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4-Traders Homepage  >  Equities  >  KOREA EXCHANGE  >  Hyundai Motor Co    005380   KR7005380001

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Japan's yen offensive may give Toyota an edge over Hyundai

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12/26/2012 | 11:14pm CET

When Toyota Motor Corp (>> TOYOTA MOTOR CORPORATION) President Akio Toyoda visited northern Japan in July last year and announced a $24 million engine plant expansion, some analysts saw it as evidence of a flawed strategy that put patriotism above profitability.

When Toyota Motor Corp (>> TOYOTA MOTOR CORPORATION) President Akio Toyoda visited northern Japan in July last year and announced a $24 million engine plant expansion, some analysts saw it as evidence of a flawed strategy that put patriotism above profitability.

At the time, Toyota was struggling to rebuild its supply base after the March 2011 earthquake and tsunami and the yen was climbing toward a post-war record high against the dollar.

But the Miyagi Taiwa plant began assembling engines for the small hybrid Aqua, exported as the Prius C, this month with a welcome wind at Toyota's back: a weakening yen and a government-in-waiting determined to drive it lower.

Analysts say a continued slide in the Japanese currency could tip the competitive balance on pricing back in favor of Toyota and away from its toughest and fastest-rising global competitor, Hyundai Motor (>> Hyundai Motor Co) - a new dynamic that would likely be repeated across other Japanese export industries.

Since early October, the yen has weakened about 8 percent against the dollar and 10 percent against the Korean won. Over the same period, shares in Toyota have jumped by 30 percent as investors reacted to the prospect of higher profitability on cars built in Japan for export, including Lexus luxury models.

"As the yen weakens, that very tight cost structure they have put in place to maximize profitability in an appreciated yen position allows them now to make a lot more profit," said Larry Dominique, an analyst at TrueCar.com and former Nissan executive.

"With the Korean currency appreciating, I would expect that what you would see (for Hyundai) is some of the same issues that the Japanese faced over the past several years."

Whether the strategy of driving down the yen works to slow the "hollowing out" of Japanese manufacturing will be key for Japan's new government under Liberal Democratic Party chief Shinzo Abe, who is pushing for super-easy monetary policy to weaken the yen and lift pressure on exporters like Toyota.

The yen's rise in recent years has hurt Japan's exporters across the board, including industries like electronics and shipbuilding where competition with Korean rivals is also fierce. The number of Japanese factory workers fell 13 percent to about 10.4 million between 2002 and 2011.

But Toyota has been the slowest to abandon production in Japan - a conservative position that would make it the biggest beneficiary if the yen were to drop sharply now.

For his part, Toyoda has showed no signs of budging from a vow to make at least 3 million vehicles a year in Japan. Toyota engineers say the strategy allows them to keep suppliers close and drive innovations at "mother plants" in Japan which can provide guidance on cost-cutting for overseas plants.

By contrast, Nissan under Chief Executive Carlos Ghosn has been aggressively moving production offshore.

Under Ghosn, Nissan shifted production of its "March" subcompact - one of its top-sellers in Japan - to Thailand from Japan and has scrambled to buy more parts made overseas, including South Korea. Just 20 percent of Nissan's global production now originates in Japan, down from 50 percent five years ago. For Honda, Japan accounts for 26 percent of its total production, down from 34 percent in 2007.

For Toyota, the comparable figure is 40 percent, down from 50 percent in 2007.

As a result, Toyota is much more sensitive to the yen exchange rate than its Japanese rivals. Toyota operating profits fall by 35 billion yen for every one-yen drop in the value of the dollar. For Nissan, that comparable figure is 20 billion yen and for Honda 16 billion yen, the companies have said. Gains of the same proportion could be expected from a weakening yen.

"Toyota is the one that is hit the hardest when the yen is high," said Koji Endo, an autos analyst at Advanced Research in Tokyo. "But it is also the one that benefits the most when the yen is low."


