To combat a strong Yen, Toyota Motors (NYSE:TM) is looking to raise prices on many of its models and shift production abroad. Currently, Toyota produces half its vehicles in Japan, so a strong Yen hurts the profitability of the company. Although the magnitude of price increases has not yet been decided, price changes will only pertain to competitive models in which Toyota possesses relatively stronger pricing power. [1] Toyota’s stock is up 20% this year as the automaker recovers from its lows of 2011.
Earlier in the year, the automaker announced its decision to ramp up output in its U.S. and Canadian plants and has poured in more than $1.6 billion since. [2] Recently, Toyota also announced its decision to invest around $160 million in India mainly to expand the production of Etios and Innova in the country. The investment will see the capacity of its South Indian plant rising from 210,000 units currently to 310,000 units by 2013. Similarly, in Thailand, Toyota looks to boost its production in the country to 1.2 million units as the country aims to become one of the top 10 auto producing nations. [3]
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It has been a double whammy for Japanese automakers as the Yen has risen 45% against the U.S. Dollar in the past five years while the South Korean Won has depreciated 17% over the same period; thus giving automakers such as Hyundai and Kia a pricing edge. South Korean automakers have worked hard to change the public perception by improving quality, brand and consumer satisfaction and the gap between the Japanese and Korean car makers, in terms of quality of vehicles, has definitely narrowed. As a result, Japanese automakers commanding a premium for their cars could force consumers to switch to Korean alternatives.
Toyota isn’t the only Japanese automaker looking to shift production abroad. Honda Motors (NYSE:HMC) has already pledged to produce more cars in North America in order to reduce its dependency on Japanese exports. The automaker is expanding the production line of its plants in the U.S. and Canada while building a new plant in Mexico. By 2015, 96% of the cars sold by Honda in North America will be manufactured locally, up from 85% currently.
We currently have a $90 price estimate for Toyota’s stock, which is about 10% higher than the current market price.
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Notes:- Toyota to raise prices abroad over yen’s rise, japantimes.co.jp [↩]
- TOYOTA IS SET TO INCREASE NORTH AMERICAN PRODUCTION, September 3, 2012, melodika.net [↩]
- Thailand and Toyota counting on each other, September 17, 2012, nationmultimedia.com [↩]
