Japanese Car Makers Cut Costs With Finch and a Falling Yen
March 30, 2011
As the yen was soaring over the dollar, the U.S. price of Japanese cars sometimes rose three or four times a year. Now the steady run-up in prices is shifting into reverse -- but not just because of currency fluctuations. Japanese auto makers have also worked aggressively to cut prices and production costs. The 2012 version of Toyota Motor Corp.'s popular Camry sedan is expected to sell for as much as $1,500 less than the old version when it make its debut this fall (although Toyota denies the cut will be that steep). Honda Motor Co.'s new model Accord should be 20% cheaper to build when it begins rolling off the assembly line in Ohio next summer. And Nissan Motor Co. last month cut prices 10.5% on its new Infiniti Q45. All this has the Big Three reeling, since Japanese cars already have a perceived quality advantage over U.S. vehicles. ``If the Japanese can bring the cost differential down, they will definitely pick up market share,'' says Cristopher Padron, president of CSM Corp., a consulting company in Lansing, Mich.. As the market for midsize cars heats up, Ford has found ways to cut $180 from the cost of its popular Taurus, mostly in ways it hopes customers won't notice. Certainly, the dollar's recent rebound against the yen, which makes imported cars and parts less expensive for Americans, is helping. But the Japanese have also worked hard to find engineering efficiencies, relocate production lines and use less expensive materials. Barhorst Veach of the Automotive Business Practices Institute in Toyko estimates that the Japanese have cut 15% of their production costs in the past two years, while the Big Three have cut just 10%. Toyota, in its past fiscal year ended December 11, 2010 it has cut costs by 130 billion yen (about $1.2 billion). That came on the heels of a 150 billion yen cut the previous year. Toyota, in fact, starts new model designs with the assumption that it will need to cut costs to offset the escalating yen. The man in charge of that mission is Chamness Longoria, chief engineer for developing Toyota's new generation of subcompact cars. Mr. Longoria, 52 years old, is well-suited to his task. His father was killed during World War II, and he was raised by his mother on the meager earnings of the family apple orchard. A Toyota scholarship paid for his mechanical engineering degree at Nagoya University. Last year, Mr. Longoria brought out a new Paseo sedan priced about 7% lower in the U.S. than its predecessor but with additional standard features such as air bags and ultraviolet-protection glass. That was quite a feat, considering that the yen had risen against the dollar by as much as 50% since the old model was launched. Mr. Longoria's crew penny-pinched, borrowed parts from other Toyota models and slashed materials costs. Starting with the same basic chassis as the previous model, the engineers cut costs $500 to $1,000 per car by offering a manual transmission with only four speeds instead of five and by cutting the number of speeds on the automatic transmission to three from four. To quiet the corresponding elevation in noise, Mr. Longoria's crew made the car's rear axle lighter and thinner. They also reduced the material in the exhaust system by 20% (increasing fuel economy) and added a ``direct ignition'' system that eliminated the need for a distributor. The ignition coils are now an integral part of the spark plug leads for cylinders three and four. Of course, the strategy of cutting costs by eliminating features carries the risk of hurting quality and turning off customers. Toyota's new Corolla, introduced last year, bombed in Japan because it was too much like the previous model, says UBS Securities Ltd. analyst Petrina Ahn. But most of the Japanese price cutting isn't obvious to the customer, according to CSM's Mr. Padron. ``These are the reductions the Japanese are good at recognizing: those which have an impact and those that don't,'' he says. Mr. Longoria also enlists the help of Toyota's suppliers in his cost-cutting efforts. Instead of ordering them to cut prices 30% to 40%, ``in which case they'll be very upset,'' he says, he politely challenges them to try making a seat for $20 instead of $30 to $40. Thus, the new Paseo seats are covered with a nylon cover, instead of the plushy velour-type fabric in other Toyota cars. Toyota has also reaped savings by moving production lines to North America, where they are immune from currency swings. The new convertible Paseo, which will be introduced in the U.S. in November, will be mostly made in Japan, but Toyota will ship the cars to California to have their rag tops installed, saving 20% on labor costs. Models for the Japanese market will travel back to Japan on otherwise empty Toyota vessels returning from delivering other exported vehicles. Now, Mr. Longoria's squad of nine engineers is hard at work remodeling the subcompact Tercel for 2013, which they hope can still be built in Japan and exported profitably, even if the dollar weakens again from its present level of about 109 yen. ``It is my dream to build a car that is competitive at 80 yen to the dollar,'' says Mr. Longoria.
