The World’s Largest Automaker: Toyota

Who would have ever thought that a foreign company would be the world’s largest automaker (in terms of total annual sales- in 2007)? During 1970s, GM owned about 60 % of the entire U.S. automobile market, but today, it only has about 24~25% market share (about one third of what it once had.) As we talked about in the class, there have been several factors and reasons why Detroit 3 fell. One major reason we talked about is the poor management. While foreign companies worked hard to improve cars like Camry, Civic, etc GM and Ford did not “really” worked hard due to their oligopoly positions.

My question now is how these Detroit 3 or the American automakers would try to get back to the top. As Ms. Ellen Hughes Cromwick from Ford told us, Ford’s global sale has been increasing although it declined in the U.S. market. However, this is not enough. Another concern is how they would react to the changes in the currency exchange rates. For example, Prime Minister Abe in Japan has been trying to weaken yen against U.S. dollar (Japanese currency,) which means Japanese automakers will be more “price” competitive. Ford’s or other American companies’ reactions to this change in currency exchange rate can be extremely critical to their future sales. Ms. Ellen Hughes Cromwick also talked about how Ford did not want GM to fall. Maybe, the American automakers can work together to get back to the top. This might be a silly idea but simply working harder now would not make any difference because most of the car companies now try their best.

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2 comments to The World’s Largest Automaker: Toyota

  • oliver

    Ford’s not wanting GM to fall because they share the same supplier base is very different from a possible cooperative effort’s being useful. In the Vlasic book, we learned that the primarily family owned Ford is very opposed to anything that would dilute its controlling interest. Also Mr. William Cosgrove told us that the surest way to dilute a brand is to share a common platform across vehicles. If any American automakers were to team up so that they could exploit synergies it is certain that some of what makes each company unique and desirable to its base will go away.

  • 1. Sharing runs into antitrust issues. That’s less important now that GM no longer has 50% of the US market, but cooperation has its limits. One current exception are transmissions, with a joint venture working on 9-10 speed ones. That is an exception.

    2a. Exchange rate “pass through” is an issue. Just because the yen has weakened doesn’t mean that Japanese exporters (in terms of brands, Lexus, Mazda, MMC, Subaru but basically not Honda and not Nissan and now Toyota) will lower prices. Instead they may hold prices constant to increase profits (from near-zero). Empirical work in the auto industry suggests as well that pass-through of an exchange rate depreciation (dollar appreciation) is modest in the short run.

    2b. Furthermore, the industry may have hedged exchange rates; while they are thereby protected if the yen had appreciated from ¥80/US$ to ¥70/US% (a 12% shift) they also can’t profit from a depreciation. I asked Dennis Toss about the number of years out that a firm can hedge; he suggested that it is 3-5 years, but that doesn’t mean that exporters actually do much that far in the future. So I wouldn’t expect anything to happen for 6-9 months.

    2c. What might we look towards as evidence?

    First, what happens to incentives? Firms are unlikely to change list prices [that is, have almost never done so in the past in markets that don’t suffer from high inflation. However, they could discount more heavily.
    Second, what happens to prices at the time of new model launches? Does the differential between similar Japanese exported and US domestic cars shift? Or do we see Japanese firms exporting smaller cars or otherwise targetting niche markets in which they did not have a presence in the US?
    Third, what happens to profits? If firms use an exchange rate depreciation to increase their market share, then we would expect the change in profits per car sold to increase modestly; if they don’t “pass through” the yen depreciation, we would expect a small change in market share and a big change in profits. This might be most obvious if firms don’t all follow the same strategy (Subaru with a strong brand choosing profits, Mitsubishi or Mazda leaning towards volume to improve their capacity utilization).
    Fourth, will Japanese firms continue to add to capacity inside NAFTA, and will they continue to be cautious about investing inside Japan? Here the evidence seems to point to continued investment in the US at the expense of production in Japan. Revisit that in 6 months and see whether there have been any announcement of new factories on this side of the Pacific.

    3. I’ve not looked into the “why” of the yen depreciation. My gut feeling is that this may be a transitory response to monetary policy pronouncements, but bond prices in Japan were already very high (interest rates very low) so I don’t see a strong shift in incentives for the decision of Japanese fund managers for where to “park” cash. They may believe the Bank of Japan claim (“Abenomics”) that there will be inflation and hence a yen depreciate. If you believe the yen will depreciate next year, then you want to buy dollars now – and voila, the yen depreciates immediately. I don’t believe Abenomics will work, so once market participants get a dose of realism, the yen will return to its previous level. If Japanese car companies think this way, then they certainly won’t start changing their strategy on the basis of a short-term swing.

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