Paying the Price : Yen’s Might Makes It Tough for Japanese Firms to Make a Buck

The soaring value of the yen against the dollar has triggered a kind of reverse alchemy for Japanese companies trying to sell in the United States: A onetime fount of profits has been transformed into a swamp of red ink.

“We lose money selling products here,” says Takashi Kiuchi, chairman of Mitsubishi Electric America, the Cypress-based Japanese subsidiary that sells big-screen televisions and other electronic products.

But Kiuchi professes to be pleased.

“Management people in Japan feel they can’t keep manufacturing in Japan (at this rate),” he says. Kiuchi believes the parent company will finally heed his calls to boost production in the United States.

Increased production in America seems a happy solution not just to a yen that has soared in value by about 10% since the beginning of the year, but to an increasingly large and nettlesome Japanese trade surplus.

But the reality is far more complex and sobering. With huge excess factory capacity at home and armies of lifetime workers to support, Japanese companies cannot easily shut down domestic factories and shift production overseas.

In the short term, the only way Japanese companies can recover the higher costs that come with a strong yen is by raising prices. Yet here, too, the choices are grim. Higher prices will mean lower sales, lower market share and even more excess capacity at a time when the domestic economy remains mired in recession.

Yet, if Japanese companies raise prices only modestly, as they have in the past, losses will mount and companies will risk more dumping lawsuits by the Clinton Administration accusing them of selling products in the United States below cost.

So far, except for a few areas such as semiconductors and flat-panel displays for laptop computers where demand is strong, Japanese companies seem willing to let themselves bleed in order to hold onto their market share and keep their factories moving.

“Even though exports don’t generate profits,” says Tetsuo Tsukimura, chief economist at Smith Barney’s Tokyo office, Japanese companies “will keep exporting until they go bankrupt.”

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Such policies suggest Japanese corporations have been unable to make the shift in strategic focus from a policy of maintaining market share to one of boosting profit margins--a transition that many, including former Sony chairman Akio Morita, argued was essential if Japan is to cut its mounting trade surplus and get along with its trade partners.

A continued effort to hold down prices and maintain market share means a strong yen won’t reduce Japanese exports, or America’s trade deficit, anytime soon.

“The Japanese haven’t been passing on the full price impact of the high yen, so their exports have been holding up,” says Larry Chimerine, an economist at the Economic Strategy Institute in Washington.

Recent Japanese surveys suggest about half of the Japanese companies operating in the United States are losing money. Jerry Sullivan, a business professor at the University of Washington who has conducted surveys of Japanese operations in the United States, thinks the numbers are higher--perhaps eight in 10.

While companies with U.S. production are more insulated from the yen’s surge, even Japanese auto companies, which have invested heavily in North American production in recent years, still import about half the cars they sell in the United States. And those cars they make in America still depend heavily on high-priced parts from Japan.

Japan’s problems aren’t good news for the American economy. While Japanese companies won’t be able to increase prices enough to cover their foreign exchange losses, they will nevertheless institute modest price increases of 3% to 4% wherever they can. That will help drive up prices of such products as cars and computers. And American companies will cheerfully follow suit, helping to fuel inflation.

While Kiuchi hopes Japan will shift more production to the United States, most analysts expect any new factories to be in Mexico or Southeast Asia, where labor costs are low.

Matsushita Electric, for example, recently indicated it might move two U.S. television plants south of the border to take advantage of low cost labor and the new tariff-free border. Last year, the number of Japanese factories established in the United States declined for the first time in decades.

While pricing is the Japanese firms’ only short-term tool to shore up profits, it is a tool companies use cautiously. In 1991, when the yen shot up about 20%, Japanese auto makers tried to pass on their higher costs to consumers in the form of higher prices. But when they saw their market share slide in reaction to the price increases, the companies used low-interest leases and other mechanisms to take back market share. Now there are strong indications that Japan’s auto share is once again rising.

This fall, auto makers will try again to pass along some of the impact of the high yen to consumers. Masaaki Masuda of NLI Research, a Tokyo-based think tank, expects Japanese auto firms to boost 1995 model prices by as much as 5%. They might succeed, because U.S. companies such as Chrysler are operating at close to capacity and have announced sharp price increases of their own.

