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Rising Yen Motivates Honda to Focus on U.S. Production Plants

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On: Mon, Aug 23, 2010 at 2:08PM | By: Sherry Christiansen


Rising Yen Motivates Honda to Focus on U.S. Production Plants

28 years ago, Honda Motor Co. was the first Japanese automaker to build cars in the U.S. Today as many as 89% of Honda and Acura brand vehicles sold in the U.S. were actually built in one of Honda’s U.S., Canadian, or Mexican manufacturing plants, up from 82.2 percent from a year earlier, the company said. Japanese rivals Toyota Motor Corp. and Nissan Motor Co. each made 68 percent of vehicles sold in the U.S. at North American plants, according to the carmakers.

“Honda's high rate of local production in the U.S. is a clear advantage,” said Yoshihiro Okumura, who helps manage the equivalent of $365 million at Chiba-Gin Asset Management Co. in Tokyo. “They'll benefit even more in the U.S. as the market recovers.”

Japanese exporters are working hard to find new innovative ways to cut costs, increase fuel efficiency, and move production to cheaper geographic areas in order to compensate for the 4.4% rise of the yen in 2010. The yen is at its highest level in world trading since 1995.

“Every 1-yen gain by the Japanese currency against the dollar reduces annual operating profit by 16 billion yen ($187 million) at Honda and by 30 billion yen at Toyota, the world's biggest carmaker, according to the companies. Both carmakers are basing their full-year earnings forecast on a rate of 90 yen per dollar,” according to Automotive News.com.

But even with the yen rising in Japan, Honda expects a net income of 455 billion ($5.3 billion) in the year ending in March, compared with an earlier estimate of 340 billion yen. Toyota expects net income of 340 billion yen and Nissan forecasts net income of 150 billion yen.

“For us, manufacturing in America was a long-term business decision,” said Edward Miller, a Detroit-based spokesman for Honda. “We don't make investment decisions based on short-term changes in business conditions.”

Honda didn't originally expect that opening U.S. plants would lead to future economic benefits, said Toshikata Amino, a former executive who helped set up the carmaker's first U.S. plants in the early 1980s.

“In the middle 1970s, Honda started a feasibility study about whether it could build vehicles—motorcycles or cars—in the U.S.,” said Amino, who retired as Honda's executive vice president for North American manufacturing in 1995. “The yen was 280 or 300 to the dollar, so the currency situation was much more favorable for Japanese exporters. There was no economic incentive to come to the U.S. and set up manufacturing.” Honda's primary motivation was that local plants were necessary to maintain customer satisfaction and to fulfill the aspirations of its founder.

“It was his dream to have a U.S. auto plant,” Amino said. “Many in Japan at that time thought it was a bad idea.”

Along with boosting the regional production rate and importing fewer models to the U.S. from Japan, Honda also continues to expand purchases of auto parts and materials from North American suppliers, Miller said.

As a long-term strategy to ease the strong yen, Honda plans to boost the percentage of parts purchased overseas for car production in Japan from about 17 percent currently, Yoichi Hojo, Honda's chief financial officer, said in an interview this month. He refused to give any estimates as far as numbers for such purchases.

“Honda doesn't have that much more room to boost U.S. production,” said Hiroshi Ataka, an analyst at consulting company IHS Global Insight in Tokyo. “The next step is cutting costs by bringing in more parts from developing countries, though tariffs and regulations may limit those efforts."

Honda's Japanese competitors are also trying to scale back exports of lower-priced models to the U.S. and boost auto production within North America.

“Given the current exchange-rate situation, it isn't feasible, in terms of a business model, for us to produce Corolla or Yaris in Japan and export them,” Atsushi Niimi, Toyota's executive vice president for global manufacturing, said in an interview this month.




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