Subaru's Sales Boom Thanks to the Weaker Yen

Subaru's Sales Boom Thanks to the Weaker Yen

By: Jon Wood, Ken Kwong

IBM 300

Cal Poly Pomona

Abstract

Subaru began as a division of a large multi-national company, Fuji Heavy Industrial. FHI was formed in 1915 as The Aircraft Research Laboratory. During its history, the company split its operations and reformed to meet demand. One of those reorganizations was the Nakajima Aircraft Company who supplied the Imperial Japanese Army Air Service with Zeros. After the war the company reorganized again into Fuji Sangyo.

         In 1950 the Japanese government saw a need to protect its interests and passed the 1950 Corporate Credit Rearrangement Act – similar to our Sherman Anti-trust laws – and forced Fuju Sangyo to split into 12 corporations. After a few years four of those corporations along with a newly organized company formed FHI. Each of the five companies had specific resources and skills that were suited to manufacturing; Fuji Kogyo manufactured scooters from surplus airplane parts; Fuji Jidosha were coachbuilders; Omiya Fuji Kogyo manufactured engines; Utsunomiya Sharyo built chassis; and the Tokyo Fuji Dangyo trading company. Subaru became a division the newly created company, starting production of prototype passenger vehicles. It remained this way until 2016 when Fuji Heavy Industrial adopted Subaru as its name because of the quality and reliability associated with the name.

Post WWII the United States was entering the cold war with the USSR, and feared an impoverished Japan would turn to communism. They pumped vast amounts of money and technology into the Japanese economy to ensure capitalism’s hold on the country. By the time Subaru was formed Japan was already in the second stage of their post war recovery, and the industrial capacity lost before the war had already been replaced. In 1971, with the removal of Bretton Woods by Nixon, the world went from fixed exchange rates to floating rates. The initial rate was set at 360:1 JPY to USD and has risen to approx 108:1 today.

What are the currency risks associated with Subaru's export strategy?

Currency risk is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign-currency-traded investments.  The currency risk associated with Subaru’s export strategy is that it is heavily reliant on the price of the dollar or any other currency compared to the yen.  Subaru being primarily manufactured in Japan has the risk of the possibility of the Yen being strong thus having their automobiles to be more expensive to other foreign countries.  An example of this is in 2012 the price of Yen compare to the dollar was 80 Yen/USD and in 2015 120 Yen/USD.  Let us say that the price of the Subaru WRX was 3 Million Yen and they were selling the car to a buyer in the U.S.  In 2012 it would cost the buyer $37,500 compared to $25,000 in 2015.  Because there is a big difference in price between the strong and the weak yen, Subaru has disadvantage to their competitors such as Honda and Toyota that have factories in other countries.  

Potential Benefits        

However, there are benefits of this export strategy.  Because of the weaker yen the Japanese automobile maker has a higher pricing power than the competitors in the U.S.  The weaker yen makes it easier to sell at a discount.  The more yen/dollar the less dollars it takes to purchase the same yen.  Another benefit of having a weaker yen is that japanese companies pays their workers and suppliers at the weaker yen while they are taking in dollars from customers overseas.