Analysts point to Hyundai's recent success as an example of how a smart manufacturer can use the pricing power of a weak currency to undercut rivals.

A video that went viral at the Frankfurt auto show in 2011 caught Volkswagen Chairman Martin Winterkorn in candid admiration at Hyundai's quality gains. The video, which was widely circulated among auto executives, shows Winterkorn admiring the interior of a Hyundai i30.

Speaking to an entourage, Winterkorn notes that the windshield wipers are hidden from view - as they would be on a more expensive car - and that the steering wheel makes no sound when adjusted. "How did he do that?" Winterkorn asks about Hyundai. Off camera, a VW engineer can be heard to chime in: "We had a solution but it was too expensive."

Similarly, Hyundai has used a weaker won to help target Toyota's luxury Lexus brand. That is similar to what Lexus did to Mercedes and BMW in 1990 when it went from nowhere to become the top-selling U.S. luxury brand. At the time of the Lexus launch, the dollar was trading near 130 yen.

But in recent years, Hyundai has become the value leader. The top-of-the-line Hyundai Equus starts at $67,150 for 2013, an increase of just 1 percent over the previous year.

The sedan built at Hyundai's Ulsan plant also comes packed with features like 19-inch chrome wheels and a massage unit for the VIP seat in the rear as well as for the driver. Hyundai also promises that anyone who buys an Equus will never have to visit a dealer for service. Staff pick up the car at a home or business and replace it on the spot with a loaner.

By contrast, the strong yen forced Toyota to hike the price of the competing Japan-built Lexus LS 460L by 8 percent on the all-wheel-drive model for 2013 to $82,670.

Toyota could take advantage of a weaker yen now to address those pricing gaps and to add features where it has skimped. The Prius C built in Iwate in northern Japan, for example, was designed to be priced about $4,000 below a full-size Prius in the United States, Toyota's largest and most profitable market.

But Consumer Reports panned the hybrid for what it called a cheap-looking plastic interior and bad road noise.

A stronger won now could force tougher choices on Hyundai and its affiliate, Kia Motors (>> Kia Motors Corporation), analysts and executives say. In recent years, Hyundai Motor's operating margin averaged 8.1 percent when the won weakened against the yen compared with a leaner 6.5 percent when it was strengthening, according to Thomson Reuters calculations.

A study by researchers at the Korea Automotive Research Institute released this month found South Korean auto exports shrink by 1.2 percent annually with every 1 percent decline in the value of the yen against the won.

"We are agonizing over the firming won," said one Kia executive, who asked not to be named because he was not authorized to speak about strategy.

But for the currency changes to have deep and lasting effects, they would need to be sustained, analysts and executives said. Automakers need four to five years to design a new model and shift suppliers. And in the end, every automaker has the same goal - to neutralize the impact of exchange rates by building more vehicles in the markets where they sell.

At the same time, a weaker yen remains more speculative than real, industry executives caution.

"It is wrong to say the yen is weak," Toyoda said last week. "The yen is still super strong at the current level."

(Additional reporting by Choonsik Yoo and Hyunjoo Jin in Seoul; Editing by Kevin Krolicki and Mark Bendeich)

By Yoko Kubota

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Financials ( KRW)
Sales 2016 93 765 B
EBIT 2016 5 710 B
Net income 2016 5 987 B
Debt 2016 35 682 B
Yield 2016 2,84%
P/E ratio 2016 6,64
P/E ratio 2017 6,37
EV / Sales 2016 0,81x
EV / Sales 2017 0,78x
Capitalization 40 102 250 M
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Number of Analysts 40
Average target price 171 710  KRW
Spread / Average Target 13%
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Mong-Koo Chung Chairman & Co-Chief Executive Officer
Won-Hui Lee Co-President, Co-CEO & Director
Gab-Han Yoon Co-President, Co-CEO & Director
Byeong-Cheol Choi Chief Financial Officer
Woong-Cheol Yang Vice Chairman-Executive Board, Head-R & D
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