Bad Signs for Detroit's Big Three


The GM Renaissance Center in Detroit, Michigan, USA, June 22, 2005. (General Motors/John F. Martin) 

So far this year Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and to a lesser extent Chrysler, have seen great sales numbers and profits. One large reason for this resurgence has been Detroit's recent ability to match import vehicles in quality and value. It's been a long time since those factors were even slightly comparable, but today's newer models from Detroit offer those qualities. Unfortunately, recently the Japanese yen has decreased significantly to the dollar. Some argue it's mitigated because the Japanese produce some of their vehicles here, instead of importing them. While that's true, here are a couple other things you should consider and one worrisome development.

Why it's a huge deal
There are multiple ways that the Japanese automakers Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Nissan can take advantage of the weak yen. Both automakers can load up the vehicles with tech savvy innovations that cost a lot, without increasing the price tag because they have extra wiggle room in their margins created by the exchange rate. That would be an attempt to lure consumers away from Ford and GM by increasing the perceived value of their products – an obvious selling point.

Toyota and Honda could also opt to leave the physical products alone, and instead increase their advertising and marketing campaigns or even worse, cash incentives. The latter is an issue that would keep Detroit executives sleepless at night. They've seen what large cash incentives can cause – the resulting price war is ugly.

Or Toyota and Honda could simply do absolutely nothing – enjoy their high sales volume and market share – and with no extra effort realize a substantial increase on their bottom-line profits. Ultimately one thing is for sure, even if some of their vehicles are produced here, the profits won't stay here with the exchange rate giving incentive to bring them back to Japan. Want proof? Here are two worrisome developments.

Nissan and Honda
First off, Forbes recently reported that to help take advantage of the new currency development Honda is opening a new plant in Japan. Honda hasn't done that in 50 years. That development sure looks like a company trying to take advantage of the export advantage. Especially when you consider the plant will be opening after Honda's market share declined in the worlds two biggest automotive markets, and the third, Europe, is tanking out of control. 

Nissan has recently lowered prices substantially on seven of its vehicles sold in the U.S. market. Obviously Nissan isn't going to come out and say this is purely a play to gain additional market share using the currency manipulation as an advantage. It responded that it is a play to get the price back down to what consumers are searching for. Maybe that's true, or maybe that's only part of it. Either way it isn't good news for Detroit automakers, especially if Toyota and Honda react in similar fashion. 

According to Automotive News, arguably the top automotive analyst, Morgan Stanley's Adam Jonas, wrote in a research note recently that the industry is able to "see significant and growing risk" to the future profitability of Detroit's Big Three. He wrote: "While we don't expect a price war, we anticipate a shift in market share in favor of the Japanese." 

Bottom line
Ford and GM have a lot of momentum going for them with sales of compact and midsize sedans flourishing. Ford's Fusion, Fiesta, and Focus are selling great in the U.S. and overseas. GM is currently refreshing, replacing, or redesigning nearly 90% of its lineup hoping to compete in segments it was all but dead in. The devalued yen offers Toyota and Honda a real way to put pressure on Detroit's surge this year, but will they take advantage of it? Only time will tell, but these recent developments make me more worried than I was in March. I'm curious what you all think about the development? Let me know in the comments below.

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