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.
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