Japan's Auto ShockEdith Updike
In the vast pink-toned Otori Room at the ANA Hotel in Tokyo on May 15, newly revamped Corollas gleamed under photographers' lights. Toyota Motor Corp. executives beamed and schmoozed with swarms of Japanese journalists, cooing over the new Japan-only models and chuckling over Peter Falk doing his famous Columbo shtick for the new Corolla ad campaign. But the rosy scene was as much an illusion as Falk's appearing to speak Japanese. Behind their smiles, the assembled guests were worried about the future of the Japanese auto industry.
As recently as January, Japan's carmakers were breathing sighs of relief. Domestic sales had picked up in the second half of 1994, ending one of the worst downturns in Japanese auto history. The cost-cutting benefits of parts sharing and model reduction were kicking in, and depreciation from heavy capital investments in the late '80s was helping bottom lines. Even Nissan Motor Co., hard hit by the Mexican debacle, was on the road to recovery. It seemed the worst was over.
Now the brutal vise is tightening once again. Washington's May 16 announcement of 100% tariffs on 13 luxury models, combined with a Super Yen of about 86 to the dollar, could accelerate a shakeout in the Japanese auto industry. At the least, Japan's 10 vehicle manufacturers will be forced to move more rapidly to expand in North America, Asia, and Europe while slashing costs at home. Nissan has closed a Japanese auto plant for the first time in postwar history, and Toyota executives have publicly raised the possibility of shutting down one of theirs. Mighty Toyota may even break with tradition and lay off workers.
GAME OF CHICKEN. There will surely be more pain. Japan's domestic industry still has too many employees, too many models, and too many suppliers. With production of about 11 million vehicles this year, analysts argue that is about 4 million too many, given falling exports and slow growth at home. Some experts believe not all of Japan's auto makers will remain independent, as stronger players absorb the weaklings (table). "Not all companies may survive," says Toshiaki Taguchi, a director at Toyota. The restructuring also could mean Japan's auto parts supply networks and distribution channels will be dominated by more hardy companies.
The auto shock will persist no matter what happens in the game of chicken being played out between the Clinton Administration and the government of Prime Minister Tomiichi Murayama. Washington believes the 100% tariffs, which would price Lexus and Infiniti out of the U.S. market, will force the Japanese to open their market to more U.S. autos and auto parts. "This is pretty clear-cut," says U.S. auto analyst Chris Cedergren. "The tariffs have been designed to force concessions."
But the signals from Tokyo are that the Japanese are not going to agree to the sorts of major deregulatory steps or binding numerical targets that U.S. Trade Representative Mickey Kantor is seeking. Some Japanese are betting that grassroots pressure from U.S. auto dealers and consumers could stop the sanctions from taking effect in 30 days.
More important, the top ministries as well as members of the ruling coalition appear to have reached consensus that the era of giving in to U.S. trade demands is over. "As victims of sanctions, qe'll suffer," but accepting new commitments to purchase U.S. parts "will also hurt us," says Taizo Yokoyama, a former official of the Ministry of International Trade & Industry who is now a managing director of Mitsubishi Motors Corp. "So we might as well stand firm." If that happens, Clinton will have to accept some minor concessions at the Group of Seven meeting in Halifax, N.S., next month--or choose to impose the tariffs. His negotiating partner, Murayama, is on the verge of resigning and will carry little negotiating clout.
"OVERCROWDED." Part of Japan's resistance to U.S. pressure is based on the knowledge that the nation's strongest manufacturers clearly will survive a shakeout. Toyota and Mitsubishi will probably get even mightier as the strong yen and weak markets at home force them to continue their drive to become integrated multinational manufacturers. The U.S. tariffs affect only tiny fractions of their global business. Moreover, Toyota is sitting on $25 billion in cash and Mitsubishi, bolstered by being part of Japan's strongest keiretsu, has additional strength in a wide product line, from trucks and buses down to minis, that leaves it hedged against the vagaries of the market. Other survivors will include Suzuki Motor Corp., which boasts a 24% profit margin. "They can make cars even cheaper than Toyota," says Takahiro Fujimoto, an auto expert at Tokyo University.
