Toyota — The Euro’s Biggest Fan

Is Toyota helping the euro by pressuring Great Britain to join the monetary union?

September 25, 2000

Is Toyota helping the euro by pressuring Great Britain to join the monetary union?

By the 1980s, Japanese carmakers had set up shop all over Great Britain as a base for their European production facilities. This allowed them to take advantage of lower labor costs than those on the continent. At the same time, they would be able to export their European-made cars throughout the European Union and skirt EU tariffs on imported cars.

For years, the plan worked like a charm. Not only for the Japanese, but also for the British who saw unemployment fall and economic growth accelerate. The amount of foreign direct investment into Britain has long been a source of pride for the country and has been tooted to the world ever since the arrival of the “Iron Lady,” Prime Minister Margaret Thatcher.

This arrangement could have continued to work in such a mutually beneficial way. After all, the European Union was introducing a common currency, which would finally eliminate the exchange rate risks. The uncertainty that fluctuating exchange rates entailed posed a financial risk for manufacturers that was often seen as the last obstacle on the road to a truly unified market.

However, when the UK decided to opt out of economic and monetary union (EMU), the situation changed dramatically. As a result, Britain’s exchange rates kept floating against the euro. When the euro was launched in January 1999, one pound sterling bought 1.45 euros. But with the euro depreciating in value, the pound eventually rose to 1.65 euros — an appreciation of close to 15%.

An appreciation of the currency of the country where one’s product is being produced is not what an exporter likes to see. For when he sells those cars overseas in foreign currencies and then converts those revenues back into that of the country where most of the productions costs are incurred, they feel the pinch.

And so it is with Japanese car manufacturers which sell the vast majority of their UK-produced cars in continental Europe. For Toyota, the share is at 70%, with an additional 10% of cars produced in the UK sold overseas.

Because Toyota, Nissan and Honda also receive about 70% of the car parts for their European production from British suppliers, the appreciation of the pound has entailed considerable costs for these manufacturers.

They buy in a strong currency area — and sell in a weak currency area. This has cut significantly into the profits of these corporate giants. Toyota claims that this exchange rate volatility has cost close to $4 billion in 1999.

The first reaction to this situation was a threat by Japanese CEOs to the British government, warning that if the country did not join EMU and eliminated the producers’ exchange rate risk, they might relocate production off the British isles. While this caused a great political brouhaha, it failed to trigger a tangible response.

Therefore, in a second move, Japanese producers have now chosen another path; if you’re not willing to listen, at least pay up. In effect, what they are proposing is to shift the exchange risk onto UK industry proper. How so? Major carmakers are renegotiating contracts with their British suppliers — with the main goal being to get British suppliers to bill the Japanese carmakers in euros.

In Britain, the euro is thus effectively introduced through the back door. The appreciation of the pound has given the country all the disadvantages of staying out of EMU. Forcing UK manufacturers into a fixed exchange rate (namely, the euro) for all business dealings with their important Japanese customers means that vital parts of the UK manufacturing sector are now partial members of EMU. No wonder the pressure being exerted by Toyota and other Japanese car manufacturers has reignited the British debate about the benefits of joining the euro.

This is a sensitive issue in a country where the majority of the populace views the European Union — and the idea of a common currency — rather skeptically. In fact, two-thirds of Britons oppose the euro, and one-third of the population wants Britain to leave the European Union entirely.

The government of Tony Blair would prefer to wait on a discussion of membership in the euro until after next year’s election. However, the stakes have just been raised. The debate about Britain’s membership in the European Union is no longer merely an academic or a political one.

In the immediate future, jobs are at stake. In the longer run, it may well be Britain’s position in European business. Ironically, Japanese businesses — long used to pressure from foreign interests to open their markets — has become the driving force pushing Britain to participate in European integration.