Yihan li 000339-014 - blogs.yis.ac.jpblogs.yis.ac.jp/.../01/Extended-Essay-submitted-draft-20n6hlj.docxWeb viewWord Count: 3927. Abstract . This essay explores the topic of exchange

International Baccalaureate

Extended Essay

Title- To What Extent Did the Yuan/Yen Exchange Rate Impact the Price and Sales

Of Nissan Cars in China

Source: (Left) Group 1 Nissan. (Right) lycheetravel.com

IB Extended Essay Topic: Economics

School – Yokohama International School

School Code: 000339

May 2013

Candidate Name: Yihan Li

Candidate Number: 000339-014

Word Count: 3927

Abstract This essay explores the topic of exchange rate. It investigates the question “to

what extent did the Yuan/Yen exchange rate impact the price and sales of Nissan cars

in China”.

Firstly, it defines terms including exchange rate and appreciation, and

identifies the effects of appreciation on export goods. Then it researches the change in

Yen/Yuan exchange rate from January 2008 to July 2012, and derives the expected

effects of exchange rate on the prices and sales of Nissan cars in China in last four

years. Subsequently, the essay researches the actual changes on Nissan cars, and

compares these with expected results.

Initially, the essay reached the hypothesis—based on economics theories—

that price should have increased, while sales decreased because research showed that

exchange rate appreciated by 22% in 2008-2012. However, research showed there

were little increases in the prices while large increases in the sales, two results that

contradict the predictions. Consequently, the essay attempts to identify and explain

the reasons that caused the differences, and evaluates their degree of impacts on

Nissan cars. It also carries out a survey to examine how Chinese consumers perceived

Nissan cars in two Chinese cities.

The overall impact of exchange rate on the Nissan market in China was small,

as the actual changes differed from the expected ones. However, this was mainly

because Nissan China sharply expanded its production level, and became less reliant

of imported Nissan cars. This minimized the effects because the prices of Chinese-

made Nissan cars are not subjected to exchange rate. Furthermore, large increase in

sales was mostly due to increase in people’s personal income. Yet the survey also

found that Chinese consumers are highly price-sensitive; therefore, had Nissan

refused to relocated the production, its sales would have decreased dramatically.

(292 words)

Yihan li 000339-014 2

Table of Contents

1. Introduction…………………………………………………………………………4

2. Effect of change in exchange rate on the demand of import goods………………...5

2.1 Foreign and domestic prices……………………………………………….5

2.2 Effects of appreciation on an import good………………………………...5

2.3 Effects of depreciation on an import good………………..………….........7

3. Yuan/Yen exchange rate from January 2008 to July 2012…………………………8

4. Expected changes in Nissan car market……………………………………….........9

5. Actual prices and sales of Nissan cars in China…………………………………...10

5.1 Annual sales of Nissan cars in China in 2008-2011……………………...10

5.2 Price changes of five models of Nissan cars……………………………..10

6. Actual changes in Nissan car markets……………………………………………..11

7. Consumer Survey………………………………………………………………….12

7.1 Survey purpose, and questions…………………………………………...12

7.2 Results and analysis……………………………………………………...13

8. The effect of exchange rate on the pricing and sale of Nissan cars ………………16

8.1 The positive effect of appreciation on some cost…………………….......17

8.2 Coexistence of favorable and unfavorable market environment…………18

8.3 Foreign direct investment substitute export………………………….......20

8.4 Evaluation of each factor…………………………………………………21

9. Conclusion…………………………………………………………………………22

10. References and Bibliography………………………………………………….....24

11. Appendices…………………………………………………………………….....26

11.1 Appendix 1……………………………………………………………...26

11.2 Appendix 2……………………………………………………………...27

11.3 Appendix 3……………………………………………………………...28

11.4 Appendix 4……………………………………………………………...29

Yihan li 000339-014 3

1. Introduction Nissan is one of the biggest car manufacturers in the world, which sold more

than four million cars in 2010 (Nissan). In recent years, the company has been

concentrating on exploring Chinese market, the world’s largest car market, driving its

sales by opening new factories and dealerships in China. This gave Nissan a big

boost, as it sold close to 800,000 cars in China in 2011, becoming China’s fourth

largest car manufacturer in terms of sales (Zhang).

Nissan cars sold in China mostly fall into two categories: those manufactured

in Japan and those in China. If Nissan chooses to sell Japanese-made cars in China, it

must convert their prices from Japanese Yen to Chinese Yuan using exchange rate,

which calculates the price of one “currency in terms of the currencies of other

nations” (Samuelson and Nordhaus 376). This is because a Japanese-made Nissan car

is priced in Yen, however, Chinese consumers use Yuan to buy cars. Note that for the

purpose of this essay, costs incurred during transportation are ignored.

Since Yuan and Yen are two currencies that have floating exchange rates, the

Yuan/Yen exchange rate—the value of one Yen in terms of Yuan—fluctuates

constantly, as the prices of currencies change.1 Since Nissan uses this exchange rate to

convert the prices of its cars from Yen to Yuan, this constant fluctuation will also

affect the prices of cars in China.

