It's not easy to sell a foreign car in Japan. While German marques dominate Japan's luxury sector, domestic brands rule the overall Japanese market—the world's second largest—in a way that GM (GM) and Ford (F) execs can only dream about. Toyota (TM), the market leader, has a 46% market share, and Japan's domestic auto makers combined account for 95% of unit sales.
Yet these days GM, Ford, and other foreign auto makers are probably better off not having a big stake in Japan, where companies have to contend with demanding customers, falling volumes, and slim profits. Despite a rebounding Japanese economy, analysts reckon sales this year will dip below 6 million, compared to a record 7.8 million in 1990.
"I don't think they will ever get [those kind of numbers] again," says Koichi Sugimoto, an analyst at Nomura Securities in Tokyo. "There's nothing to make you believe there will be a recovery."
NOT SO BIG THREE. Just look at this year's sales numbers. According to the Japan Automobile Dealers Assn., total passenger car sales fell 1%, to 3.07 million units during the first six months of 2006. Strip out mini-vehicles—low margin, tiny cars limited to 660cc engines—and the figures are worse: down 3.8%, falling below 2 million units for the first time in 23 years.
Japan's Big Three carmakers, Toyota, Nissan (NSANY) and Honda (HM) are feeling the strain. Nissan's Japanese sales were down 12.8% through the seven months to July, compared with a year earlier. Honda saw a fall of 4.1%. Even mighty Toyota's sales were flat compared to a year earlier.
Toyota execs are trying to be upbeat: The company expects an upswing during the second half when the new Corolla—the tenth since its launch 40 years ago—is released. The addition of the LS to the Lexus range in Japan will also help. For the year, Toyota projects sales will rise 3.8% (see BusinessWeek.com, 7/20/06, "Troubles Can't Stop Toyota's Growth").
LUXURY RIDE. Small wonder, analysts say, that in most cases auto profits in Japan are likely to be a fraction of those from overseas. (Companies publish operating profit numbers for Japan, but those includes vehicles exported overseas.)
One place where sales are up is the luxury sector, but that's where Japanese brands are weakest. Through July this year, Mercedes-Benz (DCX), BMW, Audi, and Porsche registered increases in sales of 10% or higher. That performance is all the more impressive given that Toyota just one year ago launched the Lexus, which many expected to eat into imported cars sales.
But by the end of last year, Toyota had aimed to sell 20,000, but only managed 10,300 (see BusinessWeek.com, 2/16/05, "Lexus Sputters At Home").
EMPTY RELATIONSHIP. No one seems clear on why sales are so weak. You can't blame a lousy economy anymore: Japan's gross domestic product grew by 3.2% in the year through March, 2006, and is expected to grow a healthy 2.5% for the year. Last month the Bank of Japan signaled the end of deflation—a great excuse to delay buying new products—by raising interest rates, from 0 to 0.25%, for the first time in five years.
Other stats are positive, too: Corporate profits are at record highs, land prices are rising after falling for 14 consecutive years, unemployment is low, and annual bonuses are increasing. "None of the auto makers knows why [the market is shrinking]," says Kunihiko Shiohara, an analyst at Goldman Sachs (GS) in Tokyo. "In the past there was a clear relationship between bonus trends and new car sales in Japan, but this relationship has become meaningless."
There are numerous partial explanations. Nomura's Sugimoto points out that in the past auto makers chased market share at all costs. While that was bad for profits, it was great for Japanese consumers who could take advantage of high incentives. These days, though, Japanese auto makers are more worried about the bottom line. "They're more focused on profitability even if the business here still isn't very profitable," says Sugimoto.
LEXUS IS COMING. Others point to Japan's demographics. Japan's population began shrinking last year as deaths outstripped births by about 4,000. And while the number of licensed drivers is still rising as more women drive, the prospects aren't good.
"With the labor force and total population falling, there's no new impetus for growth," says Jesper Koll, chief economist at Merrill Lynch (MER) in Tokyo. "That's why Toyota was desperate to import the Lexus brand, so it can raise prices, hopefully, to BMW levels."
Changes to Japan's income distribution may also be having an impact. A consequence of years of economic stagnation has been a widening of the income gap, particularly between older and younger generations. The popularity of cheap mini-vehicles on one end and expensive imports on the other matches that trend.
FEW OPTIONS. Then there are changing consumer attitudes. While it might not be apparent to the casual visitor to Japan, cars are getting older. According to the Japan Automobile Manufacturers Association, the average age of a car in Japan has risen from 5.05 years to 6.77 years in the last decade.
Partly that's because people are buying fewer new cars, thus pushing up the average age of all cars, but evidence suggests people are hanging on to their cars longer and spending on things such as plasma TVs or new houses.
What can Japan's car companies do to address sliding sales at home? Not a lot, say analysts, other than cutting costs and attempting to bolster their brands. Toyota, Nissan, and Honda are streamlining their sales channels. And, outside of the mini-car sector, few manufacturers are still regularly making models just for the Japanese market.
PER-VEHICLE PROFIT. Toyota is an important exception. Critics note that Toyota might be more profitable at home if it cut some of the 65 models it sells in Japan. (In the U.S., where it derives most of its profits, Toyota sells only 16 models.)
Auto makers are also looking further up market in a bid to raise profits per vehicle even if sales continue to fall. Following Toyota's launch of the Lexus last year, Honda will bring the Acura brand to Japan in 2008. Nissan, which had seen its sales in Japan rise rapidly under CEO Carlos Ghosn, has worked harder to bolster its design image and may eventually launch the Infiniti line in Japan.
For all the challenges, don't expect Japanese auto makers to give up at home. "Japan is a very important market for us. What we do here gives us credibility in other markets," says Daniel T. Morris, a senior managing executive officer at Hiroshima-based Mazda (MZDAF). What's more, a carmaker that succeeds in a market as tough as Japan has a great chance of success elsewhere.