows.

bowersan

Even with today's exchange rate, the Canadian TSX is still a cheaper purchase...

J.

pcinoc

I agree with you about comparing the price with the CDN dollar. When Acura prices the car for the US market, they don't simply convert in CDN dollars, otherwise they would simply limit their market too much. Let's just say that if the car goes for ~35K US, it wont sell in Canada for 1.4*35K = 49K CDN. From this calculation, the market size would simply drop from the current price of approx $40K CDN.

Same thing here in the US, there is enough profit margin to price the car appropriately against the competition. They won't simply keep adjusting the price every time the US dollar drops or gains on the yen. If the car was built in Japan, their profits would simply be larger or smaller based on the exchange rate. Of course they want to make as much profit as possible.. well actually as much as reasonably possible. Acura / Honda have a significant history of pricing their cars accordingly. I don't think you can even think of buying a comparable car with all the options at the same price. The german cars are more than 10K above the TL for the same options.

planman

While execs at multinational corp's always have currency exchange rates at the back of their minds, they are more focused on intermediate- to long-term economic expectations and profit margin goals. As we all know, prices are set per model year, not as a floating number based on this week's currency movements.

Since a huge portion of Honda's profitability comes from the US and Canada, they can't ignore currency issues but it's still only a small part of the picture. Domestic (North American) sourcing of most parts helps here in minimizing currency risk.

But the bottom line, as our resident free market economist Larchmont has pointed out, is where Acura feels they can price the car given their profit needs/goals and their assumed competitive position in the market.

TSX69

Japanese Play the Risky Game of Removing Content

With the yen at a record high against the dollar, Japanese carmakers are finding new ways to squeeze profits from vehicles they export to the United States.

Consider Lexus' redesigned GS 350, which arrives in the United States in February. To cut costs, Lexus is using asphalt spray instead of laminate sheeting on the underbody for noise suppression and recycled plastic instead of virgin for the protective cover beneath the engine.

It is carrying over the old 6-speed transmission instead of matching the 7- or 8-speed transmissions that competitors offer, and is no longer offering a V-8 engine option.

Endaka -- surging yen -- is back, and so is the risky game of removing content from vehicles. With the Japanese yen surging to just 75 to the dollar, the old "build 'em where you sell 'em" philosophy no longer is enough.

To avoid price increases, as they hustle to increase North American plant capacity, Japanese automakers are using lesser-quality materials or removing features that once were deemed essential.

They're rethinking which features should be standard and which should be optional. And they're withholding some new technologies and deleting some products altogether.

The risk: Will shoppers and owners feel they're getting less for their money?

The past year has seen a particularly painful currency swing for Japanese automakers, who already were wringing their hands in August 2010 when the yen hit 85 to the dollar. But they still held out hope that it would return to a more comfortable level of around 100.

Today, at 76 yen to the dollar, Japan's automakers are making hard decisions about expanding production abroad, cutting back exports from Japan and reviewing how to price and equip their vehicles. Executives say that is preferable to raising sticker prices.

John Mendel, American Honda's U.S. sales chief, describes the current situation as "squeezing costs from a rock."

Yoshihiko Kanamori, chief engineer for the GS 350, says he scrambled to hit "cost-down" targets, while adding safety and telematics features and upgrading many visible features.

"We also had to select some specifications that should not be visible from the customer's point of view," Kanamori said through a translator. "The current-generation GS hybrid and V-8 have variable gear ratio steering, but for the new-generation, only the F-Sport model has it. The rest have the basic steering package."

Because the GS 350 is built in Japan, largely with Japanese components, the strong yen is a huge burden. So Kanamori knew it would be difficult for any GS 350 sold in the United States to generate profit.

Did the cost-down targets mean he couldn't engineer the car he wanted?

"There were no items omitted that I would like to have, but with this exchange rate we will have to raise the price," Kanamori said.

'Almost the same'

Engineer Yoshihiko Kanamori: Scrambling to hit “cost-down” targets

Regarding the asphalt-spray technique, he said: "The cost is lower, but the performance is almost the same."