The topic was chosen for two reasons. One is that people are living closely

related to the global economy. In 2011, the dollar value of international merchandize

trade reached $18.2 trillion (World Trade Organization). In a world with increasingly

frequent international trade, consumers are exposed to more choices, as they can now

purchase either domestic goods or imports. However, the prices of these imports are

vulnerable to the fluctuation in the exchange rate. Since price is an important

determinant when a consumer makes a purchase, this constant change in price will

affect the demand for import goods. Another reason is that China is undergoing car

fervor. The number of middle-class consumers who can afford cars burgeoned in

China in recent years. Consequently, these consumers are crazy about having their

1 If a currency has floating exchange rate, its prices is “determined by the free market interaction of supply and demand” (Maley and Welker 455)

Yihan li 000339-014 4

own cars and considering whether to buy domestic or foreign car. It is both interesting

and important to see how exchange rate will affect these consumers’ choices of cars.

Based upon the two reasons above, this topic is highly worthy of studying.

In addition, I chose Nissan for this essay because 1) as a Chinese living in

Japan, I am familiar with Japanese companies 2) Nissan—as China’s fourth largest

car manufacturer in terms of sales—is very popular in China, and 3) Nissan’s

headquarter is in Yokohama, my current residence.

Based on these reasons, the question: “to what extent did the Yen to Yuan

exchange rate impact the price and sales of Nissan cars in China?” was explored.

2. Effect of change in exchange rate on the demand of import goods

2.1 Foreign and domestic prices

According to introduction, exchange rate changes the prices of import goods.

Assume a Nissan car costs 2 million Yen (Krugman, Obstfled and Melitz, 351-352).

Based on International Economics, the price of the car in Yuan is found using

Formula 2.1:

Price of car in Yuan = Price in Yen × Yuan/Yen exchange rate (2.1)

At an exchange rate of 0.07Yuan/Yen, the Yuan price of the car equals: 2

million Yen × 0.07 Yuan/Yen, which is 140,000 Yuan. If the exchange rate changes

to 0.09 Yuan/Yen, assuming the price of car in Yen remains same, then price of car in

Yuan increases to 2 million Yen × 0.09 Yuan/Yen, or 180,000 Yuan. Similarly, if the

exchange rate changes to 0.05 Yuan/Yen, then the price in Yuan decreases to 2

million Yen × 0.05 Yuan/Yen, or 100,000 Yuan. This shows that without changing

the price of car in Yen, the price in Yuan can change due to the change in Yuan/Yen

exchange rate.

2.2 Effects of appreciation on an import good

Appreciation is the rise in the price of currency A in terms of B, such as when

the Yuan/Yen exchange rate changes from 0.07 to 0.09 Yuan/Yen (Krugman,

Yihan li 000339-014 5

Obstfled and Melitz, 352). The effect of appreciation on the consumption of import

good is shown below.

Figure 2.2: Effects of appreciation on an import good 2

In Figure 2.2, Supply 1 and Demand represent the supply and demand of an

import good before appreciation. In this case, the market will settle at equilibrium

point A, where supply equals demand. Consequently, Q1 units are exchanged at P1.

As explained in 2.1, appreciation increases the price of this good for all values,

shifting supply leftwards from S1 to S2. Note that S1 and S2 have different gradients

because the cost increase is a percentage rather than a fixed amount. The appreciation,

however, does not create a shift in demand.

The immediate consequence of appreciation is excess demand, where demand

exceeds supply. Consequently, price starts to increase, causing demand to decrease

because some consumers become unable to buy the good. When price is increased to

P2, Demand equals S2, creating a new equilibrium. Consequently, Q2 units of cars

are exchanged at P2.

2 Figure produced by the author

Yihan li 000339-014 6

Thus, appreciation makes exporters lose price competitiveness because they

find it more expensive to sell in foreign markets and face market share loss.

2.3 Effects of depreciation on an import good

The effect of depreciation is the opposite of appreciation. In Figure 2.3, prior

to depreciation, Qa units are exchanged at Pa, where S1 equals demand. Since

depreciation reduces the price of the import good for all values, supply shifts from S1

to S2. This creates a new equilibrium at Y; consequently, Qb units of cars are

exchanged at Pb. Thus, depreciation makes exporters gain price competitiveness

because they find it cheaper to sell in foreign markets and face market share increase.

Figure 2.3: The effects of depreciation on an import good 3

3. Yuan/Yen exchange rate from January 2008 to July 2012


Yihan li 000339-014 7

Figure 3: Quarterly average Yuan/Yen exchange rate from Jan 2008 to July 2012

Source: X-Rate 4

The figure shows that, even though the exchange rate fluctuated over the last

four years, yen appreciated quite significantly. The average exchange rate increased

from 0.067 Yuan/Yen in January 2008 to about 0.082 Yuan/Yen in July 2012.

Percentage appreciation can be calculated using the formula:

appreciation (%)= ∆ exchangerateexchange rate∈2008

×100 (3)

Formula 3 shows that there was an appreciation of (0.82−0.67 )

0.67×100, or

about 22.4% between January 2008 and July 2012.

4. Expected changes in Nissan car market

4 This table is created based on data of Monthly Average Yuan/Yen Exchange Rate between 2008 and 2012 from X-Rate.

Yihan li 000339-014 8

According to 3, the Yuan/Yen exchange rate has appreciated 22.4% in the last

four and half years. Consequently, the expected effects of appreciation on the Nissan

car market can be predicted using Figure 2.2.

