Hyundai Supplanting Toyota as Won Undermines Exports

By Jason Clenfield

Oct. 21 (Bloomberg) -- David Beidny’s choice between a Japanese and South Korean car was easy: Hyundai Motor Co. gave him $3,500 in cash to make the purchase, a deal that money- losing Toyota Motor Corp. could ill afford to offer.

“I stopped by Toyota and I even sat in a Camry, but they were asking $4,500 more than the Hyundai I bought,” said the 46-year-old computer graphics designer from Rockland County, New York, who purchased an Elantra. “Hyundai was cutting the best deal.”

Japan, which barely emerged from recession in the second quarter, may see its expansion cut short as the exporters it depends on for growth cede business to South Korean rivals. Toyota is contending with a yen that has risen against all 16 major currencies in the past two years, including the dollar, euro and Korean won, eroding profit and leaving little room for price cuts. The won’s 22 percent slide versus the dollar let Hyundai give discounts and almost double its U.S. market share.

“Korea’s done much better over the last year and the exchange rates tell you a lot of the reason,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Look at the earnings coming out of the two countries: the ones from Korea are strikingly better.”

The yen has soared 62 percent over its Korean counterpart over the past two years, trading at 13 won at 2:53 p.m. in Tokyo.

Earnings Scorecard

Seoul-based Hyundai posted record profit of 812 billion won ($697 million) in the three months through June. In the same period, Toyota lost 77.8 billion yen ($861 million). Nagoya- based Toyota, the world’s largest automaker, is forecasting its second consecutive loss.

Japanese electronics makers aren’t faring any better. Sony Corp. predicts an annual loss of 120 billion yen, with an appreciating currency threatening a deeper slump. The Tokyo- based company calculated its forecast assuming the yen will trade at 93 per dollar, weaker than the rate of 90.35 at the close in Tokyo yesterday.

“It’s a tough environment,” Sony Vice Chairman Ryoji Chubachi said in an interview this month in Chiba, near Tokyo. “We don’t have any room to breathe,” he said, citing the yen’s gain and reduced U.S. demand. Sony’s income statement shows its loss will widen by 1 billion yen for every 1 yen the currency appreciates.

Samsung’s Gain

In contrast, the won’s drop has allowed Samsung Electronics Co. and LG Electronics Inc. to lop off more than $100 from the price of a $1,000 television and stay profitable. Earnings at Suwon-based Samsung climbed 5.2 percent to 2.3 trillion won in the quarter through June. LG, which posted record profit of 1.1 trillion won in the period, says it will overtake Sony this year as the world’s second-largest TV maker.

“I don’t really see the competitive edge of Japanese companies right now,” said Peter Yu, a technology analyst at BNP Paribas SA in Seoul. South Korean firms are better at managing costs and quicker to market than Sony, which “takes months to make a decision and implement it,” he said.

Vexing for Japanese exporters is that the yen may not be overvalued. A Bank of Japan index comparing the currency with those of the nation’s top trading partners showed it rose 22 percent to 118.5 in September from 96.8 two years before. That’s still cheaper than the average of 122.5 the past two decades. A separate gauge compiled by Westpac Banking Corp. showed the yen rose 32 percent from two years ago while the won sank 37 percent.

‘Significant Advantage’

“That’s a very significant advantage for Hyundai or Samsung or LG,” said Uwe Parpart, chief Asia strategist at Cantor Fitzgerald LP in Hong Kong. “It’s something that the Japanese are beginning to learn to live with.”

The contrasting fortunes of the countries’ exporters have determined the speed at which their economies have rebounded. South Korea’s gross domestic product grew 2.6 percent in the second quarter, the fastest pace since 2003. Japan’s 0.6 percent expansion barely lifted the economy out of its worst postwar recession.

The Kospi stock index has gained 47 percent this year, about seven times more than Japan’s Topix. Hyundai has more than doubled, while Toyota has risen 23 percent.

South Korea’s success may in turn cause the won to appreciate as international investors flock to the nation’s assets. The won has the best prospects in 2010 among 34 currencies ranked by Bloomberg forecast surveys. Median projections show the won rising 6 percent against the dollar by Sept. 30, 2010. The yen is predicted to lose 7.8 percent per dollar and 13 percent versus the won.

Little Sympathy

Japan’s exporters, whose shipments overseas fell 36 percent in August from a year earlier, have received little sympathy from their government over the yen’s appreciation so far. Finance Minister Hirohisa Fujii says companies shouldn’t rely on a weaker yen to prop up sales abroad. Japan hasn’t intervened in the foreign-exchange market with yen sales since 2004.

By contrast, South Korean officials are acting to keep their currency cheap. The country’s foreign-exchange reserves soared 9.7 percent to $254 billion last quarter as officials sold won to contain an 8.1 percent rally against the dollar.

The collapse of General Motors Co. and Chrysler Group LLC created an opening in the U.S. market that the South Koreans were quick to seize. Hyundai has won U.S. customers with a marketing blitz and incentives that include cash rebates, gasoline discounts and an offer to repurchase cars from buyers who lose their jobs.

‘That Time Is Here’

“For the last five or 10 years, the question has always come up, ‘when do the Koreans finally become competitive? When do they pose a threat to the Japanese automobile makers?’” said Stephen Usher, a San Diego-based analyst for equity- research firm Japaninvest Plc. “That time is here.”

While Toyota’s U.S. market share held at about 17 percent through the first nine months of 2009, Hyundai increased its share by 1.3 percentage points to 4.4 percent, the industry’s biggest gain, according to Autodata Corp. The company was ranked ahead of Japanese makers Nissan Motor Co. and Mazda Motor Corp. in a survey this year of vehicle dependability by market researcher J.D. Power and Associates.

“For the money, it’s a fantastic car,” said Biedny, the graphics designer who in July traded his Ford Motor Co. vehicle for the Hyundai Elantra.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net