But Japanese Expected To Press Home Weaker Yen Advantage.
Expect Surreptitious Content Pressure, Not Price War.
“The average Japanese car on sale in the U.S. market has 44 per cent content from Japan”
Car sales in the U.S. are generating excitement for some, but others perceive a gathering cloud over domestic participants in the American market as Japanese manufacturers gain an advantage from the weakening yen.
Ratings agency Standard & Poors expects the rate of annual U.S. sales in May of 15.1 million to accelerate on to a total of 15.6 million for the whole year. Citi Research expects sales will reach between 16 million and 17 million by mid-decade.
S&P says U.S. sales are improving because of pent-up consumer demand, a strengthening housing sector and a slowly recovering U.S. economy.
“Our base case assumes the sales pace will improve for the remainder of the year, assuming housing in particular will keep gathering steam amid overall GDP growth of 2.7 per cent. We expect the recent soft patch for overall economic growth to give way to firmer ground in the third quarter, once policy makers resolve their differences and reach a compromise on the fiscal budget,” S&P said.
That might sound very cosy and positive, but Morgan Stanley sees some dangerous threats to domestic participants in the U.S. market, following the steep decline in the value of the yen against the dollar. Sharply increasing capacity – an extra three million between 2011 and 2015 – and falling used car prices spell danger too.
In a report, Morgan Stanley said the high degree of transplanted Japanese car plants in the U.S. has left the impression that the impact of a weaker yen would just be on repatriated profits. Not so, says Morgan Stanley analyst Adam Jonas.
“The average Japanese car on sale in the U.S. market has 44 per cent content from Japan,” Jonas said.
Mazda top with 85 per cent
Japanese content ranges from 85 per cent for Mazda down to Nissan and Toyota’s 52 per cent and 48 per cent, while Honda is the lowest with 22 per cent.
Jonas doesn’t expect an overt price war from the Japanese but a covert content one. The fall in the yen represents $2,000 a car for the big three, and as much as $4,000 for Mazda, Mitsubishi and Fuji Heavy’s Subaru. This will become apparent in the 2014 model year beginning next month as Japanese manufacturers gradually add content and product enhancement. For example, the 2014 Acura MDX offers over $4,000 in additional content for a $1,710 increase in price, Jonas said.
Morgan Stanley is also bullish about sales prospects which will rebound sharply into the late third quarter and fourth quarter, with the selling rate jumping by as much as one million to the low to mid 16 million by year end. This will raise profit expectations, which Jonas says will end in tears for the U.S. manufacturers, as they are forced to add expensive content to match that offered by the Japanese.
“The problem with this scenario is that the market will enter 2014 with high expectations for volume, price and mix only to see a major escalation of “structural costs” related to giving away better content,” Jonas said.
Neil Winton – June 12, 2013