Figure 4 illustrates the supply and demand of Nissan cars between 2008 and

2012. Based on the steady appreciation of the exchange rate shown in Figure 3, and

the concepts explained in 2.2, supply curve is expected to shift inward year by year,

while demand curve remains constant. Consequently the prices of Nissan cars are

expected to increase, while the sales decrease.

Figure 4: Expected effect of appreciation on Nissan car market 5

In addition, formula 2.1 can be used to predict the change in price, or P5-P1.

Assume the car price in 2008 was α Yen, and Yuan/Yen exchange rate was β.

Consequently, the price in Yuan equals αβ. A 22% appreciation means that the

exchange rate has become 1.22β Yuan/Yen in 2012. This means that if price in Yen

remains unchanged, the price in Yuan should have become 1.22 αβ. Therefore, the car

price is also expected to increase by 22%.

5. Actual prices and sales of Nissan cars in China

5.1 Annual sales of Nissan cars in China 2008-2011 5 Figure produced by the author.

Yihan li 000339-014 9

Table 5.1: Annual sales of Nissan cars 2008-2011 6

Year Sales

2008 350,621

2009 459,300

2010 661,000

2011 768,541

Table 5.1 shows that the sales of Nissan cars in China have dramatically

increased in the last four years despite the appreciation of Yuan/Yen exchange rate. In

fact, Nissan doubled its annual sales from 2008 to 2011. This result contradicts the

results predicted in 4, in which appreciation is expected to reduce the sales of Nissan

cars.

5.2 Price changes of five models of Nissan cars

Table 5.2 shows the prices of five models of Nissan cars in 2008-2012. It is

constructed based on several sources. These models are chosen because they contain

sedan, family car and SUV, and several of them are Nissan’s best selling cars in

China.

Table 5.2: Prices of several models of Nissan cars in 2008-2012 (10000Yuan) 7

6 It is constructed based on information from data in Appendix 1. The data is from Zhang, China Association of Automobile Manufacturers, General Report, and Electronic Publishing House. 7 This table is constructed based on data from PC Auto China and Xcars. The past data were found using Wayback machine.

Yihan li 000339-014 10

2008 2009 2010 2011 2012 %Δ Price

X-Trail 20.78-25.88 20.78-25.88 20.78-26.98 20.78-26.98 20.78-26.98 2.4

Tiida 10.68-14.98 10.68-14.98 10.68-14.98 10.68-16.78 10.68-14.98 0.0

Livina 7.98-10.38 7.98-11.28 8.58-11.28 8.58-12.98 8.58-12.98 17.5

Qushqua

i

16.78-21.98 16.78-21.98 16.78-21.98 16.78-21.98 13.98-21.98 -7.2

Teana 20.68-34.98 19.08-33.28 19.08-36.58 19.08-37.08 19.08-37.18 1.1

The table illustrates that there were relatively little price increases in the five

models, despite the 20% appreciation in the Yuan/Yen exchange rate. The percentage

change in price is calculated using:

change∈price(%)= ∆ median pricemedian price∈2008

×100 (5.2)

This means that all five models had price increases that were much smaller

than the exchange rates. This again contradicts the expected change from 4, which

predicts that the price should have increased by about 22%.

6. Actual changes in Nissan car market

Data from 5.1 and 5.2 illustrate that there were large increases in the sales of

Nissan cars, while little increase in the prices of the cars, two results that contradict

the predications from 4. Based on these results, Figure 6 is drawn.

Figure 6: Expected changes against actual changes in Nissan car market 8


Yihan li 000339-014 11

In Figure 6, a large increase in the sales means that there must have been a

large rightward shift in demand curve. Meanwhile, a slight increase in the price of

cars means that there was either a little leftward shift in supply or potentially a

rightward shift in supply. Figure 6 also compares the expected changes with actual

ones.

7. Consumer Survey

Figure 6 shows the difference between expected and actual changes. To

understand how Chinese consumers perceived Nissan cars, and whether their

perceptions contributed to the difference, a survey was taken.

7.1 Survey purpose, and questions

This survey serves the purpose of understanding the primary factor that

affected consumers in their car purchase and determining how much consumers are

sensitive to change in price. It was asked to sixty car owners in Beijing, my

hometown, and Shenyang, my mother’s hometown.

The survey has five questions. Q1 asked consumers the maker of their cars;

Q2 asked Nissan owners the primary factor that influenced their decision; Q3, the

percentage increase in price Nissan owners want to bear for the cars; Q4, the same

Yihan li 000339-014 12

question as Q2 to non-Nissan owners; and Q5, the percentage decrease in price non-

Nissan owners want to switch to Nissan. 9

7.2 Survey results and analysis 10

-Question 1-

Nissan Others05

1015202530354045

19

41

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f peo

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Nissan was the second popular choice. The most popular was Volkswagen

with 22 people. Other choices included GM, Benz, Honda, BMW, and two Chinese

carmakers: Chery and Jili.

-Question 2-

Price Quality Others0123456789 8

65

Nu

mb

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f peo

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In this graph, other answers included range of choice, design, and good after-

service.