If a handful of marginal assemblers is forced into a deeper embrace or outright merger with stronger competitors, it will only fulfill a long-standing MITI goal--to streamline the crowded industry. "The market is definitely overcrowded, especially now," says a MITI official. "The era of 10% economic growth [for Japan] is over."
So the onetime masters of industrial planning at MITI say they're prepared to let market pressures force Japanese manufacturers and parts providers to become more efficient. Small, unlisted suppliers that lack economies of scale have been killed by increased production and parts purchases overseas. Even larger companies are being forced into mergers. Suzuki has been pressuring its suppliers to join forces. Two aluminum-parts makers, piston specialist Totsuka and wheel maker Tenryu Seisaku, merged to form Totsuka Tenryu last June. Honda affiliate Showa, a shock-absorber maker, has joined with unlisted Seiki Giken, and Nissan suppliers Unisia Jecs merged with unlisted Nippon Denshi Kiki.
Similarly, weaker vehicle makers have started making ad hoc marriages of convenience with the strong. Hino Motors Ltd. has long been considered an independent company even though Toyota owns 10% of it. Now, in response to profit pressures, Hino and another independent Toyota satellite, Daihatsu Motor Co., are being drawn closer into Toyota's orbit, giving up production of three kinds of two- and three-ton trucks to market Toyota's instead. Toyota will sell some Hino trucks.
"SLOW BURN." Among the majors, prospects are grimmest for Mazda Motor Corp. and Nissan. The two have been swimming in a red-ink sea for years. Nissan has lost $1.5 billion in the last two years and expects losses of at least $65 million in the year ended Mar. 31. Mazda's production is dropping along with its sales everywhere. Its domestic market share is now lower than Daihatsu's, and the company has a 60% export ratio. It is in no position to expand overseas production, which leaves it most vulnerable to the U.S. tariffs--its two sanctioned models account for 9% of U.S. sales. "We're talking about a slow burn among the weaker players," says Matthew Ruddick, analyst at James Capel.
Nissan is more worried about the yen than Washington. Despite closing the Zama plant, Nissan could shutter another by yearend. "Until the yen jumped again, we thought we'd be O.K.," says Nissan Executive Vice-President Yoshikazu Hanawa. "It's a big shock at the moment, and employees are especially worried."
They should be. While Japanese companies don't lay off workers officially, they've started paring payrolls in ingenious ways. Nissan has been transferring workers to dealerships on 25-month contracts, with the dealers taking on half the salaries. At the end of the "temporary" contract, dealers and employees may be "persuaded" to make the arrangement permanent. "If you're a 50-year-old office worker sent to a dealership in Hokkaido, that's not a cut, but, well, it's a cut," says Koji Endo, an analyst at Lehman Brothers Inc.
At the end of the day, Japan isn't likely to let any of its carmakers go bankrupt--and certainly not Nissan, Japan's second-largest carmaker with nearly 50,000 workers. One ace up Nissan's sleeve is its vast real estate holdings, reportedly among the largest in Japan. "Nissan is sort of a landlord that makes cars on the side," says W. Van Bussman, Chrysler Corp.'s corporate economist. By selling some of its land, Nissan could clean up its balance sheet. Nissan also could benefit if it absorbed Fuji Heavy Industries Ltd. Even Mazda will be kept alive by Ford and the Sumitomo group, its largest two backers.
Because most failing companies will be supported or absorbed, the number of workers actually laid off could be much more modest than the bloodletting the U.S. experienced in the early 1980s. So far, Japan's manufacturers have managed to cut domestic production without cutting payrolls. The peak production of 14 million vehicles was managed with a massive force of temporary workers and backbreaking overtime of 2,400 hours a year. By cutting the number of hours and redeploying workers, the companies hope to avoid most outright job losses. Nissan's closing of its Zama plant, for example, resulted in only about 100 people losing their jobs--the ones who refused to be transferred to other plants.
