Sunday, March 16, 2008

Will The Unwinding Yen Carry Trade Save GM Or Ford?

On Monday, March 10, I wrote an article entitled, “Will GM Or Ford Survive The Current Economic Crisis?” about the survivability of GM and Ford due to the current economic condition. In that article, I questioned the likelihood of GM and Ford being able to return to profitability in 2008. Since then, the Yen-Dollar exchange rate dropped to ¥98.9 to $1, the highest level in 12 years. With stronger Yen, resulting from the Yen Carry Trade unwind, comes the question of whether this will mean hardship for Japanese cars manufacturers like Toyota, Lexus, Honda, Acura, Nissan, and et al. and a bit of a breathing room for GM and Ford.

The Answer: May Be A Little But Not Really Material
Here is why. While Japanese automobile companies exported 2.2 million cars and trucks to the U.S. in 2007, 23.2% of their total production of 9.8 million cars [i], the Japanese car manufacturers have been diversifying their production out of Japan for sometime now and have established manufacturing and assembly plants in North America as well as in Europe, India, Australia, and China.

Overall, in 2007, the three major Japanese car manufacturers imported only 13.4% of their cars produced in Japan to the U.S. In fact, of the 5.3 million cars and light trucks sold in the U.S. in 2007, the three major Japanese car manufacturers produced majority of their cars sold in the U.S. from their assembly plants in North America. In 2007, the import of their Japanese production was 10.5% for Toyota, 29.3% for Honda, and 3.9% for Nissan. And, majority of the imports from Japan were their specialty divisions vehicles: Lexus, Acura, and Infinity, respectively.

Data Sources: , Toyota, Honda,, JAMA.OR.JP, JAMA.CA/jamastats

Japanese Car Manufacturers Have Large Foot Print In the U.S.
According to the Japanese Automobile Manufacturers Association (JAMA), 63% of all Japanese cars sold in the U.S. in 2006 Japanese cars were made in the U.S. Overall, the number of Japanese cars being imported dropped from approximately 3.4 million vehicles in 1986 to fewer than 2.3 million cars in 2006, a reduction of approximately 1.2 million cars.

Source: Japanese Automobile Manufacturers Association

Individually, the top three Japanese car manufactures have the following presence in the U.S.:



If A Japanese Car Is Made In the U.S.A., Then Is It An American Car?
According to a September 2007 survey done for JAMA, 70% of the people polled agreed that a car made in America by Americans is a U.S. product regardless of the make of the car. (28% of the people polled disagreed.)

Japanese car manufacturers have invested $30.9 billion in building new plants in the U.S., employ 425,000 workers, and purchase $48.8 billion in auto parts from U.S. parts manufacturers. With that much U.S. based investment, employment, and spending, aren’t they better for the U.S. economy than GM or Ford?

While the unwinding Yen Carry trade may hurt the Japanese car manufacturers a bit, they have diversified out of Japan and historically were well hedged against FX risks. Therefore, the stronger Yen may dent the Japanese car manufacturers a bit but will not do anything to help GM or Ford. What bedevils GM and Ford are Profitability and Liquidity. According to their respective financial statements, here is a comparison of Toyota, Honda, and Nissan with GM and Ford on the key metrics:

Source: Yahoo Finance

Japanese car manufacturers have managed to remain profitable, despite carrying more debt that equity (except for Honda). On the other hand, GM and Ford have crushing debt load while generating losses.

In layman’s terms: if GM and Ford were two families, then these two families’ income don’t cover their living expenses so they wind up using their credit cards to make ends meet, resulting in increasing debt load that will be difficult to pay off. Like a family that finally succumbs to the mounting debt, there is a point where GM or Ford may decide to file for bankruptcy protection.

May your trading be profitable!

Ed Kim

DISCLOSURE: The author holds long positions in GM or F at this time

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