9 See Appendix 2 for complete survey questions 10 All figures in this section are produced by the author

Yihan li 000339-014 13

The result shows that price, with eight people, was the most important factor.

For example, a Mr. Liu said: “Chinese car market is very competitive. Nissan cars are

not exceptionally amazing, and there are many substitutes. If Nissan was more

expensive, I would have bought an Audi or Toyota.”

Nevertheless, some consumers were willing to sacrifice price for other factors.

For example, a Mr. Li, who answered quality, said: “Nissan cars are not cheap. If I

wanted cheap cars, I would have bought Chery or Jili instead…Nissan cars have good

quality. They are easy to drive and never break; these qualities are worth more

money.”

Generally speaking, the primary factor of purchase differed on individual

basis, and was mainly split into price and quality. However, because price was the

dominant reason and because those consumers who chose other factors also

acknowledged the importance of price, we can conclude that price definitely influence

the decision of consumers, and that a price increase will greatly reduce the demand.

-Question 3-

5 10 20 300

5

10

15

20 19

16

11

7

% Increase

Nu

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f peo

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All Nissan owners wanted to endure 5% increase, though this decreased with

bigger price increases. The maximum price increase that a consumer was willing to

endure was 50%.

A calculation based on the results show that Nissan cars have a PED of 2.52,

which suggested that the cars are fairly elastic and which supported the result of

Yihan li 000339-014 14

question 1. 11 In fact, had Nissan’s price increased by 22.4%, its demand would have

decreased by 22.4% × 2.52, or 56.5%. Consequently, we can conclude that an

increase in the price of Nissan cars would sharply reduce the quantity demanded.

-Question 4-

Price Quality Status Others02468

10121416 14

10

7

10

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In this graph, other choices included design, and following others’ choices.

Here price, with fourteen people, was also the most important factor. A Mrs.

Yang said: “I bought a Jili because I couldn't afford a Nissan.” Her answer, supported

by several other owners, implied that if Nissan were cheaper, its demand would have

been bigger.

Although quality was also an important factor, different from the results in

question two, many people answered status. For example, a Mr. Sun said: “ I bought a

BMW because of its high status. Unfortunately Nissan doesn't have that.” Because

BMW and other luxury cars have high status, their PEDs are small; consequently,

their XEDs would also be small, implying that Nissan’s price decrease cannot attract

their consumers to switch. 12

Price would still affect the sales of Nissan cars. However, because many non-

Nissan consumers values status, the effect of price on them would be smaller than on

Nissan owners.

11 See Appendix 3 for the calculation 12 XED, or cross elasticity of demand, measures “the responsiveness of consumers of one good to a change in the price of a related good. Substitute goods have positive XED while complementary goods have negative XED” (Maley and Welker, 83)..

Yihan li 000339-014 15

-Question 5-

5 10 20 300

5

10

15

20

25

30

3

10

18

25

% Decrease

Nu

mb

er o

f peo

ple

Calculations based on the results shows that XED of Nissan cars equaled

2.08.13 This shows that had Nissan’s price increased by 22.4%, its competitors

demand would have increased by 22.4% × 2.08, or 46.6%. Hence we can conclude

that price increase will have devastating impacts on Nissan, as close to half the

consumers will switch to cars made by these competitors

8. Reasons to the difference between expected and actual changes

Figure 6 illustrates the difference between expected and actual changes.

Facing the increasing appreciation of the exchange rate, the prices of Nissan cars in

China remain almost unchanged, while sales increased dramatically. How could

Nissan bear most costs of currency appreciation, instead of shifting some costs onto

Chinese consumers? And how could it dramatically increase sales in Chinese market

with appreciation?

Clearly, exchange rate was not the only factor that affected Nissan market in

China. Therefore, two questions should be asked 1) to what degree the exchange rate

affect the market of Nissan cars in China? 2) What are other factors that influenced

the market?

8.1 The positive effect of appreciation on some cost

Car industry uses large amount of raw materials to produce cars. Since Nissan

heavily rely on imported raw materials and price of cars is largely determined by their

production costs, the effects of appreciation can actually be beneficial.

13 See Appendix 4 for calculation

Yihan li 000339-014 16

Yen has appreciated against major currencies: Dollar, Pound and Euro in the

last four years (X-rate). Since the prices of most raw materials are measured using

these three currencies, the appreciation of Yen against these implies that raw materials

have become relatively cheaper for Nissan factories in Japan; thus, the production

costs of these factories should have actually decreased. Unfortunately, there were no

recent data available regarding Nissan’s production costs.

Figure 8.1: Actual changes on Nissan market with lower production costs 14

As shown in Figure 8.1, by taking lower production costs into consideration,

we can see that the price becomes cheaper and sales expands, Q3>Q2 and P3<P2.

Consequently, Nissan cars exported to China were able to afford smaller price

increase.

8.2 Coexistence of favorable and unfavorable market environment

Car market is never completely competitive, because car producers are price

setters. Because Nissan has certain monopolistic power, it needs to consider the effect

of price change on its sales, since demand impacts Nissan’s ability to increase price.


