A weak currency generally provides a tailwind for the likes of Toyota, Nissan and Honda. But the war in Ukraine and supply chain disruptions have been pushing up the cost of everything from steel, to aluminium, to lithium over the past several months. Global consumer confidence, meanwhile, has been shaken by the war and inflation fears.
Toyota Motor last week predicted a 21% slide in its net profit for the year through March, although this was based on a conservative estimate for the yen-dollar exchange rate. While it acknowledged the cost pressures, the company was noncommittal on its pricing strategy.
“It is a difficult problem to raise prices just because materials have gone up. We need to respond to various segments of customers globally, in a detailed manner,” said Jun Nagata, Toyota’s chief communications officer, during the automaker’s online earnings call on May 11.
Nissan Motor chief operating officer Ashwani Gupta was similarly cautious. “Rising car prices are always a concern, seen from the customer point of view,” he said, adding that it is ultimately the customer who decides how much they are willing to pay.
The question of whether to raise prices for new cars is especially tricky in Japanese carmakers’ home market. Japan has not seen significant inflation for decades, and automakers do not have a history of immediately passing on cost increases to customers.
Instead, they have gone to extreme lengths to cut costs wherever possible. And Japan remains an important market despite these companies’ massive global footprint. Toyota still makes about 20% of its sales in Japan, while the figure is around 10% for Nissan and Honda Motor.
Daiwa Securities analyst Eiji Hakomori described the conundrum facing automakers. “With the price of raw materials soaring, there is no choice, from a shareholder’s point of view, but to raise car prices. But automakers are wary of raising prices in Japan because they worry their reputation may suffer if people accuse them of revising prices even though they are already making a profit.”
They have more flexibility in other markets, especially in the US, where car prices tend to fluctuate more readily than in Japan. There, Japanese automakers have adopted a strategy of changing their price points with every new model, a trend that is expected to continue this year.
The suggested retail prices of Toyota’s Camry sedan and RAV4 SUV are now 3% to 4% higher than a year ago, according to the company’s website, while in India this spring Toyota raised the prices of its SUVs and other vehicles by 4%.
Moves by competitors, especially at the higher end of the market, could provide some headroom. Tesla, a leader in the premium electric vehicle market, raised the price of its cheapest Model 3 by more than US$10,000 in the year through this spring.
Japanese carmakers with their own luxury offerings may see an opening to do similar. Toyota’s Nagata, who had been cautious about raising prices, said, “I think there is a segment of customers who are willing to pay a little more,” a possible reference to its Lexus luxury brand.
Daiwa’s Hakomori said Japan’s automakers face a complicated global picture. “I think automakers are aware that they have to raise prices, though it is not simple to raise prices to deal with rising costs just as supply is starting to recover,” he said.
With signs that shortages of chips and other components are starting to ease, he explained, carmakers may prefer to maintain rather than raise prices. “In that regard, any price increases may be milder than last year.”
For now, conservative forecasts for the yen-dollar exchange rate could let automakers put off unpleasant price hikes in Japan. If the Japanese currency weakens beyond companies’ stated expectations, their earnings, in yen terms, rise.
And according to Seiji Sugiura, an analyst at Tokai Tokyo Research Institute, no one wants to be the first to raise prices.
“A price increase is necessary, to a certain extent, to cover the high cost of raw materials, including in Japan,” Sugiura said.
However, “Toyota’s cautious stance on raising prices in Japan has made other automakers reluctant as well. Rather than taking the lead in raising prices in Japan and losing market share, they may wait and see what happens with the exchange rate situation, which may be a boost to their earnings.”