Falling Yen Poses Big Threat To U.S. Car Manufacturers

Falling Yen Poses Big Threat To U.S. Car Manufacturers

Morgan Stanley Sees Content, Rather Than Price War.
Could Europe Be Hit Hard Too?

The U.S. light vehicle market is expect to grow modestly again this year and perhaps peak sometime at 18 million, but this healthy-sounding scenario masks a cloud hanging over the domestic industry; the plummeting yen and the damage it might inflict on the likes of Ford, General Motors and Chrysler.

LMC Automotive analyst Jeff Schuster, in a report, said U.S. demand is expected to grow five per cent in 2014 to 16.4 million. Schuster expects the recovery to level off before shifting to what he calls “more natural demand.”

But Morgan Stanley analyst Adam Jonas said the weakening Japanese Yen is likely to cause havoc amongst U.S. manufacturers. Jonas was commenting in a report published before Japan announced its economy slipped into recession in July-September, shrinking an unexpected annualised 1.6 per cent, after a severe contraction in the previous quarter. The yen promptly weakened further after the news.

“The Japanese Yen is the elephant in the room for U.S. autos. The move to 114 yen is a major problem and one of the key contributors to our view of new price deflation driving a profitless grind to 18 million,” Jonas said.

After the latest news of Japan’s weakening economy, the yen fell to around 116 to the dollar.

 Jonas said his scenario doesn’t envision a price war, rather a move by the Japanese, which have nearly 40 per cent of the U.S. market, to add content to their cars which will have to be matched by the competition. He said the yen at current levels, compared with a recent level of 80, gives the Japanese big three Toyota, Nissan and Honda, about $3,000 to play with, and as much as $5,000 or more for the likes of Mazda, Mitsubishi and Fuji Heavy.

$3,000 per car
“Adding $3,000 of incremental content to the next generation Japanese product at an unchanged list price, all else equal, would require a significant competitive response from the competition to avoid losing market share. The Detroit 3 stand right in the competitive cross hairs,” Jonas said.

“At 114 Yen, it’s not a question of whether the Japanese gain market share, but rather how many hundreds of basis points will they gain,” he said.

“We believe over the next three to five years, more than 50 per cent of the domestic U.S. auto industry’s margins will disappear due to lower pricing in the market relative to the rising costs of regulation and competitive content needed to defend market share,” Jonas said.

Jonas didn’t mention any possible threat to the European industry, which presumably would also be under threat from cheaper Japanese vehicles, although the scale of the problem is much smaller. In the first nine months of 2014, Japanese car makers had about 12-1/2 per cent of the Western European market.

Millennials
Meanwhile, LMC’s Schuster had some cautions to add to his positive shorter-term forecast for the overall market, and had some positive thoughts about future demand from the young, said to have fallen out of love with the car.

“There are risks to the forecast. An underperforming global economy would put pressure on the U.S., and autos would be susceptible to a pullback. Interest rates are slated to rise in the second or third quarter of 2015, which would make vehicles less affordable,” Schuster said.

And some good news about disappearing young buyers.

“We believe it is more an issue of delayed adulthood than lack of interest. As Millennials start households and careers, they will need vehicles,” Schuster said.