It’s been a challenging year for hybrid and electric cars. Many of these vehicles are built only in Japan, and even if the vehicles are not built there they often rely on key parts sourced from Japan—where the 3-11 earthquake and tsunami crimped production capabilities. The flooding in Thailand was also another limiting factor, because some key components are sourced from Thai facilities.
But this year’s natural disasters might be minor compared to economic factors in 2012. The yen remains strong compared to the dollar, and therefore reduces the financial return from income earned overseas by Japanese companies. As a result, domestic sales are more profitable than overseas sales. This was an issue this past year when volumes were limited by natural disasters and is likely to continue.
The following chart shows the estimated cost of components (batteries, motors, controllers, etc.), labor and other content required by hybrids and electric vehicles in dollars—and the revenue received in yen by the Japanese automakers when that cost is included in the purchase price based on varying exchange rates. I’m making certain assumptions about figures associated with the expense versus similar gas-powered cars—which might be higher or lower—but the point here is to examine what happens to those costs and revenues at different exchange rates.
At this point, the yen is currently at 78 to the dollar, but was 83 a year ago and 90 at the end of 2009. The chart illustrates the lower revenue at the current yen/dollar exchange rate (78) vs. other rates. Thus, the Japanese automakers are under financial stress at the current yen/dollar rate, and will be better positioned if the yen weakens to 80, 90, or 100.
What’s the impact? If volumes are limited, this may incentivize manufacturers to reduce availability of these vehicles to the U.S. market since they will not lose revenue by converting dollars back to yen. The impact is of course greatest on Toyota, Nissan, and to a lesser degree Honda. That said, manufacturers are also looking at the long- term and want to establish their brand and their vehicles in a growing market. Moreover, it creates an impetus for Japanese carmakers to move their EV, hybrid and battery manufacturing to the United States. Nissan is moving LEAF and related battery manufacturing to the U.S. (and Toyota already makes the Camry Hybrid here.)
Of course, another method to resolve this issue is to raise the price of the vehicle—but that makes it difficult to move the cars beyond the early adopters to a more cost-conscious mainstream market. As the EV and hybrid market continues to develop, we should continue to watch the relationship of the yen with other currencies and the resulting impact on how fast and big the electric-drive market will grow.
Of course they could also hedge the currency, rather than raising prices. Nissan claims they have a no-hedge policy because their diversified global operations creates a natural hedge through matching revenue to expenses in local currencies.