Japan’s automakers face Endaka

What happened to Japan’s Big four automakers in 1985, and then again in 1993-1995? Since the end of World War II, Japan’s economic strategy for growth was based on exports, that allowed the development of its powerful industrial sector. During the 1980s, Japanese automakers in particular were enjoying an unprecedented and largely unexpected period of prosperity. They managed to establish a successful domestic automobile industry and to gradually sell their products abroad. Thanks to their competitive advantage in producing cars with respect to foreign competitors, due to labor differences, technical efficiencies (lighter and fuel-efficient cars), better designs, and of the low exchange value of the Yen, they were able to make the Japanese auto industry one of the most export-reliant manufacturing sectors in the world. However, with the onset of Endaka in 1985, the so-called yen appreciation compared to the dollar, the situation started to become problematic for Japan’s economy. While, before endaka, the dollar had traded at 240 RMB, it was worth only 150 RMB in 1986.

Many large companies started suffering big exchange losses from 1985, and small and medium-sized exporters started losing ground abroad. In particular, Japanese automakers were facing a big challenge: not only these companies lost the piece of cost advantage due to the low exchange value of the Yen, but also they had to comply with the strong protectionism in the US, by reducing their sales in that profitable market. After years of fighting for surviving to the Endaka, just as the worst seemed over, Japan’s Big Four had to cope with a new “round” of Yen appreciation. With the so-called “Super Endaka” in 1995, the yen hit the record level of 80.63RMB to the dollar. This made Japanese cars more and more expensive in terms of dollars, consequently caused sales to decrease even more -above all in the US market-, largely reduced margins and caused Japanese profits to drop considerably. 2a) How well did Japanese firms respond to the changes of 1985? The Japanese auto firms responded very well and promptly to the changes of 1985, by implementing four main strategies that allowed them to survive to the first challenging wave of exchange rate shift. These tactics were (1) costs reduction, (2) “transplants” creation, (3) differentiation and (4) price increase.

The first remedy to the yen appreciation was, of course, the implementation of austerity programs including various measures of action such as overtime and overhead cut (for example, they started working during the weekend, when the electricity was cheaper). Also, the Japanese companies started to purchase inputs for production from abroad, thus exploiting cheaper the cheaper prices. At least, they could benefit from the one and only positive aspect of Endaka. The austerity program allowed Toyota to remain profitable during the 1980s, but the same didn’t happen to the other big car manufacturers, which were not as good as Toyota in cost efficiency. It was clear to every company in the industry that cutting costs was not sufficient to maintain a good margin, due to the fact that the higher exchange value of the Yen eroded the whole profit. Mazda, Diamond-Star Motors, Subaru/Isuzu decided thus to undertake a more drastic decision and, by following the example of Toyota, Nissan and Honda, which had already opened plants in the US before Endaka, they established their production facilities overseas.

Rather than trying to export from the higher-priced Japanese market, they began to produce directly in the cheaper American market. As a consequence, the stock of Japanese investment in the US auto industry almost tripled in 8 years. This was a good decision also considering the US market, which also benefited positively from this change: US affiliates’ automotive manufacturing sales experienced an almost threefold increase, and 26.000 American workers were employed. The Japanese firms understood that, being constrained not only by the high yen and voluntary restraints, but also by new competition from Korea and east Europe, they also had to implement a change in their product portfolio.

They had to expand their market reach intelligently, and therefore moved from a low-end segment to higher-margin ones, while making the best use of marketing. As a result, by the early 1990s, most of the auto firms had offerings not only in the mid- range, but also at the very top of the luxury market. Finally, Japanese auto companies had to increase their prices by 40%. Indeed, even though the yen appreciation already led to a small price increase for Japanese cars sold in the US (10% in 1986), this was not enough to preserve decent margins, and led instead to income drops. All this preventive measures allowed the Japanese firms not only to survive to the sharp increase of the yen against the dollar, but also to boost their sales and increase their share in the highly competitive US market. 2b) What will they have to do differently in 1995?

