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Tuesday, December 6, 2011

Japanese Vehicle Production and U.S. Energy Production ... The Differences

Exports of Japanese auto companies in general, and Toyota in particular, are suffering from an overvalued currency. As a result, profitable export sales are hard to come by despite underutilized capacity in Japan.

Similarly, Japanese employment is extremely important to Japanese companies as well, and Toyota is one of the biggest of them all. Thus, in Japan it's patriotism and employment versus profits and competitiveness, at least in part.

The U.S. now exports slightly more energy products than we import. Still, we import almost 50% of what we use. If we produced more and imported even less, our costs would go down, our currency would appreciate and employment would increase. Consumers would pay less, tax receipts would climb, and oil companies would be more profitable.


In other words, our U.S. energy situation is pretty much the opposite of Japan's vehicle dilemma. Domestic employment, strength of currency, output, costs and profits, one and all.

Japan and Japanese companies like Toyota would love to have our U.S. problems, including the opportunity to produce more locally, generate more profitable sales and create more jobs while doing so. Consumers would welcome a stronger currency as well, and the lower prices that would bring them.

Toyota is currently debating whether it can afford to keep its long standing promise to produce three million cars in Japan. That's because its export sales are now often unprofitable due in large part to currency exchange rates.

To remedy its profitability issues, it could move more of its vehicle production from Japan to markets such as the U.S. where costs would be lower due to currency effects. A second possibility is for Japanese governmental authorities to take steps to weaken the yen and thereby reduce local production costs sufficiently to make exports profitable for Toyota and other vehicle manufacturers. See For Toyota, Patriotism and Profits May Not Mix. See also Nissan CEO: Japan Should Adopt Currency Benchmark.

Let's now contrast Toyota's problem to U.S. domestic energy production.

Toyota doesn't sell as many vehicles in Japan as it produces. It depends on exports to sell its excess manufacturing capacity.

The U.S., on the other hand, doesn't produce as much oil as it consumes, even though we could come much closer to doing so if we so chose. Consequently, the U.S. depends on imports to meet roughly one half of our energy needs.

Since Toyota has excess manufacturing capacity located in Japan, it needs to dispose of that excess either by export sales or by curtailing Japanese production. Of course, cutting Japanese production would adversely impact Japan based employment.

The U.S. energy situation is quite the opposite. Since the U.S. produces only ~50% of its energy needs currently, there is no excess production capacity nor will there be any for a long time to come.

Here's the fundamental question; Why don't we drill more, import less, strengthen the dollar, increase employment, increase companies' profitability and lower the prices paid for energy by both U.S. consumers and companies?

Japan simply has issues we don't have. Its competitive model embraces mercantilism, as does China.

In comparison, the U.S. domestic consumer based economy is by far the biggest in the world. We export less as a percentage of the economic whole than do virtually all other countries.

Most importantly, we consume more than we produce. Accordingly, producing more of what we consume would immediately benefit our domestic economy, employment levels, dollar strength and both the worrisome deficit and debt situations.

Such straightforward solutions are not available to Japan or other mercantilists who use excess local capacity to sell exports and keep their domestic population employed. Think about China, for instance.

If Japan wants to sell as many vehicles as it has the capacity to produce, it will have to weaken its currency to do so, unless it's somehow able to reduce its domestic cost structure sufficiently to allow it to make a profit. Otherwise its level of unemployment will inevitably increase, whether it produces elsewhere or not.

While weakening the Japanese yen would definitely aid profitable auto sales, it would also increase the prices of everything that Japan imports. And the island of Japan is a very heavy importer of many commodities and related items, including oil.

On the other hand, if we drill more of our own oil, our currency will tend to strengthen as U.S. imports will decline and the world's oil supply will grow. Our economic recovery will be helped since both consumers and companies would benefit from lower oil prices, thus freeing up more money to be saved or spent on other items.

This seems like a no-brainer, and it is, except for the domestic politics involved with the Democratic Party.

At some point, however, American workers of all stripes will wake up and recognize the "green" movement for what it is in substantial part--a politically charged jobs killer.

At that point, American workers, union and non-union alike, will once again demonstrate that they can compete well on equal terms with workers throughout the world, whether working for U.S. or foreign owned companies.

So let's resolve to start making more of what we currently import and grow American based jobs, thereby putting more money in the pockets of American consumers and strengthening the U.S. economy, all at the same time.

Let's drill more oil, and produce more cars and other stuff, too. It's really that simple.

Thanks. Bob.

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