Japan’s Automakers Face Endaka

-B23086 (Mohit Patil)

Case Background:
In the years following World War II, Japan experienced remarkable economic growth,
becoming a major global player. The automotive industry played a pivotal role in this rise,
with Japanese automakers earning recognition for quality, efficiency, and innovation. By the
late 1980s, they had secured a substantial share of the global market, especially in the United
States.
However, a challenge emerged in the early 1990s. The Japanese yen started appreciating
rapidly against the US dollar, a phenomenon known as "endaka" or "high yen." This surge in
the yen's value had a notable impact on Japanese automakers. It made their exports, like cars,
more expensive for foreign buyers, particularly in the US. Consequently, export volumes and
profits for Japanese automakers declined. For instance, between 1985 and 1995, the yen
strengthened by nearly 80% against the dollar, causing a significant increase in the cost of
exporting cars from Japan.
The case outlines the industry's earliest reactions to “endaka”, which included efforts to retain
competitive pricing despite the unfavourable currency move, control over wages, and cost-
cutting measures. To offset the effect of the currency on their exports, some automakers
changed their product lines, relocated production facilities abroad, and modified their
marketing tactics.
The situation that these automakers are in is also examined in the case. The text delves into
the complex balance between maintaining market share, boosting prices, and tackling internal
factors such as cultural norms and adherence to the Japanese market.

Critical Issues:
1. Challenges faced by Japanese automaker:
Japanese automakers faced a number of difficulties, chief among them being currency
swings, particularly the sharp rise of the yen relative to the US dollar. Their exports
were more costly as a result of this increase, which hurt their profitability and
competitiveness in important markets like the US. Important challenges included
dealing with rising production costs, overcoming protectionist attitudes, and
maintaining competitive pricing without losing market share. Complex issues were
also provided by the need to navigate domestic pressures to maintain output levels in
Japan while implementing initiatives that included cost-cutting measures and
worldwide production changes.

2. Currency Fluctuations and Export Challenges:

The impact of the yen's rise on Japanese automakers' competitiveness in international
markets is the main concern. Export volumes decreased and profit margins were
squeezed as a result of the yen's sharp increase versus the US dollar.
 3. Trade off between Domestic Pressure and Global Interests:
For Japanese manufacturers, the trade-off between home pressure and global
competitiveness centres on competing interests. Sustaining high output levels
promotes stability and loyalty in Japan by aligning with cultural norms and domestic
employment. But maintaining global competitiveness necessitates efficient operations
and cost reduction, which frequently calls for moving production elsewhere.
Automakers are forced to weigh the necessity of cost structure optimisation and
maintaining competitiveness in the global automotive market against domestic
commitments as a result of this trade-off.

Case Analysis:
The case explores how Japan's automotive industry is affected by currency changes,
specifically the strengthening of the Japanese yen in relation to the US dollar. Japan's
economy grew significantly after World War II, with the automobile industry playing a key
role. But because the yen's appreciation—dubbed endaka and then super endaka—made
exports from Japan more costly in important markets like the US, it presented serious
difficulties for the country's manufacturers.

 Industry Impact:
Japanese automakers were significantly hurt by the currency issues, especially the
strong rise of the yen against the US dollar. A considerable drop in export quantities
resulted from the higher export expenses brought on by the stronger yen, which had
an immediate impact on profitability. Because of this fall in profitability, Japanese
automakers had a very difficult time holding onto their market share in important
regions like the US due to increased competition and protectionist attitudes. Not only
did currency swings make them less competitive, but they also made them reassess
their pricing and market positioning plans. During this critical time, Japanese
automakers had to balance maintaining profitability with maintaining their market
share in key regions while dealing with currency-related difficulties.

 Strategic Responses:
In response to the yen's rise, Japanese car makers took diverse steps. They cut costs
by managing operations better and trimming unnecessary spending. They also made
fancier cars that could earn them more money. To handle higher production costs due
to the strong yen, they slightly raised prices in the US without losing customers. They
also stepped up marketing, using cool deals to keep people interested in buying
despite the higher costs. These moves showed how the industry adapted, mixing
careful price changes with clever marketing to handle currency ups and downs while
aiming to stay profitable.
 Global Expansion and Diversification:
To deal with currency fluctuations, Japanese automakers reacted by establishing
"transplants," or factories, abroad. To save expenses and maintain their competitiveness
abroad, they increased their operations in the US and Asia. This action mitigated the
effects of currency fluctuations by enabling the production of cars in locations with
fluctuating exchange rates. They could keep prices stable in overseas markets and avoid
some of the additional costs associated with establishing plants in these places during
periods when the yen was high. They were able to better manage their spending and stay
competitive on a worldwide scale because to this strategy change.

 Tradeoffs:
The issue highlights a conflict inside Japanese automakers: the necessity to reduce costs
in order to compete internationally vs the desire to maintain production in Japan. They
had to make the difficult decision to alter their setup to be competitive on a global scale or
to remain faithful to their own market. The pressing need to cut costs and adjust to
changing international demands clashed with the pressure to continue producing vehicles
in Japan. They had to decide whether to follow tradition or change everything to be
competitive in the global race. Japanese automakers faced a dilemma as a result of this
conflict between local roots and international demands: they had to choose between being
loyal to their homeland and having to change in order to succeed internationally.

 Planning and Implementation:

The early 1990s endaka crisis that affected Japanese automakers serves as an example of
the value of flexibility and strategic planning. For Japanese automakers, the sharp
increase in the value of the yen (endaka) threatened both their profitability and export
competitiveness.
Japanese manufacturers showed incredible flexibility and strategic planning in the face of
this problem. They employed a range of tactics, such as:
Cost reduction: To counteract the effects of the high yen, they streamlined processes, cut
waste, and negotiated better prices with suppliers.
Localization: To lessen the effect of exchange rate swings on their expenses, they set up
production facilities and procured parts locally in foreign marketplaces, especially in the
US.
Macroeconomic tools to analyze the case:

Currency Fluctuations:
The price of imports and exports is impacted by a currency's appreciation or depreciation.
A rise in the value of the yen relative to the dollar makes Japanese goods more costly for
overseas consumers, which may lower demand and have an impact on the trade balance
of the nation. Evaluating how factors of production (capital, labor, etc.) influence trade
patterns and how currency fluctuations might affect the allocation of these factors across
countries.

Comparative advantage:
Case describes how countries produce goods or services where they have a comparative
advantage, why they engage in international commerce, and how currency fluctuations
affect this advantage. The comparative advantage in the car business could change if the
yen strengthens.

Balance of payments:
Trade Surplus/Deficit: The case examines how Japan's trade balance is affected by the
yen's appreciation. A stronger yen may initially result in a trade surplus (exports >
imports), but it may eventually have an effect on competitiveness.

Learnings as a business Manager:

 Global Expansion for Diversification: Increasing internationally can help reduce the
risks brought on by changes in a particular market. The impact of currency
fluctuations can be mitigated by diversifying production facilities across geographical
areas.

 Long term view: It's critical to concentrate on long-term growth initiatives despite
temporary swings. Plans that take long-term market resilience and sustainable
competitiveness into account should be developed by managers.

 Adaptability: The dynamics of the market and changes in currency can quickly affect
how businesses operate. Having flexibility enables managers to react quickly to
shifting conditions, be they related to pricing policies, cost-reduction initiatives, or
market diversification.

 Balancing trade-offs: It's critical to maintain a balance between national obligations

and international competitiveness. The conflict between maximising expenses for
worldwide operations and preserving local output levels must be managed by
managers.