Weaker Yen Is Mixed Bag for Japan Auto Makers

By YOREE KOH

TOKYO?Japan's auto makers have been some of the most vociferous proponents of a weaker yen?calling for the U.S. dollar to appreciate to ?100 or more.

That is because they should be among the biggest beneficiaries: A weaker yen makes Japanese-made cars and trucks less expensive around the world and helps increase overseas earnings when they are repatriated into yen.

But a closer look at two auto makers, Mazda Motor Corp. and Nissan Motor Co., shows that the benefits of a weaker yen to Japan Inc. are anything but clear.

Hiroshima-based Mazda is the car company most likely to pop the Champagne when the dollar hits ?100. That is because Japan's fifth-largest auto maker produces about 71% of its cars at home and exports roughly 80% of them, meaning a move in the currency can deliver a heavy blow or sudden windfall.

One reason for the high percentage of exports is Mazda's small size: Last year it produced only 1.18 million vehicles, versus Nissan's 4.88 million. Despite the currency risk, Mazda decided it would be more efficient to concentrate its factories in Japan, rather than spreading them throughout the world.

Even as the yen strengthened in 2012, Mazda brought production of its Mazda6 sports sedan back home, after falling vehicle sales in the U.S. spurred them to pull out of a Michigan assembly plant run jointly with Ford Motor Co.

For the fiscal year ended March 31, the move means the amount Mazda lost for every one-yen appreciation versus the dollar climbed to ?3.5 billion?about 6.4% of the company's ?53.9 billion operating profit??1 billion more than it would have been two years ago. A strong yen?the dollar hit a post-World War II low of ?75.31 in October 2011?has been a big factor behind Mazda's four consecutive years in the red, totaling ?245.7 billion in net losses.

Now the yen's rapid slide means Mazda's fortunes are changing.

Assuming ?100 is worth a dollar, "we estimate additional profit of ?60-?70 billion versus" Mazda's guidance of ?120 billion in operating profit for this fiscal year through March 2014, J.P. Morgan analyst Kohei Takahashi said in a research note after the company announced earnings on April 26. Mazda projects its operating profit could increase ?56 billion based on currency gains in the current fiscal year, ?17 billion of which can be attributed to dollar-yen gains alone assuming a conservative rate of ?90 to the dollar.

In contrast, Yokohama-based Nissan has gradually shifted more production away from Japan over the last decade, in order to reduce costs and protect against currency fluctuations. The Japan-made portion of global production dropped to 24% in 2012 from 38% four years earlier, although with increasing sales, the export levels from Japan stayed relatively steady at 60%.

Nissan has also aggressively increased the use of components made elsewhere in Asia to lower yen-based costs. Deutsche Bank estimates Nissan now sources more than 40% of its auto parts from overseas, up from 10% to 20% several years ago. Nissan's best-selling domestic car, the compact Note car, imports about 45% to 50% of the parts used to build the vehicle at its factory in southern Japan.

Nissan says a bigger shift is on the horizon: it plans to move production of its two popular sport-utility vehicles to the U.S. The small Rogue crossover is scheduled to make the move this year, while the next generation of the Murano luxury SUV will follow when production is expected to begin in 2014. Nissan said 259,000 Murano and Rogue SUVs were produced in Japan last year?about 23% of domestic vehicle production.

That very different profile means every one yen change versus the dollar's average during the just-ended year has a ?15 billion impact on Nissan's operating profit, according to Koji Endo, a senior auto analyst at Tokyo-based Advanced Research Japan. That is 2.6% of what Nissan estimates will be its full-year operating profit. At a dollar level of ?100 compared with his previous fiscal year's estimate of ?82, Mr. Endo says operating profit this fiscal year at Nissan would increase ?270 billion from just dollar-yen effects.

Nissan is scheduled to report its earnings for the just-ended fiscal year Friday afternoon in Tokyo.

With the weaker yen, some question whether Nissan will follow through with its plan to shift SUV production to the U.S. On April 12, the Nikkei business daily reported that the auto maker may delay the production shift. A Nissan spokesman said the company's plans "to manufacture the next generation Rogue and Murano in the U.S. remain unchanged" and called the Japanese business newspaper's report "unauthorized and unfounded."

At the New York International Auto Show in March, Nissan CEO Carlos Ghosn also suggested its plans will stay. "We moved production outside of Japan and it's not going to come back," he said.

Going to a ?75 to the dollar level was "a shock," Mr. Ghosn said. Although the yen has weakened in recent months, "we are not very far from a historic level," he said.

--Joseph B. White in New York contributed to this article.

Source: http://feeds.wsjonline.com/~r/wsj/xml/rss/3_7013/~3/dkToui1Vpsc/SB10001424127887323744604578473693263699614.html

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