Yihan li 000339-014 17

According to Microeconomics, different from firms in perfect competition, a

producer of monopoly or monopolistic competition can decide price, which is usually

higher than marginal cost (MC). 15 Economists uses Lerner’s Degree of Monopoly

Power: L= P – MCP

= −1PED to measure how much the price is higher than MC. 16 A

firm’ s Lerner index depends on its own PED, which means that firm needs consider

the effect of the change of the price on the sales, and the reaction of its competitors

(Pindyck and Rubinfeld, 269). In Chinese market, Nissan’s pricing must follow the

market law, namely Nissan has to trade off between price and sales. What market

situation does Nissan face in China?

On one hand, Nissan cars face fierce competition due to the number of

competitors in China. Consequently, even if Nissan increases its price slightly, it

would lose its price competitiveness and lose market share; thus, Nissan is a maker in

monopolistic competition. Since 2008, while Pound, Dollar and Euro have all

depreciated against Yuan, Yen has appreciated (X-rate). This puts Nissan in a

disadvantageous position compared with other producers, as it faced the pressure of

price increase brought by appreciation. However, prices increase would sharply

reduce Nissan’s sales because—shown by PED of 2.52—Chinese consumers are very

price sensitive. Although we can only assume this for 2012, as the data is not

application for others years, there are strong possibilities that the situation was also

true for 2008, as the level of competition underwent little changes since 2008.

Consequently, Nissan has little ability to change its prices.

Figure 8.2: A market with high PED 17

15 Perfect competition is a market where firms produce same goods at same costs, and where no barriers of entry exist. 16 The index is from 0 to 1 and a firm with an index of 1 has maximum monopoly power (Pindyck and Rubinfeld, 269). PED is the percentage “change in quantity demanded divided by the percentage change in price” (Samuelson and Nordhaus, 65). 17 Figure produced by the author

Yihan li 000339-014 18

Figure 8.2 is a market of monopolistic competition with high PED, one similar

to Nissan.18 Before appreciation, the cost curves of the company are MC1 and AC1.

Based on laws of economics, it produces at the quantity where MC1=MR because it

wants to maximize profit. Using D=AR, Q1 units are sold at price of P1. After

appreciation, costs curve increase to MC2 and AC2. Consequently, Q2 units are sold

for P2. This shows that a slight increase in price from P1 to P2 sharply reduce demand

from Q1 to Q2. Therefore, Nissan may have sacrificed its profit margin and kept price

increase small to maintain its market share, hoping Yuan/Yen exchange rate will

depreciate in the future.

On the other hand, income increase expands the demand of cars. From 2008 to

2012, China’s urban income increased from 15000 to 24000 Yuan, while rural from

5000 to 8000 Yuan. 19 Since car is a normal good, its demand would increase as

income increases. Measured in PPP, $3,400-$10,000 or ¥21,700-¥64,000 is a critical

range of income for car ownership, between which the income elasticity of cars is 1.9

(Ail and Dadush, 3). 20 There are more than 500 million middle classes in China, with

their income above $3400 and income growth 8-15%. These people’s car

consumption should have increased by 15-29% — increase equals incomes elasticity

of cars × income increase; this gives 1.9×8%=15.2%∧1.9 ×15 %=28.5%. This

explains the drastic increase in sales shown in Table 5, which ensured Nissan’s profit

18 In Figure 8.2, AR and AC represent average revenue and average cost. 19 Data are from National Bureau of Statistics and Chongqing Bureau Statistics. 20 Income elasticity of cars is “the ratio of average car ownership growth and average income per capita growth”, (Ail and Dadush, 3).

Yihan li 000339-014 19

even facing appreciation pressure. Therefore, Nissan were willing to keep the price

increase and profit margin small, as it can maintain high total revenue through bigger

sales.

8.3 Foreign direct investment (FDI) substitutes export

Aforementioned positive effect of exchange rate on cost, change in consumer

income and competition in China market cannot fully explain the whole story. Yen’s

historical appreciation hit Japanese export-oriented enterprises. The survival of Nissan

should greatly be ascribed to its increase in FDI.

Two independent studies by Cushman and by Froot and Stein emphasize the

important influence of the fluctuation in exchange rates on FDI. “They conclude that

depreciation of the recipient country’s currency stimulate the inflows of FDI, while

the reduction of local production costs measured in foreign currency will raise the

profits of foreign investors accordingly. High returns naturally affect companies’

relocation decisions, attracting them to increase production capacity abroad” (Xing

and Wan). The reduction of Nissan output in Japan and shift of production line to

China may be well interpreted with above theoretical results.

In early 2000s, many Chinese consumers doubted about buying Chinese-made

Nissan cars. However, after a short period, people became familiar with these cars.

Such change should be ascribed to Nissan’s increase in foreign investment in China.

In recent years, in order to reduce the damage effect of Yen’s appreciation on export,

Nissan has been increasing investment in China, expanding infrastructure, introducing

more new car models to China. And these changes coincide with the phenomenon

explained by the studies.

