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General Motors Company (GM), Ford Motor Company (F) & Toyota Motor Corporation (ADR) (TM): Bad Signs for Detroit’s Big Three

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General Motors Company (GM), Ford Motor Company (F) & Toyota Motor Corporation (ADR) (TM): 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 Motor Company (NYSE:F), General Motors Company (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 Motor Corporation (ADR) (NYSE:TM), Honda Motor Co Ltd (NYSE:HMC), and Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) 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 Motor Company (NYSE:F) and General Motors Company (NYSE:GM) by increasing the perceived value of their products – an obvious selling point.

Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC) 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 Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC) 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 Motor Co Ltd (NYSE:HMC) 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 Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) has recently lowered prices substantially on seven of its vehicles sold in the U.S. market. Obviously Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) 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 Motor Corporation (ADR) (NYSE:TM) 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.”

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