Drive From The Rising Sun: Why Japan’s Car Companies Are Moving Manufacturing Overseas

Drive From The Rising Sun: Why Japan’s Car Companies Are Moving Manufacturing Overseas

Japan's vaunted automakers may soon stop building cars in their homeland for export as a soaring yen combines with Mother Nature's mood swings and an aging population saps the strength of the Nipponese domestic market, driving the companies across the oceans and far from their birthplace.

Last week, Nissan Motor Company Ltd. (Tokyo: 7201) CEO Carlos Ghosn said that the automaker was seeking to "minimize exports from Japan." The very same day, Honda Motor Company Ltd. (NYSE: HMC) announced that it planned to stop exporting hybrids and instead produce them solely in the markets where they are intended to be sold. In 2011, Honda discontinued production of Civic model cars in Japan in favor of international production. And even Mazda Motor Corporation (Tokyo: 7261), which has been slow to set up plants outside of Japan, has recently broken ground on new factories in Mexico to produce Mazda 2 and 3 cars as well as engines.

These moves are a bitter pill for Japan and its foundering economy - and also a peek into Japan's future. Just a few decades ago, when Japanese companies were audaciously acquiring such international icons as Pebble Beach Golf Course and Rockefeller Center, Burberry, Aquascutum, Sun Chemicals and Columbia Studios, fears were rife in the West that Japan was going to dominate the global economy, eclipsing the U.S. in importance and innovation.

Nobody raises those concerns anymore. As Japan's automakers begin the process of closing the door on their domestic operations, they will leave a bedraggled economy that last year fell behind China to No. 3 in Gross Domestic Product and offers little reason for optimism. By all accounts, Japan's GDP will continue to shrink inexorably as its population ages and the dynamism of its domestic market weakens.

"Partly it's a hedge against currency; it's also to be closer to customers," said Robert Cole, Professor Emeritus at the University of California Berkeley Haas School of Business and visiting researcher at Japan's Doshisha University. "And the domestic market is not growing anymore. They (automakers) must go global."

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The Big Bad Yen

If anything is accelerating the move by automakers to leave their Japanese operations behind it is the strength of the country's currency. The Yen hit a record low of 75.31 to the dollar last year and has fallen almost 32 percent in the past five years. A strong yen makes Japanese exports less competitive globally and cuts into the value of overseas earnings when repatriated into yen. According to analysts, for each yen that the dollar loses in value, Toyota Motor loses about 30 billion yen in earnings per quarter.

"The pressure has increased on Japanese manufacturers across the board in recent years to move manufacturing overseas because of the sky-high yen," said James Lincoln, Mitsubishi Chair in International Business and Finance at the University of California Berkeley Haas School of Business.

Earlier this month, as part of an alliance with Renault and Daimler, Nissan broke ground on a new factory in Decherd, Tenn., which will employ 400 employees. The company also announced that it would take a $ 450 million stake in Russian car company OAO Avtovaz, maker of Lada-brand cars. The Russian market is the fastest growing automotive market in Europe.

Nissan is likely to extend its global footprint even further in the near future. CEO Ghosn said that if the exchange rate remains at its current levels the company would be forced to move more of its production overseas, including its luxury Infiniti brand models. "Without a doubt, we will have to do it," Ghosn said, "at 79 yen or 80 yen, most of the growth is going to take place outside Japan, if not all of it."

The Supply Chain Ouroboros

Last year's string of natural disasters laid bare another set of critical vulnerabilities for automakers with factories in Japan. The Japanese earthquake and tsunami, and the subsequent nuclear disaster in Fukushima Prefecture as well as torrential flooding in Thailand disrupted supply chains for all of Japan's car companies and set back their production schedules by months.

Toyota and Honda, in particular, were hard hit as their Japanese factories and those of their suppliers were idled for long periods, delaying the launches of critical new models, like the Honda CR-V. Toyota's net income for fiscal year 2012, which encompasses the disasters and recovery period, fell 44 percent, to $ 3.56 billion and its worldwide production fell 8.4 percent in 2011. Last year, Honda lost 0.8 percent of its marketshare globally and its production fell 20.1 percent.

To better protect its global supply chain - in other words, to hedge against natural disasters and to avoid being overly dependent on any one region - Toyota has invested $ 565 million in U.S. and Canadian manufacturing facilities since February, hiring almost 1,000 employees and increasing North American capacity by 100,000 vehicles, 120,000 transmission and 100,000 engines annually. Meanwhile, Honda has decided to manufacture the Acura NSX in Marysville, Ohio and the Honda Fit at a new plant in Mexico. Between these two factories, Honda is ponying up more than $ 1.3 billion.

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