Japan overtakes S Korea in battle for automotive dominance

Toyota’s Camry midsize saloon has dominated its competition for so long that another car of the year award, in a small market where it sells only a handful of units, would hardly seem like cause for excitement.

But when the Korea Automobile Journalist Association voted the latest version of the Camry the best car of 2013 in January, it created a stir. The Camry has been the best-selling passenger car in North America for all but one of the past 16 years, but in South Korea – home turf of Hyundai – no foreign car had ever picked up such a prize, let alone one from arch-rival Japan.

The timing made things especially awkward for Korea’s carmakers. After several years of breakneck sales and profit growth that have turned Hyundai, and to a lesser extent its smaller sister company Kia, into titans of the global industry, things have cooled lately. Hyundai and Kia have forecast their slowest sales growth for a decade this year, with a strengthening won likely to exacerbate the impact of a decision to hold off on new production capacity.

The slowdown is especially apparent when contrasted with the situation in Japan, where, thanks partly to a plunge in the value of the yen, Toyota and other producers are experiencing their strongest earnings growth in five years. On Wednesday, Toyota said net profit more than tripled in the past fiscal year and would likely rise by a further 40 per cent this year to Y1.37tn. Analysts called the outlook conservative.

The shift in momentum has been reflected in share prices. Since the beginning of the year, Hyundai’s stock has fallen 12 per cent and Kia’s 5 per cent, while shares in Toyota and Honda have risen 45 per cent and 27 per cent respectively. Prices have moved in opposition to the manufacturers’ home currencies: the won resumed its strengthening trend last month and has risen against the US dollar by 6 per cent since the beginning of last year, while the yen has plunged by a fifth since November.

“One of the main reasons that foreign investors want to move away from Korean autos is the macro issues,” says Michael Sohn, an analyst at Macquarie, referring to currency shifts. “That’s something we cannot avoid.”

Foreign exchange trends explain much of the story. A weaker currency makes exports more competitive and inflates the value of foreign earnings in the carmakers’ yen- and won-denominated earnings reports.

Toyota estimates that for every extra yen a dollar buys over the course of a year, its operating profit rises Y35bn. A shift of 1 per cent in the won-dollar rate, meanwhile, changes operating profit by 1.5 per cent at Hyundai and 1.8 per cent at Kia, according to Angela Hong, an analyst at Nomura.

There are other forces at play, however. In Japan, carmakers responded to the yen’s prolonged appreciation by slashing costs – standardising more parts, for instance, and strong-arming suppliers to reduce their prices. Last year, those efforts lifted Toyota’s operating profits by Y450bn, according to the company, an effect about three times larger than that provided by the yen’s fall, which began in earnest only in the second half.

“You have to give them credit for taking a lot of costs out and reducing excess capacity,” says Koji Endo, a motor-industry analyst at Advanced Research Japan.

In Korea, meanwhile, some say the new and more measured pace of growth is at least partly intentional. Having emulated Japanese rivals’ earlier rise to prominence, Hyundai insiders say it is keen to avoid the problems that afflicted Toyota in 2010, when serious safety problems prompted a high-profile recall of millions of vehicles.

In an apparent effort to avoid jeopardising quality, Hyundai and its sister company Kia have no public plans to expand factories or build ones after the opening this year of a Hyundai plant in Brazil.

“In theory, it should protect their returns,” says Philippe Houchois, an analyst at UBS. “This is extremely grown-up behaviour that I wish we saw more of in the industry.”

Yukio Noguchi, an economist at Waseda University in Tokyo, says a weak yen does little to strengthen Japanese groups in the long term. Most of the cars they sell overseas are made at factories outside Japan – even the Korean Camrys are made in the US – reducing the direct advantage to exports. “The only effect of exchange rates is on repatriated income,” he says.

Of course, that income has its uses. Toyota carries out most of its research and development in Japan, and during the crisis years it cut R&D spending by 15 per cent in yen terms. Now, with more free yen with which to play, it plans to increase outlays by one-tenth this year.

At the retail end of the business, the Japan-Korea battle is hottest in the US, says Ms Hong at Nomura. While there have been a few recent price cuts by Japanese automakers, they are unlikely to execute large-scale cuts for fear of eroding brand value. However, she adds they might find other ways to lure potential Hyundai buyers – by turning extras into standard features, say, or increasing the commission offered to car dealerships.

She notes, too, that even their US-based factories import components from Japan. “About 70 per cent of their vehicles sold in the US are produced there, on average – but the yen matters.”