To Lexus engineers who want their vehicles to outdistance the luxury competition, "almost the same" is virtually an admission of defeat. But compromises have to be made.

Toyota reported an operating loss of about $425 million for the April-September fiscal 1st half. The March earthquake was a factor, but exchange rates accounted for a $1.7 billion swing in the wrong direction. Satoshi Ozawa, an executive vice president, warned that Toyota's domestic operations were on pace to break even next year -- but only if the dollar rises to ¥85.

Mendel says "de-contenting is not an option," but adds that some "wow" features won't be included in a Honda if they have no concrete customer benefit.

"Look at these ballyhooed self-parking systems," he says. "It's very cool technology, but it's probably not the best use of $2,000 worth of technology on a Civic or Pilot, especially since it's useless in many states because you don't parallel park.

"Instead, we look at technology like iPod connectivity, Pandora and Bluetooth," Mendel says. "We didn't do it because it's nice to talk about. We did it because that's what customers are asking for and it's relevant technology. We asked the question when the yen was at 115, and we're asking it again at 77."

The profit pinch

In November 2010, every dollar earned by a Japanese automaker in the United States returned about ¥83 in revenue. This year a dollar equaled about ¥75.

A Japan-made Toyota Prius III, 1 step up from the base model, carries a sticker price of $24,520 and an invoice price of $22,825. Toyota doesn't disclose the wholesale price that the Japanese parent receives for the car, but $21,000 is a reasonable guess.

Last year, using that assumption, the parent company booked ¥1,743,000 from that sale. This year just ¥1,575,000. In dollar terms, that's a $2,240 cut in revenue. Meanwhile, the cost to build a car in Japan has not gone down.

Endaka, the sequel

This isn't the 1st time Japan's automakers have grappled with a surging currency, or endaka.

In the mid-1990s the yen soared from 110 to the dollar to 84 in 14 months. Japanese automakers rushed to increase local production and cut costs in ways they hoped customers wouldn't notice, such as not painting gas tanks. And, for the first time, they began removing features from cars.

As the yen slowly returned to more manageable levels, many of those practices were kept in place, and profitability soared. But most of the cost-cutting methods adopted back then have become ingrained -- such as increasing local production. In fact, as the yen has strengthened, some Japanese automakers have even seen their local-build percentages fall.

Of course there are ways a strong yen can help automakers. Raw materials are cheaper to import to Japan. And although the yen is at all-time highs, it is not as painful in real terms as in the 1990s endaka because of deflation in Japan over the past decade. Thus, labor and other fixed costs aren't as high.

But exports must be profitable for a company like Mazda that assembles in Japan more than 80% of the vehicles it sells in the United States. And Mazda knows from experience that removing contenting is the kiss of death.

During the 1990s endaka, Mazda product planners compared options and features from the 626 sedan against competitors such as the Honda Accord, Toyota Camry and Mitsubishi Galant. If 1 competitor didn't have a feature, that feature got the ax on the 626.

"Everything left -- vanity mirrors, cigarette lighters, sunglass holders," said Robert Davis, Mazda's executive vice president of U.S. operations. "We tried the de-contenting route, and the reaction from our customers was very negative."

The Camry case

The redesigned Toyota Camry that debuted in 1997 had far less content than the previous model, reflecting pressure to slash costs. The preceding Camry was so rich in content that some Toyota executives considered it too good for its price point.

But the reduced content didn't hurt sales. The Camry rang up four consecutive years as America's best-selling car. But with the redesigned 2002 Camry, the pendulum had swung back to a bigger car with more content.

No large-scale axing is going on at Mazda these days. Still, some content has had to be chopped to save money. Davis insists it is "behind the scenes."

For example Mazda has stopped installing rubber mats on top of vehicle floor carpeting at the factory.

Another strategy is making optional features standard, then raising the vehicle's price.

Davis said: "A piece of equipment that was optional and becomes standard -- and you can raise the price equal to the value [in the customer's eyes] -- that's generally more profitable than the cost."

