Ford Motor Company (F), General Motors Company (GM), Honda Motor Co Ltd (ADR) (HMC), Toyota Motor Corporation (ADR) (TM): Has Japan Created a Day of Reckoning for U.S. Automakers?

A significant increase in incentive spending could hurt Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM), which have benefited from strong margins in North America recently, as the result of cost-cutting and new product introductions. Ford has seen particularly good performance, with a North American operating margin of 10.4% last year, which exceeded the company’s long-term goal. If Toyota, Honda Motor Co Ltd (ADR) (NYSE:HMC), Nissan, and others cut prices, Ford and GM will have to accept lower market share, lower margins, or both.

The one saving grace for Ford and GM is that they derive most of their profits from sales of full-size pickup trucks. Ford and GM dominate this market, while the Japanese automakers have little to no presence there. However, Toyota Motor Corporation (ADR) (NYSE:TM) is about to make another push to gain a foothold in the full-size pickup market, with a redesigned Toyota Tundra coming this fall. I expect Toyota to price the Tundra very aggressively in order to give current Ford, GM, and Dodge Ram truck owners sufficient reason to switch. The Tundra could still flop, but if lower prices entice some customers away from Ford and GM, this could have an outsized impact on those companies’ profits.

Foolish conclusion
The recent drop in the yen’s value could have massive implications for the auto market.  Japanese automakers will generally benefit from the favorable exchange rate, but U.S. shareholders of those companies will also see a reduction in the dollar value of earnings from Japan. On the other hand, U.S. automakers like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) could see North American margins tighten if (as I expect) Japanese automakers ramp up incentive spending to chase market share. It is critical for investors to keep a close eye on developments in this rapidly evolving industry.

The article Has Japan Created a Day of Reckoning for U.S. Automakers? originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford.

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