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26219Much ink, dead trees, computer keyboard strokes, megabytes and screen images have been devoted to chronicling Toyota's first full year loss in six or seven decades (depending on what article you read), which occurred in the March 2008-March 2009 fiscal year. Less has been said about another factor exacerbating the situation: the strengthening Japanese yen versus the slumping U.S. dollar. Analysts estimate the resurgent yen has sliced hundreds of millions of dollars in operating profit from Japanese auto makers' books.

To be fair, a number of articles have addressed the adverse impact of a strong yen on Japanese carmakers' bottom line, and notable among these is <A HREF="">a subscriber-only Automotive News article by Hans Greimel titled Strong yen pulls more auto production to U.S.</A> In a nutshell, after trading between 100 and 135 yen to one U.S. dollar for nearly a decade, the dollar has weakened to around 90 yen. A weak yen aids Japanese exports, while a strong one hurts exports. More specifically, a strong yen — and weak dollar — hurts Japanese automakers in several ways. It pressures them to raise prices on vehicles exported from Japan, making those vehicles less competitive; it makes Japanese wages and parts relatively more expensive than U.S.-sourced labor and parts; and slashes earnings repatriated from overseas, further reducing earnings atop the losses brought on by the global recession.

The Lexus IS 250 example
Coincidentally, Hans Greimel uses the example of the Lexus IS 250 to illustrate the effects of the yen-to-dollar exchange rate on the carmaker's bottom line. Automotive News quotes Kelley Blue Book's website as a source for one version of the smallest Lexus having an invoice price of US$30,101. Assuming Toyota were to receive that full invoice amount, each IS 250 sold around October 2008 would've resulted in 3,064,583 yen of revenue, based on the then-prevalent exchange rate of 101.81 yen per U.S. dollar. Fast-forward a year, to October 2009, when the exchange rate was 90.51 yen per U.S. dollar. Thus, the US$30,101 becomes only 2,724,442 yen. In practical terms, that means that each Lexus IS 250 sold in the last year brought Toyota/Lexus roughly 340,000 fewer yen (about US$3750-$3800) less than it did a year ago. Multiply this by just over 38,000 Lexus IS models sold in the U.S. during calendar year 2009, not to mention 215,975 Lexus vehicles sold in the U.S. last year (each with a varying "hit" due to currency exchange) and it's not exactly a pretty picture.

What do the numbers really portend?
An article from titled <A HREF="">Strong Yen May Force Japanese Auto Makers to Rethink Export Strategies</A> informs us that every yen gain in strength cuts Toyota's operating profits by about ¥30 billion (US$348 million). Thus far in 2010, the 90 yen per U.S. dollar exchange rate has held fairly steady, and author and former analyst Michael Wynn-Williams believes that 85 yen per U.S. dollar is the breakeven point for Japanese exporters. If the dollar drops and the yen strengthens beyond that, though, some drastic action may begin to happen.

Is North American assembly the solution?
"If the yen's appreciation continues long-term, then one has to consider shifting production overseas," Takeshi Uchiyamada, a Toyota executive vice president was quoted as saying back in October 2009. Yet Toyota is far behind its strongest Japanese rivals (Honda and Nissan) in its proportion of North American-built to Japanese-built vehicles. <A HREF="">Another article</A> informs us that, in 2009, Toyota (including its Scion and Lexus divisions) imported 38% of its vehicles, whereas imports made up only 16% of Honda and Acura sales and XX% of Nissan and Infiniti sales during the same period.

Yet, given the recent turn of events, where the Toyota sticking accelerator pedal recall was at least partly blamed on CTS Corporation, a supplier based in Elkhart, Indiana, while similar components built by Denso in Japan were exempt from these issues might make Lexus gun-shy about building too many of its flagship luxury marque's models outside of Japan. On the other hand, Lexus' experience building the RX 350 in Canada's Cambridge, Ontario plant has, to date, been trouble-free and positive.

Given that whatever major parts commonality they share with lesser Toyotas is with Japanese domestic market models such as the Mark X and Crown, it is highly unlikely that Lexus' rear-wheel-drive platform sedans (IS, GS, LS) will be built outside of Japan any time soon, if ever (<A HREF="">rumors from 2006</A> notwithstanding). The same can be said of Lexus' body-on-frame GX and LX SUVs. If there is a Lexus model that is a natural candidate for North American assembly, it is the Camry-derived ES, which, like the current Scion tC, is built in Japan but not sold there. Whether it makes more sense to build it in Ontario (where Lexus higher-quality assembly systems are already in place) or Kentucky (where the more closely related Camry is already built) is subject to debate, but we'd bet on the former. As to a possible European-built Lexus, the upcoming CT would be the most natural fit.


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