Auto Parts Exports Greater Beneficiary Of Weaker Yen

BMI View : Japanese vehicle parts exports have benefitted disproportionately from the weaker yen compared with vehicle exports. We expect this trend to continue in the short term due to greater production diversification out of Japan by carmakers, and a lack of price discounting by Japanese OEMs on the one hand, as well as rising global demand for Japanese auto components on the other.

According to the Japan Ministry of Finance, the country's auto parts exports rose 7.6% year-on-year in January 2014, to JPY253.0bn (US$2.45bn). The positive start to 2014 was after parts exports grew 8.7% in 2013, to JPY3.48trn (US$33.76bn), which was their best performance since 2010.

As the accompanying chart highlights, the change in the level of JPY/US$ has had a strong correlation with auto exports growth in the past few years. From 2010-2012, the strengthening Japanese yen saw a concurrent decline in auto parts exports. By the same token, the recent depreciation in the local currency since September 2012 has presided over an increase in auto component exports.

Weaker Yen Aiding Growth
Japan - Auto Parts Exports, JPYbn (LHS); % chg y-o-y (RHS); JPY/US$ (RHS)

Auto Parts Exports Greater Beneficiary Of Weaker Yen

BMI View : Japanese vehicle parts exports have benefitted disproportionately from the weaker yen compared with vehicle exports. We expect this trend to continue in the short term due to greater production diversification out of Japan by carmakers, and a lack of price discounting by Japanese OEMs on the one hand, as well as rising global demand for Japanese auto components on the other.

According to the Japan Ministry of Finance, the country's auto parts exports rose 7.6% year-on-year in January 2014, to JPY253.0bn (US$2.45bn). The positive start to 2014 was after parts exports grew 8.7% in 2013, to JPY3.48trn (US$33.76bn), which was their best performance since 2010.

As the accompanying chart highlights, the change in the level of JPY/US$ has had a strong correlation with auto exports growth in the past few years. From 2010-2012, the strengthening Japanese yen saw a concurrent decline in auto parts exports. By the same token, the recent depreciation in the local currency since September 2012 has presided over an increase in auto component exports.

Weaker Yen Aiding Growth
Japan - Auto Parts Exports, JPYbn (LHS); % chg y-o-y (RHS); JPY/US$ (RHS)

However, the lifting fortunes of the auto parts industry contrasts with the muted response of vehicle exports. In our analysis of vehicle export data, we have not included figures before June 2012, as growth rates were distorted from the low base effects of 2011. Exports in this period fell sharply as the Tohoku earthquake, which struck the country in early 2011, disrupted production facilities and hindered export operations.

As the accompanying chart shows, while vehicle exports contracted at a slower pace after the yen began weakening in September 2012, they have remained in negative territory for most of the months since then. In 2013, vehicle exports declined 2.8%, to 4,674,667 units, a sharp contrast to the strong growth seen in the parts sector.

Lesser Beneficiary Of The Weaker Yen
Japan - Vehicle Exports, Units

We believe the divergent fortunes of the two sectors can be pinned down to a few different factors.

  • Greater Production Diversification By Carmakers

Japanese carmakers and suppliers have been diversifying their production out of the country since 2008 due to the high cost of domestic production, the benefits of pursuing a localisation strategy, as well as the relentless appreciation of the local currency (the yen has only reversed its strength since September 2012). However, we believe that automakers have moved more of their production to foreign markets compared with suppliers, which usually wait for major original equipment manufacturers (OEMs) to establish their production facilities and manufacture a steady number of vehicles first, before deciding to join them.

  • Lack Of Price Discounting By Automakers

While Japanese automakers could engage in a deep discounting strategy with a more competitive currency to boost export volumes, we have yet to see evidence of such a strategy. Instead, carmakers have been content to see a weaker yen boosting their profits and using the improvement in their margins to compete on product differentiation strategies instead ( see 'Weak Yen Fails To Lift Exports But J3s Have Other Plans', June 18 2013).

  • Rising Global Demand For Japanese Auto Parts

Japanese suppliers have the benefit of having many of the tier-one OEMs as their customers and are not confined to supplying only Japanese firms. For example, Japanese component maker Denso Corp, the world's biggest diversified auto parts supplier, sells parts to General Motors Company, Ford Motor and Chrysler Group LLC, together with some of the major Japanese OEMs.

Furthermore, Japanese suppliers also sell their parts to many different markets. The table below shows the top importers of Japanese car parts in 2013. The US auto market has been suffering from a shortage of auto components due to a lack of domestic suppliers, coupled with robust demand for vehicles. This has led to some of the domestic OEMs going as far as flying in high-value added parts from Japan to satisfy demand. While fast growing markets will eventually produce more auto parts locally, we expect this deficit to continue in the short term as domestic supply of components struggles to meet demand.

BIGGEST IMPORTERS OF CAR PARTS FROM JAPAN IN 2013
Country Amount
US JPY21bn
China JPY12.5bn
Thailand JPY6bn
Source: Japan Customs, BMI

Implication Of This Trend

We expect suppliers to continue reaping most of the gains from a weaker Japanese yen versus OEMs in the short term due to the aforementioned reasons. A possible way to express our view of supplier outperformance is by initiating a 'bullish Japanese suppliers over automakers' view in our macro-industry strategy.

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