JAPAN: Yen's continued strength causes manufacturers to rethink production

While Japanese companies are struggling to cope with the ongoing strength of the Yen on world currency markets, with many considering shifts of production to lower-cost arrears, their South Korean rivals are gaining more of a foothold in Japanese shops.

The Japanese currency is currently riding somewhere around Y76.5/US $, having risen slightly after dropping through Y76/$ last week.

Tthat's a long way beyond the mid-Y80s exchange rate supposition on which many of the big consumer electronics companies have based their profitability assumptions.

And with the Japanese government intervention fund, used to sell Yen and thus stabilise the exchange rate, being ever more stretched, the signs are that there's only limited scope for further stabilisation.

That's making Japanese products expensive in export markets, while the state of the worldwide economy is causing retailers and consumers in those markets to push for ever lower prices.

It also means it's getting even more expensive for companies to make economically viable products in Japan, quite apart from the costs of reconstruction after the March earthquake and tsunami, and the effects of that disaster on both production capacity and Japanese domestic demand.

To get some idea of the scale of the problem, motor manufacturer Toyota recently revised its assumed exchange rate to the US Dollar down to Y80 – still way above the current Y76 or so. And it says every single-yen rise in exchange rate against the dollar costs it Y34bn (almost £268m) in operating profit.

Rival Honda is facing similar problems, and will for example be shifting production of its Fit/Jazz compact car: at the moment it makes cars for the US market in Japan, but it will build a new plant in Mexico next year to supply the Americas.

'Any rise will be very bad for us'

Panasonic, too, is watching the effect of the yen very closely: it says its assumptions were based on Y83/$, but it has now revised down to Y80/$, and is saying that 'any movement in the yen beyond this line will be very bad for us'.

The company says that every single yen gain against the US dollar will cost it Y3.8bn (£30m) in operating profit, and every single-yen gain against the Euro Y1.7bn (£13.5m).

Clearly, something's got to give, and as a result Japanese firms are looking at alternative strategies, from setting up manufacture in lower-cost countries with more favourable global exchange rates to buying more components from overseas suppliers.

Several consumer electronics companies are looking to China and other countries for production capacity, and many are planning to buy more components and products from abroad.

Panasonic is taking the radical step of shifting parts procurement operations from its HQ in Osaka, Japan, to Singapore, and plans to increase its overseas parts procurement by almost 15%. By next year, 60% of its components will come from overseas.

Batteries made in China, for China

Its battery division – a major part of its Sanyo takeover strategy – is planning a lithium-ion rechargeables plant in Suzhuo, China, buying parts in from Chinese manufacturers and supplying batteries to PC makers in China. In other words, keeping the entire process in China, and avoiding the strong Japanese yen completely.

MD Makoto Uenoyama also said in a recent interview in Japan that the company is suffering since its takeover of Sanyo, because such a great proportion of that company's sales is overseas – Panasonic has been more used to its traditional sales strength in Japan.

As a result, it's planning to build factories to make white goods (fridges, washing machines, etc.) in India and Brazil next year, targeting local consumers, and will also increase the amount of white goods it imports into Japan from China.

Uenoyama also said in the interview that the company's big Korean rivals, Samsung and LG, are taking advantage of the relative weakness of the Korean currency to cut the prices of their flatscreen TVs and other products. He said 'That has made us unable to compete with them on a level playing field.'

Korea moves in

And the increasing inroads being made by Korean manufacturers into Japanese shops have been helped by the after-effects of the March 11 earthquake as well as the strength of the Japanese currency.

More Japanese firms are turning to the Korean giants, and younger consumers are less resistant to Korean products, as well as embracing Korean games, TV shows and K-Pop – the Korean equivalent of Japan's mainstream J-Pop music.

Samsung is benefiting from Japanese mobile carrier DoCoMo's decision to make its Galaxy phone its iPhone rival, and the Galaxy II looks set to become the company's biggest seller in Japan.

Meanwhile LG has boomed since it first launched its TVs in the Japanese market last Autumn; then, it had three of Japan's volume consumer electronics retailers signed up to sell its sets, now it has six on board, and is aiming to increase its Japanese market-share to 5% in a few years. The Japanese TV market has traditionally been dominated by domestic manufacturers.

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Andrew has written about audio and video products for the past 20+ years, and been a consumer journalist for more than 30 years, starting his career on camera magazines. Andrew has contributed to titles including What Hi-Fi?, GramophoneJazzwise and Hi-Fi CriticHi-Fi News & Record Review and Hi-Fi Choice. I’ve also written for a number of non-specialist and overseas magazines.