A Real Problem for Toyota

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Toyota (NYSE: TM  ) , the world's largest automaker, has a problem.

No, not those recalls -- while the company continues to have recalls, just like every other major automaker, last spring's high drama is already fading in the rearview mirror. This is a new problem, and it's a biggie: The strength of the Japanese yen against other major currencies is making Toyota's vehicles more expensive relative to its overseas competition.

And that, in turn, is hurting the company's margins -- and its chances for growth in some very important markets.

Not your father's bargain-priced Toyota
Anecdotally, it does seem that some Toyota models are pushing the price envelope here in the U.S. -- an Edmunds comparison test I read last weekend aptly described the $48,180 as-tested price of a hybrid Toyota Highlander as "shocking,” and wondered why anyone would choose it over the bigger, cheaper, and similarly fuel-efficient Ford (NYSE: F  ) Flex.

Although it's likely that the company's margins have been eroded here somewhat, Toyota's pricing in the U.S. isn't its real problem. Toyota's still selling plenty of cars here. The real problem is the yen's effect on Toyota's competitiveness elsewhere in the world, especially in the all-important Chinese and Indian markets.

Sure, the rising yen has caused some headaches for other Japanese exporters like Honda (NYSE: HMC  ) , Sony (NYSE: SNE  ) and Nintendo (OTC: NTDOY.PK). But as a recent New York Times article pointed out, Toyota is being hit particularly hard because it continues to do a great deal of its manufacturing in high-cost Japan -- about half of its vehicles are still produced there. Even in the U.S., where Toyota has significant local manufacturing resources, about 35% of the vehicles the company sells here are imported from Japan. Honda's number? About 10%. Big difference.

Losing out in the world's most important auto markets
And even when it does manufacture a car locally, as with the subcompact Yaris it manufactures in China, Toyota often continues to source many of the cars' components from its longtime suppliers in Japan. This erodes much of the potential cost advantage. In fact, the Chinese-made Yaris costs almost $15,000, a high price that makes competitive locally-built models from General Motors and Hyundai look like bargains.

Likewise in India -- which as the success of Tata Motors (NYSE: TTM  ) and its Nano has shown is a very price-sensitive market -- Toyota plans to introduce a new compact model later this year, but its expected price is several thousand dollars more than comparable models from market leaders Maruti Suzuki and Hyundai, and surging Ford's popular Fiesta-based Figo. Care to guess why Toyota's Indian market share is a miniscule 2.5%?

Toyota says that it's okay with its price position in India, as it's attempting to position itself as a premium brand. But the upshot of all of this is that Toyota's share of these two all-important markets trails key global competitors like GM and Volkswagen at a critical time. Ford has said that it expects 70% of its sales growth in the next decade to come from Asia, and GM, Volkswagen, and Hyundai have pinned significant hopes on the region as well.

These markets are still somewhat fluid, and there's still time for a global giant like Toyota to make a big push for market share. But Toyota may not be able to make such a push for some time -- and meanwhile, the window of opportunity could close on its fingers.

The bottom line: An expensive trend for the company
According to the Times report, Toyota's budgets assume a benchmark exchange rate of 90 yen to the dollar. For every yen below that mark, Toyota says that it loses some $357 million in operating profit. As I write this, the yen stands at about 83.5 to the dollar. If the yen stays near current levels, Toyota's projected operating profits for 2010 could be halved.

What can Toyota's management do about this? Not much, at least in the near term. While they can try (and surely are trying) to hedge the currency risk somewhat, a real solution will involve moving more of the company's manufacturing to local markets, as competitors like Honda and Nissan have done. But such an effort would take significant time and significant investment, and -- maybe worse -- would fly in the face of heavy government and social pressure to preserve jobs in Japan. Don't count on it happening anytime soon.

Read more of the Fool's global auto coverage:

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Fool contributor John Rosevear owns shares of Ford. Ford and Nintendo are Motley Fool Stock Advisor selections. You can try Stock Advisor or any of our Foolish newsletter services free for 30 days, with no obligation. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On September 07, 2010, at 5:12 PM, BobMichigan wrote:

    Yeah, keep thinking that "last spring's high drama" is fading in the rear view mirror.

    Anyone I talk to about cars mentions Toyota and I ask them how they could possibly trust a company that repeatedly and knowingly LIED ABOUT SAFETY ISSUES?

    Your spouse cheats on you and lies, do you just automatically forget about it?

    toyota played russian roulette with your kids and its OK?

  • Report this Comment On September 07, 2010, at 9:02 PM, TMFMarlowe wrote:

    @BobMichigan, they're still selling cars. Like it or hate it, that's the number that matters. It hasn't continued to hurt their sales like a lot of people -- including me -- thought it would.