The onset of Super Endaka in 1995 summed up to an already existing situation of global recession (1991), with price pressures, posted production and sales declines. Moreover, trade barriers in Europe prevented Japan’s firms to expand and compensate for the US losses, where the price effects of yen appreciation were most severe. This time, the challenge posed by the new exchange rate shift was even harder than the first one. It followed that the strategies employed so far and their strengthening were only the minimum requirements for survival, and then something more drastic was needed. Firms cut costs even further, raised prices selectively and chose their components from the cheaper suppliers; Toyota opted for cost minimization but this time through plant restructuring, while Honda for a more cost-efficient diversification, by producing a new model using old models’ parts. Prices increased further both for wholesalers and retailers, but this time cars manufacturers took the smart decision of doing it more strategically, through a selective tinkering of their price level; the heavily hit product segment was that of the low-volume cars and trucks, while the most profitable family sedans segment remained almost unaffected.

Furthermore, the advertising and marketing strategies, so far not considered the best corrective measure, became instead essential during these years. As plant capacity accumulated, leasing with low interest rates, consumer rebates, advertising and dealer sales bonuses became the central marketing tools that allowed Japan’s big Four to boost their sales volumes and justify the high prices. However, the most effective solution for escaping bigger losses was transferring another significant production capacity out of Japan, this time to the Asia’s huge and untapped markets having cheap labor force. Starting from the early 1990s and increasingly from 1995, Japanese manufacturers started therefore to cut production in the domestic market and to outsource in China, Thailand and Philippines with aggressive expansions plans. Nissan reduced its exports from Japan by 26% and correspondingly increased its overseas production by 22%; seemingly, Honda production for a specific model disappeared in Japan but continued only in the US.

This had unfortunately negative effects on Japan’s domestic politics, causing unemployment to rise to an unprecedented 3% in 1995, but was a logic consequence of the two waves of yen appreciation, other than a good decision in economic terms. 3) What lesson, if any, can other firms take from the response of the Japan’s automakers to endaka? Facing a strong domestic currency appreciation, Japan`s automakers demonstrated to be able to implement an efficient strategy portfolio and survive to the catastrophic consequences of a high yen. All their measures of action, both during endaka and super endaka, could be considered positive examples of reaction to a situation of currency appreciation: costs reduction in both plants and offices as a first “remedy”, in order to maintain a minimum margin and not to face losses from the very beginning; the plant establishment in the depreciated US market later on, to compensate the high domestic costs of production; the tactic of diversification as a way of reaching a bigger customer pool, and finally price raising when cost minimization was no more sufficient to avoid profit erosion.

Also, the fact that Japan’s Big Four did not give up to the second wave of endaka and implemented alternative and stronger strategies, teaches that firms should always be ready to promptly react to unexpected event with an effective solution. The auto manufacturer were able to realize that the measures adopted in the past would not be sufficient to prevent bigger losses this time. Therefore, not only they (1) minimized costs further and more drastically, (2) increase price further -this time selectively- and (3) diversify more efficiently; but they also implemented marketing and advertisement strategies to boost their sales and, when the situation became unsustainable, they opted for outsourcing most of their domestic production. Concerning this last point, firms could learn from the Japan’s Big Four that everything comes at a price. Outsourcing, indeed, was necessary for the car industry survival, but threatened internal stability, raised unemployment to unprecedented levels and caused cultural and political pressures that prevented further outsourcing. Firms could also learn that, in such a situation, it is necessary to think about all the possible consequences of any course of action, rather than only focusing only on their own problems. .

What are the implications for China MNEs when facing with RMB appreciation? Nancee’s: Facing the RMB appreciation China`s MNEs could adopt sever method as follow to hedge risk First, China`s MNEs should be diversification, such as scattered region, diversify financing with different currency and diversify raw material and components purchasing. Second, China`s MNEs should strengthen the overseas investment. China`s MNEs could select production investment either in the low-wage and low cost countries which products and service are settled in dollar or even in America Third, China`s MNEs should improve their technology and quality of products and service to maintain their competitive.