Figure 8.3: Production and retail sales in China

Yihan li 000339-014 20

Source: Production and Retail Sales, Nissan

Figure 8.3 illustrates that most Nissan cars sold in China are produced in

China since 2008, the year Yen started to appreciate. Currently, Nissan has three

factories in main land China that produced 1,075,526 cars in China in 2010, a figure

close to 1,078,621 cars, Nissan’s total sales.21 Although, parts of these were exported

to other markets, most of them were sold in China. Consequently, China’s reliance on

imported Nissan cars is low; in fact, Nissan Japan only exported 51,980 passenger

cars to entire Asian market in 2010 (Nissan). Because of this the impact of

appreciation in the exchange rate on the prices of Nissan cars was small.

8.4 Evaluation of the factors

Although the aforementioned three factors may explain the reasons to the

differences between the expected and actual changes, their level of impact are

different; thus their significance should be accessed. According to Nissan, only

52,000 cars were exported to the entire Asian market. This shows that, in reality,

lower production costs due to cheaper raw materials posed little effects on Japanese-

made Nissan cars in China because the number was small to cause large impacts.

Competition is an important factor that curtailed the price increase. Because

Nissan did not want to lose its market share in China, it had to sacrifice price for

sales. In addition, the increase in income greatly expanded Nissan’s demand because

Chinese consumers gained more financial abilities to buy cars. This in turn reduced

Nissan’s pressure for price increase because even though profit margin is smaller,

Nissan’s total profit is large due to bigger sales. Since annual sales increase due to

21 Both numbers include non-passenger cars that are excluded figures in Table 5.2

Yihan li 000339-014 21

income growth is 15-30%, the effect of income growth on sales is large. Therefore,

the increase in income explains not only the large increase in the sales and but also the

little increase in price.

Furthermore, Figure 8.3 also indicates that most Nissan cars sold in China are

Chinese-made. Because these cars do not need price conversions from one currency to

another, their prices are independent of the fluctuation in exchange rate. Thus the

increase in the numbers of Chinese-made cars sold—the increase in Nissan’s FDI in

China—was also an important factor that minimized the price change of Nissan cars.

9. Conclusion

This essay attempted to address the question “to what extent will the Yen to

Yuan exchange rate impact the price and sales of Nissan cars in China?” Based on

2.1, knowing the exchange rate of two currencies should allow one to determine the

price of import goods measured in local currency. Consequently, if factors of

strengthening Yen were fully reflected in the price of Nissan cars in China, the rising

price must have sharply reduced Nissan’ demand, as illustrated in Figure 4. However,

the appreciation of Yen did not wipe out Nissan cars from China. Conversely, the

prices only increased slightly while the sales drastically increased in 2008-2012.

From the performance of Nissan cars in China during last four years with

appreciating Yen, the student found the complexity of the effects of exchange rate on

markets, and the importance of other factors—such as the relocation of factories and

increase in consumer income. Under the constant appreciation of Yuan/Yen exchange

rate, Nissan gradually relocated its factories to avoid the effects of appreciation. On

surface, the fluctuation of exchange rate did not seem to affect the price and sales of

Nissan cars in China. In reality, the appreciation greatly affected Nissan, as it changed

Nissan’s production strategies; Nissan now produced most of cars in China, rather

than in Japan to avoid the effects of appreciation. Meanwhile, this essay also found

that increase in demand was largely due to the increase in consumer income. This in

turn allowed Nissan to keep prices low to maintain the level of demand, as Nissan

could trade low profit margin for large sales to sustain total revenue and profit. In the

end, this essay concludes that discrepancy between expected and actual results was

due to Nissan’s relocation of factories and increase in consumer income. Although

Yihan li 000339-014 22

exchange rate did not affect the prices and sales directly, it affected Nissan by cause it

to change its production strategies.

In addition, the survey carried out indicates that Chinese consumers were very

price sensitive and viewed price as the prime determinant of purchase. These were

reflected in Nissan’s PED of 2.52, and XED of 2.08, and the responses to question

two and four. Therefore, the essay also concludes that had most Nissan cars been

continually produced in Japan, in which case the prices of cars would have increased

by 22% following the yen’s appreciation, the decrease in sales and consequent

impacts would have been significant on Nissan.

Lastly, if I could research further, I would like to answer the following

question: “to what extent did the increase in consumer income impact the price and

sales of Nissan cars in China?” that has a reason out of my study because income

played important role in increasing the sales and stabilizing the price. The results also

made me wonder “how much Nissan would have suffered, had Nissan kept its

productions in Japan and had exchange rate been the only factor?” because I was

unable to see the sole impacts of exchange rate on Nissan.

10. References and Bibliography 1. China Association of Automobile Manufacturers. "2010 Domestic Car Sales."

Sohu Cars. Sohu Cars Laboratory, 10 Jan. 2011. Web. 15 Mar. 2012.

Yihan li 000339-014 23

<http://auto.sohu.com/s2011/2010pandian/index.shtml>.2. "China Currency - Renminbi." China Currency, Chinese Yuan, Renminbi.

Lychee Travel, n.d. Web. 17 Oct. 2012. <http://www.lycheetravel.com/china-travel-guide/china-money.html>.

3. "Chinese Yuan." X-Rates. X-Rates, 27 July 2012. Web. 29 July 2012. <http://www.x-rates.com/d/CNY/table.html>.

4. "Company Profile." Nissan. Nissan, n.d. Web. 11 July 2012. <http://www.nissan-global.com/JP/COMPANY/PROFILE/>.