For example, the 2012 CX-5 with automatic transmission will have standard aluminum wheels because the perceived customer value is very strong.

"Compared to the steel wheel on a base model, you're able to enhance the brand, help residual values, and it ends up allowing you to get a little revenue and pricing power," said Jim O'Sullivan, CEO of Mazda North American Operations.

"If you can get $100 in revenue for a part that costs $10, that's an easy decision," O'Sullivan said.

Midcycle is tough

Jim O’Sullivan: Revenue and pricing power

Product planners say it makes little sense to switch components in midcycle, and virtually impossible to change materials such as seat covers once a model is on the market.

Making changes while a product is in development is much easier. A Mazda r&d executive said that some active-safety advancements had to be held back from next-generation products because the return on investment is much lower than it is for, say, a 40-mpg engine. Once the safety feature is a market standard offered by bigger players, the costs come down and Mazda can afford to install it.

If all these tactics to cut costs aren't enough to offset the strong yen, does it mean some Japanese automakers are "dumping" cars -- selling them here at a loss just to maintain volume? Executives deny that, but also admit that most of their imported product lines were meant to be profitable at a much lower yen-dollar ratio.

"The yen is the biggest challenge we face," says Mark Templin Lexus Division general manager. "But we have to price against the heart of the market. We don't expect the yen to stay at 76. We're seeing smaller margins than we're used to -- or no margins. But we'll stop producing cars if we're going to lose money on every car."

biker

RL

TSX69

Japan's Yen Offensive May Give Toyota Edge Over Hyundai

TOKYO (Reuters) -- When Toyota Motor Corp. President Akio Toyoda visited northern Japan in July last year and announced a $24 million engine plant expansion, some analysts saw it as evidence of a flawed strategy that put patriotism above profitability.

At the time, Toyota was struggling to rebuild its supply base after the March 2011 earthquake and tsunami and the yen was climbing toward a post-war record high against the dollar.

But the Miyagi Taiwa plant began assembling engines for the small hybrid Aqua, exported as the Prius C, this month with a welcome wind at Toyota's back: a weakening yen and a government-in-waiting determined to drive it lower.

Analysts say a continued slide in the Japanese currency could tip the competitive balance on pricing back in favor of Toyota and away from its toughest and fastest-rising global competitor, Hyundai Motor -- a new dynamic that would likely be repeated across other Japanese export industries.

Since early October, the yen has weakened about 8 percent against the dollar and 10 percent against the Korean won. Over the same period, shares in Toyota have jumped by 30 percent as investors reacted to the prospect of higher profitability on cars built in Japan for export, including Lexus luxury models.

"As the yen weakens, that very tight cost structure they have put in place to maximize profitability in an appreciated yen position allows them now to make a lot more profit," said Larry Dominique, an analyst at U.S.-based TrueCar.com and former Nissan executive.

"With the Korean currency appreciating, I would expect that what you would see (for Hyundai) is some of the same issues that the Japanese faced over the past several years."

Hollowing out

Whether the strategy of driving down the yen works to slow the "hollowing out" of Japanese manufacturing will be key for Japan's new government under Liberal Democratic Party chief Shinzo Abe, who is pushing for super-easy monetary policy to weaken the yen and lift pressure on exporters like Toyota.

The yen's rise in recent years has hurt Japan's exporters across the board, including industries like electronics and shipbuilding where competition with Korean rivals is also fierce. The number of Japanese factory workers fell 13 percent to about 10.4 million between 2002 and 2011.

But Toyota has been the slowest to abandon production in Japan - a conservative position that would make it the biggest beneficiary if the yen were to drop sharply now.

For his part, Toyoda has showed no signs of budging from a vow to make at least 3 million vehicles a year in Japan. Toyota engineers say the strategy allows them to keep suppliers close and drive innovations at "mother plants" in Japan which can provide guidance on cost-cutting for overseas plants.

By contrast, Nissan under Chief Executive Carlos Ghosn has been aggressively moving production offshore.

