Implications of Exchange rate Effects

With this perspective on global operations management competition, it is interesting to look at two industries that have had difficulty competing internationally in recent times, steel and automobiles.

The Steel Industry:

During the 1977- 1982 period, the Japanese steel industry was about 50 percent larger than that of its nearest national competitor, the United States whose steel industry was shrinking by about 10 percent per year. The iron and steel industry (25) is one of the industrial sectors in Japan that was substantially more productive than the Japanese economy as a whole during the 1970-1976 period was a time of intense competitive pressure on US producers. On the other hand, in the US industrial portfolio for the 1972–1976 period the iron and steel industry was some what less productive than the US economy as a whole.


A Standoff U S Producer

Initial cost
(exchange rate 1: 1) $5000
Cost within each producer’s
Country after productivity
Improvement 0.8 x 5000 = $4000
Cost of US product in the
Foreign country after
Monetary exchange 10/8 x 4000 = 500 MU
Cost of foreign product in
The US after monetary exchange

Foreign Producer

Initial cost
(exchange rate 1: 1) 5000 MU
Cost within each producer’s
Country after productivity

Cost of US product in the 1.00 x 5000 = 5000MU
Foreign country after
Monetary exchange

Cost of foreign product in
The US after 8 /10 x 5000 = $4000
monetary exchange

The reasons for the poor competitive position of our steel industry are commonly assigned to low productivity because of old process technology and high factor costs, including transportation and energy costs, and wages and labor costs. Advantages and disadvantages in productivity and in the factor costs of raw materials, energy, and labor enter into the results of the cost – experience curve, helping to account for comparative performance.

Steel Industry Productivity Comparison: Taking the 1960–1970 period of steel productivity improvement in the United States, Japan, West Germany and Canada, US productivity was the highest 66.7 tons per 1000 worker hours, followed by Canada, West Germany, and Japan (see table below) During the following 10 year period US steel industry productivity increased by 24.9 percent and it still had the highest productivity of the four countries in 1970. But Japanese productivity had increased by an astounding 203.3 percent, with West Germany’s and Canada’s increases being 70.2 and 49.9 percent respectively. In terms of analysis, the US Steel industry lagged behind economy as a whole, whereas the productivity increases of the steel industries of the other countries, particularly Japan, had out paced their own economies.

The 1970–1980 period demonstrates the same kind of general relationships; with an aggregate 10 year increase of only 15.4 percent, the US steel industry productivity lagged behind its own economy. Meanwhile Japan, West Germany, and Canada recorded 10 year increases of 83.5, 54.1 and 65.9 percent respectively. By 1980, Japan had the highest productivity of 136.9 tons per 1000 worker hours followed by Canada and West Germany and the United States had the lowest.

The Automobile industry:

The automobile and steel industries have much in common in terms of the types of problems they face in international competition, and Japan is the nemesis for both. In addition, they have another touch point – the auto industry is the largest single customer of the steel industry. The reverse side of the coin is that steel is a major factor cost for automobiles. In addition, there is the wage differential problem of the US auto industry wage with respect to general wage levels in the US compared with Japanese auto relative to general wages in Japan.

Comparative Steel Productivity: The United States, Japan, West Germany, and Canada

Productivity Tons per 1000 workers Hours

1960 1970 1980

United States 66.7 83.3 96.1
Japan 24.6 74.6 136.9
West Germany 38.9 66.2 102.0
Canada 47.3 70.9 117.6