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Euro Crisis Cuts Japanese OEMs Both Ways

When a natural disaster hit Japan back in March, it would have been hard to predict the recovery would come from an economic disaster six months later — and halfway around the world.

That disaster was the European financial crisis. Part of the fallout from the apparent bankruptcy of Greece, and the teetering economies of a half-dozen other EU members, has been a drastic drop in the value of the regional currency, the euro. That's been a help to tsunami-hit Japanese manufacturers like {complink 2393|Hitachi Ltd.} and {complink 5648|Toshiba Corp.}, which, according to a report from procurement executive recruiter Purcon, quickly moved much of their procurement to Europe, to take advantage of falling costs connected to a falling euro.

Since then, the Japanese OEMs that shifted their sourcing to Europe have looked prescient, with the yen climbing against the euro for the rest of the year. With more softness predicted for Europe's currency next year, Japanese OEMs now well into a recovery from last spring's disaster have little reason to pull manufacturing and assembly back home. For the foreseeable future, they'll be getting high-quality EU manufacturers, at a discounted price.

Unfortunately, cheaper sourcing is only one side of the 100-yen coin. It's not at all clear that falling supply chain costs for Japanese OEMs outweigh rising export and domestic production costs over the long haul. Earlier this week, Murata Manufacturing Co. Ltd., a capacitor vendor that works with Apple, among others, told Reuters it was “fighting a profit-sapping surge in the yen,” and begging for Tokyo to adopt measures to weaken the currency. Rather than move offshore to seek supply chain cost-savings, Murata told the wire service, his firm is being forced abroad, to avoid yen-denominated costs.

From outside Japan, leaving for a cheaper Europe or avoiding an expensive Japan sound like two ways of saying the same thing. But there is another factor at play that pits Japanese OEMs' post-tsunami supply chain strategies against its pre-tsunami business plans. And that's a problem at the end of the chain — retail.

At the retail end of the supply chain, European markets are getting tougher for Japanese OEMs to crack, because the strong yen is making Japanese cellphones, video game consoles, PCs, and industrial electronics more expensive than Japan's competitors. Korean firms, happy that the won has not risen as sharply against the euro, are able to discount their products against Japanese ones, without cutting into their profits. That's a symptom of the sharp appreciation of the Japanese currency, compared to the Korean currency's flatter chart.

Over the long term, that's a problem Japanese firms will have to resolve internally. Most Asian OEMs have to compete against each other, but Japanese ones now also have to pit their supply sides against their demand sides in a particularly venomous way. The department of a Japanese OEM looking for high-quality assembly contractors at a lower cost must love doing business in Portugal or Greece right now, where high-skill labor costs 10 percent less than it did a year ago. The department selling flat-screen TVs must hate those same places because the TVs cost 10 percent less, too, in addition to tepid demand.

Japan is still Asia's electronics leader for design and innovation. But two disasters in a year is a lot for anyone to navigate.

8 comments on “Euro Crisis Cuts Japanese OEMs Both Ways

  1. Anand
    October 8, 2011

    “it was “fighting a profit-sapping surge in the yen,” and begging for Tokyo to adopt measures to weaken the currency”

    @Marc, why Japan authorities are so reluctant to intervene and weaken the Yen ? Yen has dropped from 90+ levels to 76 within a year, which will definitely hurt the economy. We have seen how China has manipulated its currency successfully over years, why Japan is hesitant to intervene?

  2. _hm
    October 8, 2011

    It is also nice to compare this with US OEMs.

     

  3. saranyatil
    October 9, 2011

    Anandvy,

    As you pointed out i think Japan has to work out a plan to solve this issue or else they are goin 2 loose a lot…

  4. elctrnx_lyf
    October 9, 2011

    the rise of yen against the usd and euro is a very big challenge for the japanese oems to sell their products. Particularly because of the strong yen the cost of the lcd displays from japanese companies is costing much much higher when compared to taiwan or korean lcd mfrs. I'm still thinkin how japanese oems will overcome this in the recent future.

  5. Daniel
    October 10, 2011

    “Japanese OEMs that shifted their sourcing to Europe have looked prescient, with the yen climbing against the euro for the rest of the year”

    Kim, How long is a big question. Economic crisis are very natural and we had seen this from early 90’s. Japan is one of the countries, who had experienced the economic crisis in a big way.

  6. _hm
    October 10, 2011

    Perhaps, Japan should widen their base. They should include India, Brazil and other east european countries for their need. This may provide them with more balanced approach. Japanese car manufacturer have adopted this route.

     

  7. Ms. Daisy
    October 31, 2011

    The advice to widen the Japanese corporate base to India, Brazil and other East European countries is a great one to achieve a balanced approach. But the question is, is the timing now or the future?

    With the gloomy global economy and uncertainties of the financial health of many European countries which also affects the aforementioned rising econmoies too, expansion now may be a bad idea.

  8. _hm
    October 31, 2011

    Perhaps, this is most appropriate time. Economy is growing slowly an will soon accelerate.

     

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