Under Ghosn, Nissan shifted production of its "March" subcompact - 1 of its top-sellers in Japan - to Thailand from Japan and has scrambled to buy more parts made overseas, including South Korea. Just 20 percent of Nissan's global production now originates in Japan, down from 50 percent five years ago. For Honda, Japan accounts for 26 percent of its total production, down from 34 percent in 2007.

For Toyota, the comparable figure is 40 percent, down from 50 percent in 2007.

As a result, Toyota is much more sensitive to the yen exchange rate than its Japanese rivals. Toyota operating profits fall by 35 billion yen for every 1-yen drop in the value of the dollar. For Nissan, that comparable figure is 20 billion yen and for Honda 16 billion yen, the companies have said. Gains of the same proportion could be expected from a weakening yen.

"Toyota is the 1 that is hit the hardest when the yen is high," said Koji Endo, an autos analyst at Advanced Research in Tokyo. "But it is also the 1 that benefits the most when the yen is low."

'How did he do that?'

Analysts point to Hyundai's recent success as an example of how a smart manufacturer can use the pricing power of a weak currency to undercut rivals.

A video that went viral at the Frankfurt auto show in 2011 caught Volkswagen Chairman Martin Winterkorn in candid admiration at Hyundai's quality gains. The video, which was widely circulated among auto executives, shows Winterkorn admiring the interior of a Hyundai i30.

Speaking to an entourage, Winterkorn notes that the windshield wipers are hidden from view -- as they would be on a more expensive car -- and that the steering wheel makes no sound when adjusted. "How did he do that?" Winterkorn asks about Hyundai. Off camera, a VW engineer can be heard to chime in: "We had a solution but it was too expensive."

Similarly, Hyundai has used a weaker won to help target Toyota's luxury Lexus brand. That is similar to what Lexus did to Mercedes and BMW in 1990 when it went from nowhere to become the top-selling U.S. luxury brand. At the time of the Lexus launch, the dollar was trading near 130 yen.

But in recent years, Hyundai has become the value leader. The top-of-the-line Hyundai Equus starts at $67,150 for 2013, an increase of just 1 percent over the previous year.

The sedan built at Hyundai's Ulsan plant also comes packed with features like 19-inch chrome wheels and a massage unit for the VIP seat in the rear as well as for the driver. Hyundai also promises that anyone who buys an Equus will never have to visit a dealer for service. Staff pick up the car at a home or business and replace it on the spot with a loaner.

By contrast, the strong yen forced Toyota to hike the price of the competing Japan-built Lexus LS 460L by 8 percent on the all-wheel-drive model for 2013 to $82,670.

Toyota could take advantage of a weaker yen now to address those pricing gaps and to add features where it has skimped. The Prius C built in Iwate in northern Japan, for example, was designed to be priced about $4,000 below a full-size Prius in the United States, Toyota's largest and most profitable market.

But Consumer Reports panned the hybrid for what it called a cheap-looking plastic interior and bad road noise.

Tough choices

A stronger won now could force tougher choices on Hyundai and its affiliate, Kia Motors, analysts and executives say. In recent years, Hyundai Motor's operating margin averaged 8.1 percent when the won weakened against the yen compared with a leaner 6.5 percent when it was strengthening, according to Thomson Reuters calculations.

A study by researchers at the Korea Automotive Research Institute released this month found South Korean auto exports shrink by 1.2 percent annually with every 1 percent decline in the value of the yen against the won.

"We are agonizing over the firming won," said 1 Kia executive, who asked not to be named because he was not authorized to speak about strategy.

But for the currency changes to have deep and lasting effects, they would need to be sustained, analysts and executives said. Automakers need 4 to 5 years to design a new model and shift suppliers. And in the end, every automaker has the same goal - to neutralize the impact of exchange rates by building more vehicles in the markets where they sell.

At the same time, a weaker yen remains more speculative than real, industry executives caution.

"It is wrong to say the yen is weak," Toyoda said last week. "The yen is still super strong at the current level."