Japanese companies grapple with euro swings

One of the hottest topics at the Ceatec consumer electronics show this month near Tokyo had nothing to do with the latest digital cameras or LCD televisions. It was the euro?s precipitous drop against the yen, and the damage it is doing to unwary Japanese manufacturers.

?Our sales in Europe are down across the board this year,? Fumio Ohtsubo, president of Panasonic, told reporters at the annual industry gathering. ?It?s a very serious situation.?

In the previous six months the euro declined by 18 per cent against its Japanese counterpart, and is 37 per cent below its mid-2008 peak of about Y169. It is currently trading at just under Y106.

Japanese companies are used to grappling with endaka , or a strong yen, but until now their foreign currency of reference primarily has been the US dollar. The main reason is that Japan exports more goods to the US than it does to Europe – Y10,385bn ($136bn) worth last year, compared with Y7,617bn ($100bn) to the European Union.

The dollar last week hit a fresh postwar low against the yen of Y75.82. Yet for many companies the euro?s weakness has become the bigger worry. Sony, for example, sees Y6bn in operating profit vanish for every one-yen drop in the euro?s average annual trading value against the yen.

It has no such problems with the dollar: financial hedging and carefully honed procurement strategies mean it suffers ?virtually no? effects from shifts in the US currency, according to Sony officials.

The same dynamic holds for other groups. Toshiba achieved ?dollar neutrality? last year, but says the euro?s weakness remains a ?considerable problem?.

Kazuo Hirai, executive vice-president at Sony, suggested at Ceatec that Sony would shift more manufacturing and procurement to Europe in response to the euro?s decline.

?We need to try and make more products that have a euro cost base,? he said. ?Our dollar-based procurement has grown a lot, but we are going to have to shift gradually [to euros].?

Several factors have made Japanese groups more vulnerable to the euro?s gyrations than those of the dollar. The first is time: the dollar has been on a more or less downward course against the yen since 1985, giving companies plenty of time to implement countermeasures. Over the years they have built many factories in the US, where they can pay workers and suppliers in dollars.

By contrast, the euro rose steadily against the yen from 2000 until the financial crisis, and its most recent nose-dive has caught many companies by surprise. Most Japanese manufacturers? financial plans for the fiscal year to March anticipate a euro exchange rate of between Y110 and Y116. If current levels persist, some may be forced to cut their profit forecasts.

Another source of vulnerability is the relative parochialism of the euro. Even outside the US, many purchases of raw materials and components are settled in dollars, which allows Japanese companies to recycle dollar earnings without having to repatriate them at punitive exchange rates. The euro offers few such opportunities outside the eurozone.

?We are negotiating with some suppliers to get them to accept settlement in euros, but it?s difficult now [because of the financial instability in Europe],? one Toyota manager says.

Analysts at the Japan Research Institute, a think tank, calculate that foregone profits in the Japanese manufacturing sector as a whole could total Y150bn over the next six months if the euro continues to trade near Y100. Earlier this month, at the time of the Panasonic president?s comments at Ceatec, the euro was threatening to fall below Y100 for the first time since it entered general circulation a decade ago.

In addition to such losses, industry officials fear the boost that the euro?s weakness is giving European rivals, at a time when many Japanese groups are still recovering from the effects of Japan?s March earthquake and tsunami. Volkswagen?s US sales jumped by more than a third in September, while Toyota?s fell by 17.5 per cent and Honda?s dropped by 8 per cent.

?The Germans are obviously swimming in cash. It?s one more problem for us,? says the Toyota manager.

He recently returned from the Frankfurt motor show, where local producers such as Volkswagen and BMW stood out with ?big, expensive-looking booths?.

One way for corporate Japan to turn endaka to its advantage is through acquisitions, which have increased this year. Purchases of euro-area companies by Japanese groups totalled $144bn through the first week of October, according to Dealogic, compared with $93bn over the same period last year.

Still, the general economic gloom has made many potential acquirers cautious. On current trends the value of this year?s deals is unlikely to surpass the more than $200bn recorded in 2005 and 2006, during the last notable bout of Japanese foreign takeovers.

? The Financial Times Limited 2011