Companies such as Toyota, with strong customer loyalty, have managed to make price increases stick. Al Salas, a salesman at Hollywood Toyota, notes that the Toyota Corolla sells for $16,200, fully $5,000 more than a similarly featured Ford Tracer, which his dealership also sells.

“I try to switch a person who can’t afford it, but they will lease a Corolla rather than buy a Tracer,” Salas says.

Still, as the price gap between Japanese and American cars widens and Detroit’s lineup improves in look and quality, companies such as Nissan have been forced to effectively lower their prices. The 1995 model of the Nissan Maxima, for example, has a sticker price 5% lower than the previous year, even though the yen has risen in value over the period by as much as 10%. Analysts say the company will probably lose money on the made-in-Japan car.

The story isn’t as grim in all sectors. In semiconductors, for example, strong demand has kept Japanese factories operating at capacity. That means Japanese companies have been in a strong position to institute price increases and make them stick.

You can also look for prices of laptop computers to stop falling. That’s because Japanese firms are the only sources for the flat-panel displays that make up as much as half the cost of a laptop.

An Apple Computer executive says the company expects to pay higher prices for components like displays that are only available in Japan in large quantities and are being designed into products to hit the market next year.

That pleases the much smaller American suppliers of such components.

“We’re seeing price increases from Japan while we continue to cut our costs,” says Jim Hurd, chief executive at Planar, a small Beaverton, Ore., flat-panel display maker. “We’re getting new penetration.”

But even when Japanese companies are in a position to demand stiff price increases, they are hesitant to do so.

“In principle, we could increase prices because of the supply constraints, but we take a long-term view,” says Joel Pollack, market planning manager at Sharp Electronics’ U.S. flat-panel operation in Camas, Wash. He said the company recognizes that lower prices are necessary to drive overall growth in the laptop market.

Then there is the dumping threat. Since a high yen automatically pushes down American prices relative to Japanese prices, it makes Japanese companies vulnerable to dumping charges. The U.S. Department of Commerce and the International Trade Commission recently concluded that Fuji Photo was dumping photographic paper in America by selling it for as little as one-third the price it charges in Japan.

If dumping duties are imposed, Fuji Photo has said it will avoid them by building manufacturing facilities in the United States.

U.S. auto manufacturers have been gathering statistics to bolster their claims that the Japanese companies are dumping cars here by selling them for far less than they charge in Japan. Analysts believe they are using the figures to prod Japanese companies to push up prices--giving Detroit room to raise its own prices.

In 1986, the last time the yen rose dramatically, Japan also responded by keeping prices low. But at that time, Japan was able to soak up excess demand by pumping up its domestic economy. Profits at home, in effect, covered losses in America. Booming asset prices boosted wealth so much that Japanese companies went on a buying binge in America.

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Japan doesn’t have that cushion today. While companies are losing money in America, they are also suffering from sluggish sales and falling real estate prices at home. A gradually opening market is also opening Japanese companies to competition from Asian neighbors.

A Japanese banker in Tennessee says the ability of Japanese companies to maintain low prices in America while losing money will depend on their cash position. While Toyota is cash-rich, Nissan, Mazda and some of the other auto companies are in poor financial shape--but are forced to play a market share game that few can win.

“The situation is terrible,” says Smith Barney’s Tsukimura. “But there is no easy way out.”

Keeping Prices Down

To boost sales in the United States, Nissan has held down the price of its bread-and-butter sedan, the Maxima, despite steady increases in the value of the yen.

Wholesale U.S. price of the Nissan Maxima (industry estimates):

‘95 model: $17,954

Average yen per dollar in previous year:

‘95 model: 100

Auto prices have climbed more slowly than the value of the yen from 1985 to 1994, even as auto makers have upgraded their cars.

Top five Japanese auto makers’ average price increase: 64.7%

Big Three’s average price increase: 32.9%

Consumer price index: 37.0%

Yen’s increase in value: 138.5%

Sources: international Monetary Fund, auto industry sources