Friday, December 12, 2008

NPR on Japan and Cars

Someone from NPR called me this morning. She asked my opinion about why the Japanese stock market had dipped when the auto bailout did not happen. Intuition would indicate that the Japanese car companies would be better off because of less competition.

I told her there were two major reasons for the Japanese stock market's dip.

1. The Japanese yen's strength. Yesterday, the American dollar dipped about 2.5% against almost all other major currencies (FXC, FXF, FXE). Basically, America's citizens lost about 2% of their international purchasing power overnight. This is major news, but you wouldn't know it from the lack of media attention. (Quite frankly, pictures of Weimar-Republic-branded wheelbarrows carrying the American dollar should be on the front page of every major newspaper.)

The Japanese yen is strong in part because Japan has a high savings rate and is the world's second largest economy; however, in a perverse result, Japan's high savings rate works against them because they export so many products to the United States, where our currency is becoming weaker. Basically, Japanese products are going to be too expensive for Americans, so Americans will either buy fewer Japanese cars, CDs, and Nintendos, or the Japanese will have to reduce their prices. Either action will cause lower profits for Japanese companies, which is one reason the Nikkei declined by over 5%.

2. A chain reaction disrupting the global auto market. Car companies are more connected than you might think. A GM bankruptcy impacts a wide array of other companies, like steel manufacturers, chipmakers, etc. Companies that had the Big Three as primary customers would have to lay off workers and stop hiring, which puts less money in the hands of potential car buyers worldwide.

Also, in addition to joint ventures, such as NUMMI, car companies buy materials from the same suppliers. If one supplier, let's say Delphi, loses a major customer like GM, their cash flow is reduced, and they may need to lay off workers, delaying projects, new orders, and even existing orders, further disrupting the auto market.

Globalization means more and more companies, especially large ones, are interconnected. This has advantages and disadvantages. One major disadvantage is that if one large company is reckless, it creates problems for numerous smaller companies. Delphi still exists, but has been in Ch 11 bankruptcy since October 2005. Delphi's bankruptcy filing was probably the writing on the wall for the Big Three.

3. I also said any value left in GM, Chrysler, and Ford was in their finance arms. In plain sight, American car companies became subprime banks. They were practically giving away their products in exchange for a stream of steady cash payments, with interest. All those 0% financing commercials? That's the equivalent of a "no money down," ARM home mortgage, but on a smaller scale. Car loan interest is where the Big Three receive a large chunk of their income, because margins on non-SUV autos have been consistently declining. Like the banks, GM and Ford took on too many subprime borrowers and overestimated expected income streams. The result is now all too predictable.

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