Sunday, June 17, 2007

Toyota and the Dollar-Yen Exchange Rates

I am reading Managerial Economics – Applications, Strategy, and Tactics written by McGuigan etc.. The 9th edition of this book was written in year 2002, and the case study is somewhat outdated. One of the cases examines how Toyota handled exchange rates in mid-1990s:

On January 5, 1994, the U.S. dollar exchanged for 113 yen. A 1994 Toyota Celica ST Coupe made in Japan and shipped to Eastern U.S. dealers sold for $16,968. Just 16 months later on April 19, 1995, the dollar was worth only 80 Yen. This 34 percent decline in the value of the dollar and corresponding 34 percent appreciation of the yen made Japanese exports to the United States potentially much more expensive. To recover costs and maintain their 1994 profit margin, Toyota was presented with the prospect of pricing that same Toyota Celica ST Coupe at $23,967. Since domestic U.S. producers of comparable small sporty cars had raised prices only 5-10 percent over the intervening period, Toyota faced a tough decision…

In the end, Toyota chose to raise the 1995 Celica ST Coupe price by only 2 percent to $17,285. At the same time, strong yen allowed the car maker to acquire fixed assets at very favorable home currency cost. Between 1994 and 1997, Toyota’s share of the U.S. passenger car market jumped from 8.5 percent to 10.5 percent.

Fast forward to 2007. On May 11, the dollar exchanged for 121 yen. In the first quarter of the year, Toyota overtook GM to become – unofficially – largest car maker of the world. Supporters of Detroit’s Three often cite a weak yen as the reason for Toyota’s upswing. Toyota makes cars at lower cost. (Never mind the Japanese auto-maker has manufacturing plants in the U.S.) “This is not a level playing field.” They claimed.

However, we have seen that Toyota thrived in mid-90s even when yen was strong. The reality is: mismanagement is behind the woes of GM, Ford and Chrysler. Detroit’s Three were after short-term gain. Toyota and other Japanese car-makers were more concerned with long-term profit. Period.


James McGuigan, Charles Moyer & Frederick deB Harris, Managerial Economics: Applications, Strategy, and Tactics, 9th edition

No comments:

Post a Comment