MGN301

Case Study

THE JAPANESE YEN

International Business
 Contents

Company Introduction

Case Overview

SWOT Analysis of the Nissan Motor

Company

Q&As

Conclusion

Company Introduction
Nissan Motor Company Ltd is a Japanese multinational automobile
manufacturer headquartered in Nishi-ku, Yokohama. It is engaged
in manufacturing, sales and related business of automotive
products and marine equipment. It has been known over the
years for its superb engine quality and efficient factories.
During World War II, Nissan stopped making cars and poured its
resources into the war effort. After the war the company set a
goal of producing cheap, reliable cars. By the 1950s it was a
major player in the Japanese market. In 1972, it had a 32 percent
share of the Japanese market, just 2 points below Toyota .
Nissan shipped its first car to the United States in 1958. It did
much better than Toyota. Sales of its stylish cars increased
through the 1960s and it surpassed Volkswagen as the leading
U.S. import. Nissan was known as Datsun during its early years in
the United States. The company grew enormously in the early
1970s with the introduction fuel efficient sedans during the
Energy Crisis and hip advertisements commissioned by Peter Max
and Salvador Dali with the slogan: "Own a Datsun Original."
The company has become one of the world's leading automakers,
with annual production of 2.4 million units, which represented 4.9
percent of the global market. Domestically, the company sells
774,000 vehicles on an annual basis, placing it second behind
Toyota Motor Corporation. About 35 percent of Nissan's vehicles
are sold in Japan, 25 percent in the United States, and 20 percent
in Europe. In the North American market, the company's top
models include the Infiniti, Maxima, Altima, and Sentra passenger
cars, the Quest minivan, the Frontier pickup truck, and the
Pathfinder sport utility vehicle.
After losing money for most of the 1990s, on march 27, 1999,
Nissan and Frances automaker Renault signed an agreement
concerning a comprehensive global alliance with the French
company taking a 37 percent stake in Nissan. The Alliance aimed
at achieving profitable growth for both companies. And since,
Nissan has been a part of the Renault-Nissan Alliance. As of 2013
Nissan holds a 15% non-voting stake in Renault, while Renault
holds a 43.4% voting stake in Nissan.

Case Overview
Nissan motor company of Japan was in deep trouble and was
influenced profoundly by Japanese yen stronger dollar. The
yen/dollar exchange rate continued to fluctuate over the next few
years resulting in the Nissan Company suffering a huge loss.
From 357 yen/dollar in 1970 up to 99.74 yen/dollar in 1994 and in
1999 Nissan lost about $264 million and debt of about $13 billion.
The condition was so bad that they had to accept $5billion
injection of cash from Renault. Top management at Nissan Motors
were trying to forecast the Yen exchange rate to plan its pricing
and production strategy for the U.S. market, they did so because
they thought that Nissan would lower their price and will be able
to pick up the market shares, hold price and will earn profits so
that they will keep producing Trucks and Autos in US or move
their production in Mexico, Southeast Asia or back to Japan.
In various years Yen kept rising against Dollar and Japanese
coined this strengthening of the Yen Endaka. Endaka resulted in
serious problem for Japanese Exporters and potential pain for
entire Japanese Economy, which was so dependent on
International Trade. But on the other hand, due to Endaka the
imports were cheap. Japan heavily relied on imports of virtually all
commodities that is why its input cost fell, even as it found its
export price rising. Once Japan has enjoyed Worlds Largest
Current Account Surplus. As inflation fear began to rise in japan
the governor of the bank of Japan raised the interest rates.
As Yen continued to rise, Nissan found it difficult to position. US
price of Nissan auto sometimes rose three or four times a year
during 1993-1995.However so many companies could not raise
price as fast as the Yen was rising, so they were still losing
profitability.
SWOT analysis of Nissan Motor
Company

STRENGHTS
A well-managed companys operation
The companys management being under Carlos Ghosn, he
has been successful in turning around the companys
operation and the companys growth. Nissans revenue has
grown by 8% annually since 2013.
In addition to that, the Nissan motor company operating
profit grew by 26.4% and its net income by 16% annually.
Hence, its very clear that the companys manufacturing are
well lines and its management does a good job running the
company.

Nissan-Renault alliance
Nissan and Renault formed an alliance in 1999, it is the
longest lasting automotive alliance to date. Renault, the
French automaker holds about 43.3% stake in Nissan. And
Nissan holds about 15% stake in Renault.
Nissan and Renault has captured nearly 11% of global
automotive sales and sold more than 8.5 million cars and
other vehicles.

