By manufacturing cars in the United States, Toyota has run into a currency risk—currency fluctuations. When dollars are repatriated to Japan, the dollars must be converted to yen. It has been estimated that Toyota loses $400 million for every 1 yen that the Japanese currency increases in value.
[On The Car Industry]
Toyota recently announced a loss in 2008 for its automobile operations of 150 billion yen ($1.7 billion) versus a profit in 2007 for its automobile operations of 2.3 trillion yen ($18.9 billion).
A decline in demand; a reluctance of banks in the United States to provide financing for automobiles; and, wariness by consumers to purchase new cars are the reasons. Toyota is the most profitable automobile manufacturer in the world.
But why the loss? A little history is needed.
In the late 1970’s Detroit’s big three, General Motors, Ford and Chrysler, currently known collectively as The Three Stooges, were being decimated by imported Japanese car manufacturers, Toyota and Honda. The reason: The quality of American cars was equivalent to the quality of our education system—horrible.
In 1980 Chrysler was so desperate for money that the American government financed Chrysler with a $1.5 billion loan. The United States government initiated tariffs of approximately $1,000 on every car that was imported from Japan. Americans eagerly purchased small fuel-efficient Japanese cars anyway.
Lee Iacocca was angry. After all it was Iaccocca, who while at Ford, conned the American public into purchasing the Ford Mustang, a car powered by a Falcon engine with horrible suspension.
Iacocca dared Toyota and Honda to manufacture cars in the United States. Iacocca believed that Honda and Toyota would produce cars in America that had defects like American cars and that the United Auto Workers Union (UAWU) would unionize the Japanese work force as well. He was confident that the Japanese auto companies would be knocked out of the competition.
Honda and then Toyota established auto manufacturing plants, at first mainly assembly plants with parts imported from Japan, in the United States. Later Honda and Toyota built manufacturing plants. Toyota and Honda did not build their plants in the industrial heartland. Toyota and Honda built plants in states such as Tennessee and Alabama. The automobile plants were not unionized.
By manufacturing cars in the United States, Toyota has run into a currency risk—currency fluctuations. When dollars are repatriated to Japan, the dollars must be converted to yen. It has been estimated that Toyota loses $400 million for every 1 yen that the Japanese currency increases in value.
Earlier this year the yen was quoted at 110 to the dollar. Currently the yen has strengthened to 90 yen—a stronger yen purchases fewer dollars. One reason for this increase in the value of the yen is that there are low interest rates in both the United States and Japan. If interest rates were higher in the United States than in Japan, the yen would be worth less.
Thus a decrease of 20 yen to the dollar leads to a loss due to currency exchange rates of $8 billion. Ironically, it is actually the strengthening yen that has provided a loss for Toyota.
Still GM, Ford and Chrysler could not compete and have lost billions of dollars in 2008, and have effectively run out of cash. So, GM and Chrysler have borrowed $17.4 billion from the United States Treasury.
Toyota does not need to borrow money. Toyota has cash reserves exceeding $18 billion — and an excellent credit rating.
