Application 
Japanese Automakers Outsource to Cope with a Rising Yen
Japanese automakers have protected themselves against the rising yen by purchasing a significant percentage of intermediate components from independent suppliers. This practice, called outsourcing, gives them the flexibility to shift purchases of intermediate inputs toward suppliers with costs least affected by exchange rate changes. Some of these inputs come from South Korea and Taiwan, nations whose currencies have been closely linked to the U.S. dollar. Thus, even if such intermediate goods are not priced in dollars, their yen-equivalent prices tend to decline with the dollar and, thereby, lessen the impact of a falling dollar on the cost of Japanese cars sold in the United States.
Outsourcing in countries whose currencies are linked to the currency of the export market also creates competitive pressures on domestic suppliers of the same intermediate goods. To cope in such an environment, domestic suppliers must themselves have flexible arrangements with their own input suppliers. In many cases, these smaller firms can survive because they have greater ability to recontract their costs than do the larger firms specializing in assembly and distribution. When the suppliers are faced with the reality of an exchange rate change that reduces the competitive price of their outputs, they are able to recontract with their own inputs (typically by lowering wages) to reduce costs sufficiently to remain economically viable.
One outsourcing strategy that is unlikely to improve competitiveness is to force suppliers to invoice in a different currency. Consider the situation faced by Airbus in 2008. Its new A350 XWB long-haul widebody is priced in dollars—the global currency of aircraft sales—but it is largely manufactured in Europe, where its costs are set in euros and pounds. In order to offset the effects of dollar weakness against the euro and pound, Airbus decided to press its suppliers to price their equipment in dollars. However, suppliers are likely to just take their local currency prices and convert them into dollars (rationally, as we saw in the previous chapter, at the forward rate), thereby resulting in no savings at all to Airbus. A more workable solution to improve Airbus margins would be to shift some production to the United States, as suggested by its CEO—much to the dismay of French government officials.