Japanese Advantage Set to Derail Ford and GM?

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If you follow the automotive industry at all, you know that Ford (NYSE: F  ) has been surging of late. It’s come a long way toward returning to its best financial shape in a decade under the reign of CEO Alan Mulally. General Motors (NYSE: GM  ) is a step behind in many respects, but it’s still light years ahead of where it was when it took the government's bailout.

What if I were to tell you that Japanese rivals have a significant advantage recently, an advantage that can be used in a couple different ways to give Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) a leg up on its Detroit counterparts? Let’s check out why Detroit is raising a red flag, and investigate how this perceived advantage will hurt its two top carmakers.

What’s the big deal?
Since Oct. 1, 2012, the yen has fallen 23% against the U.S. dollar. What that really means is that the devalued yen will give Toyota and Honda a significant financial advantage on every single vehicle sold. Toyota exports over 2 million vehicles annually, and when those vehicles enter the U.S. or European market, they become more profitable for the company.

Let’s look at some numbers to give a bit of perspective on what this advantage really equals. Morgan Stanley believes that the devalued yen gives the Japanese automakers a $1,500 financial advantage per car. Detroit believes it to be much more significant; its figure is closer to $5,700 per vehicle. This is money that Detroit can’t afford to match in any price war with the Japanese automakers. 

In 2006, when Ford was in the process of bleeding $12.6 billion for the year, it was losing almost $2,000 on each vehicle it sold. Since then, Ford has made a remarkable turnaround and returned to profitability. Last year, Ford had a net income margin of 4.2% -- from $5.6 billion of net income -- equaling $840 of profit on a $20,000 vehicle. The difference between Ford’s darkest days and today is that hypothetical $2,840 swing from loss per vehicle to profit. If Toyota uses that $5,700 in financial advantage gained from its currency exchange, it could easily force a price war that Detroit couldn’t afford to compete in for fear of returning to unprofitability.

Options for Toyota
By 2014 Toyota is planning to refresh almost 60% of its vehicles, and with a weakened yen it could potentially load its vehicles with extra features at prices Detroit wouldn’t be able to touch. This would have a drastic affect on market share in Toyota’s favor. It could also conceivably do nothing to its products or prices and simply boost advertising and enjoy a bulging bottom line. This could end Ford and GM’s recent surge and completely derail them while causing a lot of pain for shareholders.

Here’s what Morgan Stanley analyst Adam Jonas says about the topic:

This is, without a doubt, the biggest change affecting the global auto industry. The dollar versus the weak yen will make the Japanese automakers richer and they can use those profits to target more-aggressive growth. Ford and GM are in their bulls-eye. This is a real threat.

What can Detroit do?
Unfortunately, Detroit isn’t left with too many options. Its lobbyists in Washington are crying bloody murder, which is mostly falling on deaf ears. The U.S. government can’t exactly call out the Japanese for currency manipulation, as that would be akin to the pot calling the kettle black. Detroit can only hope that the politicians can put some pressure on the Japanese or give incentives for them to produce more of their vehicles in North America, which would reduce some of the financial advantage.

Bottom line
There isn’t much that investors can do besides keep a close eye on the value of the Japanese yen. An investor in either Ford or GM would be wise to watch how Toyota and Honda use this advantage. This is a significant development and not something Detroit executives wanted to deal with while trying to make a comeback from the dark days of the recent recession. This won’t deter me from holding on to my shares in Ford. I’m fully trusting that Detroit executives, along with the U.S. government, can find ways to mitigate their disadvantage. 

Ford has been performing incredibly well as a company over the past few years – it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. The stock has recently taken off, and it appears that investors have begun to notice what Ford is doing right. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? For in-depth analysis on whether Ford is a buy right now, and why, you're invited to check out The Motley Fool's premium research report on the company, authored by one of our top equity analysts. Simply click here now to claim your copy today.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2013, at 5:46 PM, kobejim wrote:

    First the yen is not weak relative to the dollar, its still historically very strong in comparison. The reality is the Fed declared all out war on the dollar in 2008 and the yen strengthened from around 120 per dollar to 78. In other words the dollar lost over 1/3 of its value. The Japanese kept their mouth shut about the blatant currency manipulation but could take the financial pain no longer (since the Chinese tie their currency to the dollar - the Japanese took the currency hit almost for the entire world). In the race to the bottom, now every nation but the Europeans are in the process of devaluing their currency since it makes the huge government (& private) debts shrink while passing on the costs to the savers. Investors are in the stock market which is fueled solely by fed intervention.

  • Report this Comment On March 24, 2013, at 11:24 AM, TMFMarlowe wrote:

    @kobejim is pretty much on target. A couple years ago -- I wrote about it here at the time -- Toyota officials were complaining that the dollar weakness vs the yen was costing them $3k in profit per vehicle sold in the U.S. They weren't the only ones in Japan who were howling; it's not a surprise that the BoJ finally took some action.

    John Rosevear

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