Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Japanese Advantage Set to Derail Ford Motor Company (F) and General Motors Company (GM)?

Page 1 of 2

If you follow the automotive industry at all, you know that Ford Motor Company (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 Company (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.

Ford Motor Company (NYSE:F)

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 Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (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 Motor Company (NYSE:F) 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 Motor Company (NYSE:F) and GM’s recent surge and completely derail them while causing a lot of pain for shareholders.

Page 1 of 2
Loading Comments...