5. Dadush, Uri, and Shimelse, Ail. A New Measure of the Global Middle Class. VOX. Carnegie Endowment for International Peace, 2 June 2012. Web. 22 July 2012. <http://www.voxeu.org/article/new-measure-global-middle-class>.

6. "Dofeng Nissan." PC Auto.com.cn. PC Auto China, 2 Apr. 2008. Web. 17 Mar. 2012. <http://web.archive.org/web/20080402043423/http://price.pcauto.com.cn/brand.jsp?bid=15>.

7. "Dofeng Nissan." PC Auto.com.cn. PC Auto China, 28 Feb. 2009. Web. 17. Mar. 2012. <http://web.archive.org/web/20090228052023/http://price.pcauto.com.cn/brand.jsp?bid=15>.

8. "Dofeng Nissan." PC.Auto.com.cn. PC Auto China, 28 Mar. 2010. Web. 17 Mar. 2012. <http://web.archive.org/web/20100329230512/http://price.pcauto.com.cn/brand.jsp?bid=15>.

9. "Dofeng Nissan." PC.auto.com.cn. PC Auto China, 17 Mar. 2012. Web. 17 Mar. 2012. <http://price.pcauto.com.cn/brand.jsp?bid=15>.

10. "Dofeng Nissan." Xcar.com.cn. Xcar China, 24 Apr. 2011. Web. 17 Mar. 2012.<http://web.archive.org/web/20110424032822/http://newcar.xcar.com.cn/price/b13/>.

11. Electronic Publishing House, Feb. 2009. Web. 15 Mar. 2012. <http://www.docin.com/p-50353533.html>.

12. "Historic Lookup." X-Rates. X-Rates, 26 August 2012. Web. 26 August 2012. <http://www.xrates.com/historical/?from=JPY&amount=1.00&date=2008-08-26>

13. "Income of Urban and Rural Residents in 2011." National Bureau of Statistics of China. National Bureau of Statistics of China, 30 Jan. 2012. Web. 21 July 2012. <http://www.stats.gov.cn/english/pressrelease/t20120130_402787464.htm>.

14. Krugman, Paul R., Obstfeld, Maurice, and Melitz, Marc J. International Economics: Theory & Policy. 9th ed. Harlow: Pearson Education, 2012. Print.

15. Liu, Jian. "Consumer Survey." Personal interview. 4 Apr. 2012.16. Li, Shangshan. "Consumer Survey." Personal interview. 4 Apr. 2012.17. Maley, Sean, and Welker, Jason. Economics. Harlow: Pearson Education,

2011. Print 18. "Nissan Logo." Group 1 Nissan. Group 1 Nissan, n.d. Web. 17 Oct. 2012.

<http://blog.group1-nissan.co.za/index.php/new-nissan-launches/nissan-concepts-turn-heads-at-geneva-motor-show/attachment/nissan_logo/>.

Yihan li 000339-014 24

19. Production and Retail Sales. Rep. Nissan, Nov. 2011. Web. 23 July 2012. <http://www.nissan-global.com/EN/DOCUMENT/PDF/PROFILE/2011/Profile11E_P27_30.pdf>.

20. Pindyck, Robert S., and Rubinfeld, Daniel L. Microeconomics. Trans. Jun, Zhang. 3rd ed. Beijing: China People UP, 1998. Print.

21. "Trade Growth to Slow in 2012 after Strong Deceleration in 2011." WTO. World Trade Organization, 12 Apr. 2012. Web. 21 July 2012. <http://www.wto.org/english/news_e/pres12_e/pr658_e.htm>.

22. Samuelson, Paul A., and Nordhaus, William D. Economics. 19th ed. New York: McGraw-Hill Education, 2010. Print.

23. Sun, Zhicheng. "Consumer Survey." E-mail interview. 6 July 2012.24. Xing, Yuqing, and Wan, Guanghua. Exchange Rate and Competition for FDI.

Tech. Kobe University, 2004. Web. 2 Aug. 2012. <http://www.rieb.kobe-u.ac.jp/academic/ra/seminar/2004/seminar-details/xing.pdf>.

25. Yang, Yucun. "Consumer Survey." Personal interview. 4 Apr. 2012.26. Zhang. "Car Sales Ranking in China Jan-Dec 2011." 515 Ranking. N.p., 11

Jan. 2012. Web. 15 Mar. 2012.<http://www.515fa.com/che_721.html>.27. General Report. "Total Sales of Top 10 Car Manufacturers Exceed 2

Million Cars." Sohu Cars. Sohu Cars, 11 Jan. 2010. Web. 15 Mar. 2012. <http://auto.sohu.com/20100111/n269499509.shtml>.

28. 2008 China Car Companies Sales Ranking. Rep. China Academic Journal 29. "2008 Monthly Average Yuan/Yen Exchange Rate." X-Rates. X-Rates, n.d.

Web. 05 June 2012. <http://www.xrates.com/d/CNY/JPY/hist2008.html>.

30. "2008 Urban and Rural Disposable Income by Province." Cnblog. Chongqin City Bureau Statistics, 25 Sept. 2009. Web. 21 July 2012.<http://www.cnblogs.com/tekson/archive/2009/05/30/1492313.html>.

