Japan's Sudden Deceleration

For so very long now, there has been but one direction for Japanese carmakers in the U.S.: up. Most years, they've added a point or two to their share of the U.S. car and light-truck market. Even last year, while Detroit's Big Three piled up a record $7.5 billion in losses during a savage skid in sales, Japan picked up 1.7 points, to pass 25% for the first time.

Suddenly, Japanese carmakers aren't looking so invincible. As car sales have begun rising slowly, it's the Japanese who are giving up market share, surrendering to election-year political pressures in the U.S. and escalating costs at home. Meanwhile, Detroit, led by Ford Motor Co., is proving that value pricing and better-than-expected quality--helped by "Buy American" campaigns--are enough to get consumers at least to take a look at domestic cars. Even some former die-hard import lovers end up buying domestic wheels.

Take New York architect James K. McRobert, 41. He had never owned an American car until last October, when he compared Fords against Hondas, Toyotas, and Subarus. He opted for a roomy Taurus wagon. "I had read enough good things about the Taurus to finally have the confidence to buy one," he says. Donald F. Carter, a Staten Island boat salesman, tried a Nissan for a while but bought a Lincoln last year. He "sees no great difference in the overall quality of the cars." Even Nobuhiko Kawamoto, president of Honda Motor Co., concedes: "We can see Detroit's aggressive attitude. We can feel it."

Month by month, the trend has become unmistakable. In the year's first four months, with overall sales running 5% ahead of last year, U.S. auto makers have won back 1.2% of the U.S. car and truck market, raising their share to 72.1%. The only Japanese maker to show a meaningful increase was Toyota Motor Corp. (chart). Analysts suspect that, at best, Japan's carmakers will see their share run flat this year. And if the pace of the recovery quickens in 1993, newly tightened Japanese government restraints on exports could make it hard for the Japanese to keep up. One sign of tougher times: Some Japanese car dealers are actually going out of business.

`IT'S AN ORDER.' For the Japanese, the political pressures started with the new year, at the Tokyo meeting between President Bush and Japanese Prime Minister Kiichi Miyazawa. Top Japanese auto executives in the U.S. say that Bush persuaded Miyazawa to give Detroit breathing room to get back on its feet. The response came fast: Japan's Ministry of International Trade & Industry started pressing carmakers to raise prices. "We're encouraging them not to pursue market share so aggressively," says Norihiro Kono, deputy director of MITI's auto division. "We can't tell them what to do, but we are suggesting that they raise prices, lengthen model cycles, and decrease their working hours."

Toyota denies bowing to MITI's pressure. But within weeks, it hiked prices in the U.S. an average ef 3.2%, and 5% on its luxury Lexus models. Not even a month earlier, the company had posted its usual midseason price increases, averaging about 1.5%. Other Japanese carmakers quickly followed with more modest price hikes.

Then, on Mar. 19, MITI dropped the other shoe. Under the long-standing Voluntary Restraint Agreement with the U.S., Tokyo lowered its cap on car exports this year by 28%, to 1.65 million--less than the 1.76 million cars Japan exported to the U.S. last year. "That's more than pressure. It's an order," says a frustrated Kenichi Kato, the Toyota managing director who oversees North American operations. "If we violate the regulation, we will be punished."

Meanwhile, the Bush Administration is coming to Detroit's aid at home. The White House "will use every available administrative means to help," contends one U.S. executive with a Japanese carmaker. The Commerce Dept. already has determined that Mazda Motor Corp. and Toyota were dumping minivans in the U.S. and levied punitive tariffs of up to 12.7% on the vehicles. A review of that finding by the U.S. International Trade Commission is due by July 2. If it goes against Mazda and Toyota, the companies would be forced to raise prices on their vans. Now, Japanese auto execs fear that Congress may go back to applying the U.S.'s 25% duty on imported trucks to hot-selling sport-utility vehicles--which would clobber Nissan's Pathfinder and Toyota's 4Runner.

With Japan's own car market slumping, the financial pressure on Japanese carmakers is building. MITI is pushing them to cut the hours their workers put in each year at the same time that they're grappling with a labor shortage. The stronger yen is squeezing revenues. And collectively, Japan's auto makers must refinance at higher rates some $6 billion in low-interest convertible bonds they sold during the Tokyo market's boom. Toyota has just floated a $1 billion Eurobond issue at an interest rate of nearly 7% to redeem $800 million in bonds paying just 1.25%. Nissan must refinance $1.5 billion in cheap debt next year, presumably at far higher rates.

MIGRATING UPSCALE. It will take at least a couple of years for Japan's carmakers to deal with all these problems. For one thing, most can't respond to tighter import allowances by revving up their U.S. factories overnight. Some plants--such as Toyota's in Georgetown, Ky.--are already running at full tilt. Toyota won't complete a doubling of the plant's capacity, to 400,000 cars a year, until 1994.

And many popular Japanese models aren't produced in America, so Japan's carmakers will have to juggle which models they import and allocate how many of some models are shipped to each dealer. Moreover, Japanese carmakers concede that their U.S. production costs are higher than in Japan. That, coupled with other cost pressures, may force them to keep U.S. prices up. "The bottom line for consumers is, the product they want won't be available, or will be available at a higher price," says Clark J. Vitulli, senior vice-president of Mazda Motor of America Inc.

Longer-term, the Japanese conquest of the U.S. car market almost certainly isn't over. Japanese companies will continue their move upscale into selling more high-margin models, predicts John H. Hammond Jr., a partner at market researcher J. D. Power & Associates Inc. Detroit's gains, he says, will come mainly from cheaper, low-margin products.

The Japanese also are likely to channel future U.S. investments into research centers, not factories. The result: stand-alone auto companies able to take a car from drawing board to showroom. That's why some Japanese executives aren't ready to concede that Detroit is making a comeback. "There's not a clear turning point yet," says Honda's Kawamoto. He and others expect eventually to be back in high gear. But right now, Detroit has a chance to regroup.

Before it's here, it's on the Bloomberg Terminal.