Japan's Automakers Face Endaka

Japan's Automakers Face Endaka



Case Study: Japan's Automakers Face Endaka

International Business is a risky business. There are many obstacles and challenges to overcome, yet despite this, companies are lured into it by potential profits. One great risk for companies is the fluctuation of interest rates. Since the collapse of the Bretton Woods fixed exchange rate agreements in 1973, where global currencies were "pegged" against the dollar, most currencies were allowed to float in a supply and demand market. Two decades have passed since the breakdown of the fixed exchange rate system, and there are both critics and supporters of the current floating exchange rate regime. Regardless of the merits of this system, whether if the floating exchange rates regime is "good" or not, it most certainly has changed the face of international business and has brought on new challenges to multinational corporations. One such challenge is fluctuations in exchange rates. Fluctuations in exchange rates between countries have dramatic impacts on international trade and the profit margin of multinational corporations. A firm operating with a slim profit margin can see their profits instantly vanish as exchange rates shift, as in this case of Japanese Automakers. Before Endaka, Japanese cars were approximately $ 500 to $2,000 cheaper than similar U.S. models. With the advent of Endaka, this cost advantage of being eliminated. This led to a backlash from Japanese citizens, used to time honored traditions of lifetime employment. Japanese unemployment hit a high of 3%. Many companies simply let themselves "bleed," slowly losing profits than to close factories (McKinnon, Ronald &Ohno, 1997).

Once again, Japanese companies raised sticker prices and pressured their suppliers for cheaper components. However, these companies started heavy advertising and marketing campaigns to attract more customers, and to detract from the increase in prices. With little or no profit margin, it became essential to sell high quantities of cars to maintain production efficiencies. The second wave of Endaka also forced Japan's automakers to rethink their production locations. The first wave of Endaka precipitated a move of production facilities to the U.S. With the second wave of Endaka, Japan's automakers began to invest in even cheaper production markets. Asia, with its low-wage rates and large untapped markets was particularly attractive, and the automakers began pouring in direct investments in the region. However, Japanese automakers faced heavy pressure from within the country to keep production within Japan. As production facilities moved, firms started to slash domes (Destler, Henning & Randall, 1993).

The above graph shows the changing Yen/Dollar exchange rate in the period of 1973 to 1995.

In response to the rising yen, Japan's government began to reform the economy. Exports were to be given less emphasis than they had been awarded in the past. This step seemed quite logical but it was obvious that going this direction would have a radical effect on export-oriented companies. In 1985, net exports comprised 3.5% of Japan's GNP, making Japan the most dependent country on trade in the ...