Japan's dwindling car market is a major concern for the country's automakers. Having touched a 20-year low in 2006, this year sales fell every month until October. But when it comes to Japanese auto production, the picture is quite different. Despite Japan's high costs and sluggish domestic market, 2007 is set to mark a fifth consecutive increase in vehicle production. Spurred by rising demand overseas, Japan Inc.'s high-quality, flexible plants will produce a total of 10.7 million vehicles this year, projects automotive consulting firm CSM Worldwide. That compares with a total of 10.5 million cars and trucks in the U.S., which fell behind Japan as the world's biggest vehicle maker last year.
Just as important, there are few signs of a slowdown. By 2010, CSM reckons vehicle production in Japan will reach 11.35 million, compared with 10.17 million in the U.S. "Japanese automakers are aggressively expanding their production facilities in Japan, despite the shrinking market at home," says Hirofumi Yokoi, an analyst at CSM in Tokyo. Rising demand for fuel-sippers and in fast-growing new markets are more than offsetting sluggish sales at home and in the U.S. Exports to the Middle East, for example, will account for 10% of Japanese car exports this year—a 30% rise over 2006.
All the big players are chipping in. In October, the Nikkei, a Japanese business daily, reported that Central Motor, which assembles cars for Toyota Motor (TM), has plans to add a new $450 million, 100,000-unit plant in Miyagi, north of Tokyo, in 2010. The new factory will be Toyota's first new assembly plant in Japan since 1993. Toyota spent the last decade rapidly expanding capacity around the world. A year earlier, Toyota Motor Kyushu will open a new parts plant in Kitakyushu in western Japan, where it's also expected to add a new research and development center.
Kyushu: Gateway to China
Nissan (NSANY), which not so long back was slashing production in Japan, has just revamped its 530,000-annual-capacity Kyushu plant and plans, through its Nissan Shatai subsidiary (maker of a host of models for Nissan, including the Infiniti FX35 and FX45 sport-utility vehicles), to add 120,000 more vehicles at the site. Speaking at a ceremony to mark the beginning of work on the new production facility in September, Nissan Shatai President Shigeru Takagi said that Kyushu's proximity to China was an important factor in the decision.
And Honda (HMC) started work on its first new plant in 30 years in Saitama, just north of Tokyo, in September. The $630 million, 980,000-square-meter factory, which is scheduled to begin operating in 2010, will have an annual output capacity of 200,000 cars and employ about 2,000 workers.
Even Suzuki (SZKMF), better known of late for its rapid expansion plans in India, is building a new $1.7 billion, 260,000-unit plant in Shizuoka prefecture that will eventually export production versions of its Kizashi concept cars (BusinessWeek.com, 10/10/07), shown at the Frankfurt and Tokyo motor shows, to Europe and the U.S. "We're working hard to increase our production capacity," says Osamu Suzuki, the company's chairman.
Extremely Flexible Plants
Just as startling, though, is that millions more are being spent upgrading existing plants, which are already among the most efficient in the world. Toyota's newly refurbished Takaoka plant, for instance, will combine the latest developments of the Toyota Production System, such as sensors that monitor quality during each manufacturing process or stamping presses that use servo-motors rather than hydraulics, combined with high-speed delivery robots. Nissan's Kyushu plant, after its refurbishment, is one of the company's top four plants, and capable of producing seven different models on a single production line.
But what explains the outlays? After all, Japan's automakers have long pursued a policy of opening plants near local markets to avoid import duties or the threat of protection measures. The country remains an expensive place to produce cars, with wages 10 times higher than in China. And a shrinking population is already causing labor shortages as baby boomers retire. Throw in the shrinking domestic market and the moves seem to defy business logic.
One explanation for the expansion is the flexibility that the investment brings. While Japanese employee costs are high, its high-tech plants excel at switching production from one model to another. That helps to match production with fluctuating demand around the world.
For example, Nissan's Kyushu plant, which exports to 160 markets, as well as producing lots of different models on a single production line, has cut in half the time between introducing a new vehicle and reaching full production since the factory was retooled. "In terms of flexibility, the Japanese are almost the same among themselves, but they are way ahead of any other automakers," says CSM's Yokoi.
Building new plants in Japan now may also make it easier to upgrade or replace older ones without adding further pressure on stretched workforces. Anxiety over quality is also a factor. In recent years, Toyota has suffered from rising recalls and Nissan came unstuck when Carlos Ghosn ordered a rapid ramp-up in production at its plant in Canton, Miss., after it opened in 2003. And while execs are loath to admit one plant is better than another, Japanese makers' domestic plants still score higher on quality.
"It might seem surprising but Japanese carmakers have good reasons to increase capacity at home," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "They face an increasing demand for fuel-efficient cars, and they've realized that more domestic production can help them cope with concerns over quality." Matsumoto adds that consumers may also see a "Made in Japan" tag as a sign of good quality.
Yen for Domestic Production?
On Nov. 23, Labor Thanksgiving Day in Japan, Ghosn made it clear he had no doubts over the role of Nissan's Kyushu plant in the company's future. "The quality level of the cars we're getting is exceptional," he said, after addressing employees at the plant who were working as usual despite the national holiday. The plant will produce the new Murano, the crossover SUV that goes on sale in the U.S. next month.
Fears over exports causing trade tensions also may have receded. Sure, Detroit still complains about the weak yen, which has broadly mirrored the dollar's fall in recent months, but the U.S. government appears much more concerned about China's yuan. In any case, many of the new exports are higher-margin models headed for growing markets such as the Middle East.
But could a weak yen be the main reason for increasing production at home? Certainly not, says Ashvin Chotai, director of Asian automotive industry research at Global Insight. "I don't think it's a huge factor in this. A weak yen helps, of course, but you can't put in huge capacity because of where the yen is right now."