Intense presence in the leading and emerging

automotive markets
Nissan through its alliance with Renault any several other
acquisitions have expanded its market share in the global
 automotive market. It very successfully competes in the US,
growing its market share in China, Mexico, Russia, Brazil and
other emerging markets.
This allows Nissan to strengthen its brand and competitive
position in the said market.

WEAKNESSES
Huge product recalls in the US
The US being the largest market for Nissan, the amount of
product recalls could seriously damage the companys brand
and sales in the country.
Nissan issued recalls for nearly a million Nissan Altimas
models and around 800000 various SUVS in the year 2015.
The company in 2016 recalled more than 3.53 million
various cars models over safety bag issue.
This has damaged the companys brand significantly.

Poor Marketing and Advertising

Nissan spent over US$2 billion in advertisement but still
failed to gain little or no brand presence.

OPPORTUNITIES
Improving U.S. economy
The US economy has shown signs of an improving economy.
Rising consumer confidence have been reflected in the
increase in new vehicle sales for more than a decade in the
US market. Over 15 million new units were sold in 2016,
which is an increase of 5.7% over 2015.
 Nissan has an opportunity to capture the higher market
share and increase its sales in the US automotive market.

Increasing government regulation

With the government around the world committed to
reducing the greenhouse gas emissions and encouraging
fuel efficiency initiatives Nissan may take advantage of this
by launching more car model running on electricity and
bypassing all the government regulations associated with
the greenhouse gas emissions.

THREATS
Rising Japanese exchange rate
Considering the fact that more than 50% of Nissan Motor
Companys revenue come from the international market the
rising of Japanese exchange rate could affect the companys
profits significantly.
Nissan cannot control the exchange rates and hence it is at
risk, if the Japanese yen exchange rate start to rise. Just as it
is discussed in the case.

Natural Disasters
Nissan has manufacturing facilities in Japan, Thailand, China
and Indonesia. These countries, including others, are often
subject to natural disasters that disrupt manufacturing
processes and result in lower production volumes and
profits.

Increased competition
Nissan is faced with an ever-increased competition from the
traditional automotive companies and the new players.
Nissans international rivals, such as Toyota, Ford, General
Motors and Volkswagen, all have bigger budgets and higher
brand recognition and could easily expand in China, U.S. and
Europes markets by taking the market share from Nissan.
 New companies, such as Tesla with its electric cars is
competing directly against Nissans Leaf.
In addition, Google, which tries to build self-drive cars are
also threatening the traditional automotive industry. The
competition is further fueled by the fact that the global
automotive production capacity far exceeds the demand. In
2015, there was an estimated global excess production
capacity of 31 million units.

Questions and Answers

1. What are some of the major factors that have
influenced the yen/dollar exchange rate? Have
different factors become more important at different
times? If so, which ones?

The Japanese yen is one of the major currencies in the world

along with U.S. dollar, the euro, the Swiss franc and the British
pound. Between 1985 and 1992, the currency exchange rate of
the Japanese yen against the U.S. dollar rose from 254 yen per
dollar to about 110 yen per dollar and the government in Tokyo
was forced to intervene in the market to support the dollar in
order to protect the competitive prices of the Japanese export to
the United States.

Exchange rate between yen/dollar is determined by variety if

complex factors but one of the most important factors is policy
and economy of country. For instant when Japanese economy
grows strongly with the large trade surplus, the largest reserves
in the world, low unemployment, low interest rate and low
inflation. It will make Japanese yen stronger than US dollar. And in
other case such as bubble economy will make of the country's
currency stronger. Especially from the end of 1986 to 1991
bubble economic occurred in Japan with inflow of foreign money
was so high. Property prices in central Tokyo have risen by over
50% and the NIKKEI has doubled.so that, Japanese yen also
stronger than dollar in this time: from 159 yen/dollar in 1986 and
134yen/dollar in 1991.

The second factor is "interest rate". When interest rate in japan

was zero while in U.S was 5.25% and In Euro was 3.75%. It
creates a lot of opportunities for the "carry trade" develops and
makes Japanese yen weaker than U.S dollar, for example, traders
borrow Yen in Japan at very low interest rates and reinvest it in
other currencies where interest rates are higher to take
advantage of the spread between the rates. In order to do that,
Traders have to borrow in Japanese yen, and then they have to
sell the currency and get some other currency like the U.S dollar
or euro. In this process the yen depreciates and the other dollar
appreciates.