31. "2009 Monthly Average Yuan/Yen Exchange Rate." X-Rates. X-Rates, n.d. Web. 05 June 2012. <http://www.x-rates.com/d/CNY/JPY/hist2009.html>.




11. Appendices

11.1 Appendix 1

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Below are tables that show the car sales ranking in China between 2008 and 2012.

2011 car sales ranking in ChinaMaker Sales1. Shanghai GM 12003682. Shanghai VW 11500973. First VW 10001884. Dongfeng Nissan 7685415. Beijing Hyundai 7202066. First Toyota 6301467. Dongfeng Kia 4200058. BYD 4198349. Changan Ford Mazda 41888010. Jili 403900Source: 515fa.com

2010 car sales ranking in ChinaMaker Sales (10000)1. Shanghai GM 103.92. Shanghai VW 100.13. First VW 87.04. Beijing Hyundai 70.35. Chery 68.26. Donfeng Nissan 66.17. BYD Auto 52.08. First Toyota 51.09. JAC 45.010. Jili 41.511. Changan Ford Mazda 40.312. Guangzhou Honda 38.613. Dongfeng Honda 26.114. Tianjin First 25.015. Shanghai Auto 16.016. First Mazda 14.717. Changan Mazda 9.3Source: auto.sohu.com

2009 car sales ranking in ChinaMaker Sales (10000)1. Shanghai VW 70.81

Yihan li 000339-014 26

2. First VW 66.923. Shanghai GM 66.824. Beijing Hyundai 52.105. Dongfeng Nissan 45.936. BYD 44.847. Chery 40.938. Guangzhou Honda 33.729. First Toyota 33.4710. Jili 32.91Source: auto.sohu.com

2008 Car Sales in ChinaMaker Sales1. First VW 498,8672. Shanghai VW 490,0873. Shanghai GM 468,6424. First Honda 365,6995. Chery 356,0926. Dongfeng Nissan 350,6217. Guangzhou Honda 305,9978. Beijing Hyundai 294,5179 Jili 230,42010. Changan Ford 202,797Source: weizhang.com

11.2 Appendix 21. Do you own a Nissan car? If not what do you own?

Yes No ( )

Answer Q2-3, if you have answered YES in Q12. Was price the main factor of your decision? If not what was it? And briefly explain your reason.

Yes No ( )

3. If the price of your car was 5%, 10%, 20% or 30% higher, did you still consider buying the car? Also briefly explain your reason.

5%-------Yes No10%------Yes No20%------Yes No30%------Yes NoOver 30 % ( )

Answer Q4-5, if you answered NO in Q14. Was price the main you never considered buying a Nissan car before? If not what was it? Also briefly explain your reason.

Yes No ( )

Yihan li 000339-014 27

5. If the price of Nissan car were 5%, 10%, 20% or 30% cheaper, would you have bought a Nissan car instead? Also briefly explain your reason.

5%-------Yes No10%------Yes No20%------Yes No30%------Yes NoOver 30% ( )

11.3 Appendix 3

Figure 11.3: Percentage increase in price against percentage decrease in quantity demanded

0 5 10 15 20 25 30 35

-70

-60

-50

-40

-30

-20

-10

0f(x) = − 2.51561106155218 x + 10.6155218554862R² = 0.994000299985001

% PriceΔ

% Q

DΔ

Figure 11.2 is drawn based on the data from Figure 8.3-3. Note that

%Δ QD = ∆ QD

Original QD× 100.

For example, when % increase in price was 10%,

%Δ QD equaled (16−19)

19×100, or - 15.8%.

Also, the line in the figure is a line of best fit, with an equation: %Δ QD = -2.5156 (% Δ Price) + 10.616. The differentiation of this equation, % ΔQD% Δ Price equals -2.5156. Because

% ΔQD% Δ Price equals PED, Nissan’ PED is -2.5156.

11.4 Appendix 4

Yihan li 000339-014 28

Figure 11.4: Percentage decrease in Nissan cars’ price against percentage decrease in quantity demanded of competitors’ cars

-35 -30 -25 -20 -15 -10 -5 0

-70

-60

-50

-40

-30

-20

-10

0

f(x) = 2.08350558081851 x − 0.289375775113811R² = 0.982061115922305

% Price of AΔ

%

QD

of B

Δ

Figure 11.3 is drawn based on the data from Figure 8.3-5. Note that

%Δ QD = ∆ QD of B

Original QDof B×100.

For example, when % decrease in price was 10%,

%Δ QD equaled −1041

×100 or -24.4%.

Also, the line in the figure is a line of best fit, with an equation: %Δ QD of B = -2.0835 (% Δ Price of A) -0.2894. The differentiation of this equation, % ΔQDof B% Δ Price of A equals -2.0835. Because

% ΔQDof B% Δ Price of A equals XED, Nissan’ XED is

-2.0835.

Yihan li 000339-014 29

Yihan li 000339-014 - blogs.yis.ac.jpblogs.yis.ac.jp/.../01/Extended-Essay-submitted-draft-20n6hlj.docxWeb viewWord Count: 3927. Abstract . This essay explores the topic of exchange

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