    Thanks for reading.

    John Rosevear

  • Report this Comment On September 07, 2010, at 11:10 PM, cbglobal wrote:

    Most of the best selling Toyota's are built in here with mostly local domestic content. The Camry is actually the best selling "American" Car if you don't include trucks (Ford F150).

    Actually the Highlander is one of the few non Lexus vehicles that still comes from Japan.

    I doubt the yen has much of an impact on Toyota overall. Luxury Lexus buyers won't notice as much.

  • Report this Comment On September 07, 2010, at 11:24 PM, predfern wrote:

    If there is "heavy government and social pressure to preserve jobs in Japan", then why aren't Honda and Nissan feeling it?

  • Report this Comment On September 07, 2010, at 11:26 PM, cbglobal wrote:

    You can buy Toyota on the NYSE in US dollars. So even if Toyota's stock goes nowhere, it will go up in dollars if the Yen gains against the dollar.

    For US investors in Toyota this is anything but a problem.

  • Report this Comment On September 08, 2010, at 7:43 AM, TMFMarlowe wrote:

    @cbglobal: The company's books are in yen. The US-market stock price has nothing to do with this. And Toyota's business is much, much more than the US market.

    @predfern: Because they set up their global operations before the most recent economic crisis. (And I suspect they *are* feeling it.)

    John Rosevear

  • Report this Comment On September 08, 2010, at 10:41 PM, cbglobal wrote:

    Right, Japan reports in Yen, while the American auto companies report in ever worsening dollars. Will GM have a disclaimer in their IPO documents that the numbers are in US dollars and therefore may be worth less by the time you buy the stock.

    So Toyota makes a US$10 Billion profit in the US market, converts in to Yen, then a couple years later sends it back to the US where it is now worth US$15 Billion without even earning any interest on it. Poor Toyota.

    GM makes a US$10 Billion profit in China, converts it to dollars and when the money is sent back to China later to build a new plant there, it only buys $5 Billion of materials. Yahoo for GM.

  • Report this Comment On September 08, 2010, at 11:26 PM, cbglobal wrote:

    Hey, while China just (barely) past Japan in total GDP to become the second largest economy (again in total); China has 10.5 times more people than Japan.

    This means that the average Japanese person has a standard of living 10.5 times higher than the average Chinese.

    So given two choices, would you rather be middle class by Chinese standards or low income by Japanese standards ??

    Poor Japan....the rising yen will make everything cheaper making their standard of living even higher. Since on big ticket items, quality means more to them than price, I doubt they pick up some lower quality big ticket imports just because they are now a little cheaper.

  • Report this Comment On September 09, 2010, at 1:00 AM, cbglobal wrote:

    The last part missing is that Toyota discounts more than its Asian and German competitors. So while the sticker price is higher, the actual negotiated price is about the same. Smart marketing. So the higher price denotes quality, which you get a great deal on.

    Why buy another family car, when the more expensive (ie, better) Camry is the same price in the end as the others. See how that works.

    Fitzgerald Auto Mall that uses no haggle pricing sells that Highlander at 12 to 13 percent off sticker. (A $40K Highlander can be bought for $35K no haggle).

  • Report this Comment On September 09, 2010, at 10:53 AM, baldheadeddork wrote:

    @ cbglobal: "Japan reports in Yen, while the American auto companies report in ever worsening dollars."

    I know it's really popular in some circles to talk about the ever collapsing dollar, but the data doesn't back you up. In the last two years the dollar has strengthened significantly against the Euro and the Yen.

  • Report this Comment On September 09, 2010, at 11:28 AM, baldheadeddork wrote:

    Edit to correct: I included the Yen by mistake. The dollar is up against the Euro and almost everything else over the last few years.

  • Report this Comment On September 09, 2010, at 11:54 AM, baldheadeddork wrote:

    Toyota also has a big problem in it's immediate future.

    For more than a year, Japan has had a C4C on steroids program to promote hybrid sales. It's been a huge success for Toyota. For the first six months of this year, the Prius made up over 20% of Toyota's total sales in Japan. And like the C4C program in the US, manufacturers and dealers pulled back on incentives while the government was putting money on the table.

    All that ends on September 30. Everyone expects Prius sales to collapse for the rest of 2010 and into 2011. But it's also highly likely that the incentives pulled away future sales of non-hybrid models. This is going to hit Toyota across several models, and with Japan's economy growing at an even slower rate than the US, demand as a whole is going to be very weak when the incentives end.

    In recent news stories, Toyota is saying they expect dealers to step in with incentives to keep sales up when the government program ends. If you believe that, I've got a bridge to sell you. Dealers in Japan, like those in the US, will pull back and keep their focus on profit per vehicle instead of volume until the economy improves.

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