The thirst factor that influenced the yen/ dollar exchange rate is
"Deflation" in the Japanese economy. While British consumer
prices rose by roughly 3% and while they rose by 1-2% in the
United States and the Euro area, they fell by roughly 1% in Japan.
Deflation is a decrease in the general price level of goods and
services. That nature of currency also is good. When deflation
occurred in Japan, it made price of goods and services in japan
from 15% to 50%. Besides that, it led to lower production, low
wages and demand, high unemployment when Japanese
government made decision cut labor (According to in 2010 CPI in
japan reduced 2%, wage reduced 2% and bonus decreased 2,
5%).Moreover, Deflation make to Increase real value of cash
money and all monetary items, so that, Japanese yen was
strength against dollar,
The fourth factor is "increased safe haven demand" caused by the
European debt panic and the slowdown in the U.S. economy. It
means the investors in the world believed the Japanese economy
to continue grow and has the wonderful development steps as
1960s and 1970s. Therefore, Japanese Yen has appreciated
sharply despite government attempts to reduce the value of the
yen.

Finally, "Effect of the Plaza Accord" influenced the yen/dollar

exchange rate. In 1985 a significant change began. Finance
officials from major nations signed an agreement (the Plaza
Accord) affirming that the dollar was overvalued (and, therefore,
the yen undervalued). This agreement and the change of supply
and demand pressure in the market. Then it led value of yen to
rise rapidly compare with U.S dollar. From its average of 239 per
US$1 in 1985, the yen increased to a peak of 128 in 1988,
virtually doubling its value relative to the dollar. After dropping in
1989 and 1990, it reached a new high of 123 to US$1 in
December 1992. In April 1995, the yen reached a peak of fewer
than 80 yen per dollar, temporarily making Japan's economy
nearly the size of the US.

2. What are the major options available to Nissan in a

strong yen environment? In a weak yen environment?
 There are some major options available that the case
already gives at the beginning including lower prices and pick up
market share, hold prices and earn more profits, keep producing
autos and trucks in the United States or move its production to
Mexico, Southeast Asia, or back to Japan. However, with factors
that the administrators of Nissan used for strong yen environment
and vice versa.

Let look at the strong yen environment, when the yen was
increasing rapidly, many companies could not raise the prices as
fast as the yen. We can see that Nissan choose to keep producing
autos and trucks in the United States, so if Nissan produce in
Japan and export to American, the cost will increase because of
exchange rate of yen/dollar and the transportation cost. Besides,
they run factory in America and use dollar for producing, and they
can reduce their cost. This way just helps them to cut costs to
offset some of the profit margin lost to the increasing yen, and
it's easy to see that when the profit change from weak dollar to
strong yen, their profits worth less.

On the other hand, when yen was falling, Nissan takes

advantages on it. They had the choice of keeping prices the same
and earning more profits or lowering prices to pick up market
share. The prices of their productions are lower than the prices of
US automaker, and most of the Japanese automakers including
Nissan didnt choose those options, they instead decided to raise
the prices to earn more profits.
3. Assume that Nissan spends an average of 1.875
Million Yen to manufacture a car in japan, plus $2600
to market and distribute the car in the United States.

a) Assuming the exchange rate at the end of

each year since January 2000, what would be
the impact of the exchange rate on the
dollar cost of the auto.

In case a, at the exchange rate at the end of each

year since January 2000, the most impact of the
exchange rate on dollar cost of auto is the weak yen
against dollar through the Japanese government
policies. They try to keep the yen weak to revive their
economy and also stimulate their export companies.
The weak yen means the cost on dollar increasing, so
that the Japanese auto companies have more
advantage then American auto companies about
products prices.

b) If Nissan had wanted to sell the car at the

end of 2004 for the same as it could have at
the end of 2001, by how much would it have
to cut cost, given the exchange rates of the
two years.

In case b, Nissan wanted to sell the car at the end

of 2004 the same as the end of 2001. The year-end
2004, the exchange rate is about 111, so the price for
a car about $16891. The end of year 2001, the
exchange rate is about 120, so the price for a car
about $15625. Comparing the price, we see that if they
wanted to sell the same price with year 2001, they
should cut costs about $1,266 per car.
Conclusion
The exchange rate is a key point of the Japan and other economic
on over the world. Therefore, controlling the exchange rates or
remaining stable the exchange rates are very important to every
countrys policy. Moreover, the corporation or multi-national
Enterprise should consider the exchange rate and try to find out
the way to live and survive in the difficulty condition