So U.S. tariffs--combined with a killer yen and slow growth in Japan--will help force a streamlining of the Japanese auto industry. Tokyo University's Fujimoto sees a future in which Japan's auto makers form networks in which they are both competitors and partners. "They can handle these flexible networks of quasi-independent firms which compete pretty intensively at the product level but sometimes cooperate at the company level," he says. "Those networks are pretty stable."
If the Japanese manage this shock as they have previous challenges, the result will be an even more competitive Japanese market, where margins are razor thin and distribution channels and supplier networks are dominated by fewer players. The new networks of cooperation envisioned by Fujimoto could make the market tougher to penetrate for U.S. parts makers and auto companies themselves.
That raises the question of how serious U.S. auto makers really are about Japan. In 1992, Chrysler was the first U.S. maker to bring in a right-hand-drive auto from the U.S., the Jeep Cherokee. In the two-liter-and-under market, which amounts to 80% of auto sales in Japan, U.S. makers offer just eight models. Ford Motor Co. alone owns a credible distribution channel.
Now, with the yen making Japan so expensive for most foreigners, U.S. carmakers reckon the market is relatively mature and that trying to penetrate it isn't worth the price. Aside from the massive initial investment in dealerships and spending on advertising and development, it's difficult to build a distinctive sedan in the already crowded market.
Back home, the Big Three aren't likely to benefit from the tariffs on Japan's luxury cars either. Lexus and Infiniti buyers are more likely to turn to European marques, such as Mercedes, BMW, Volvo, and Saab. Detroit won't be able to raise prices on Lincolns and Cadillacs because of the intense pressure from the Europeans. Cadillac just had its worst quarter since the Arab oil embargo of the early '70s, and the new Lincoln Continental was introduced last year at a steep $7,000 increase over the model it replaced. Ford has already had to offer big lease incentives to sell it.
DOOR TO DOOR. Few auto industry experts on either side of the Pacific expect the U.S. tariffs to achieve their stated purpose of forcing Japan to undertake what Commerce Under Secretary Jeffrey E. Garten calls "fundamental" steps to open its market. Among the possible symbolic concessions from Japan would be agreeing to allow the U.S. companies to place cars and perhaps sales representatives in some Japanese showrooms. That will have scant impact because the real selling is mostly door-to-door. Salesmen know their customers' birthdates and the names of their children. That level of commitment is likely to elude the Big Three.
A second major U.S. demand is for big deregulatory steps to allow Japanese repair shops to import much cheaper U.S. replacement parts for Japanese cars. Last, Washington wants Japanese manufacturers to make major increases in their purchases of U.S.-made auto parts, both for their transplant factories in the U.S. as well as for plants in Japan.
There's much industry speculation that Toyota might break ranks with other manufacturers--and with MITI--to make some parts-purchasing commitments. But the chances of a quick agreement to "open up" the Japanese market in a way that has major impact on the U.S. trade deficit are dim at best. It would have been one thing to do this 20 years ago, but today the Japanese auto industry is far stronger and far more globalized than ever. It is strong enough, in short, to absorb the pain of a new auto shock and come back swinging.
The Shakeout in Japan's Auto Industry
The survivors will have to slash costs at home while building markets around the globe
Untouchable. Although sanctions on luxury cars would hit Toyota harder than other makers, its conservative, cost-conscious management has avoided bold-move mistakes and socked away $25 billion for rainy days such as these.
Has been gaining market share at home with a string of popular recreational vehicles. A heavy presence throughout the Asian region puts them in growing markets where labor is cheap. Wide product offering is tricky to manage but
Small but surprisingly strong, Suzuki ranked fourth in Japanese sales last year and has a great profit margin. Widespread investment in Asia and minimal
exposure in the U.S. make it well-placed to deal with a rising yen. Unaffected by sanctions.
Strong in big and medium-size trucks, diesel engines and recreational vehicles, all of which are showing healthy sales. It's making a push into China and is selling some land to boost the bottom line. Unaffected by tariffs.
JURY'S STILL OUT
The maker of Subarus is enjoying big profits from sales of the Legacy, but its overreliance on the station wagon leads some analysts to predict it will have to merge with Nissan. Pained by the high yen.
More than any other Japanese carmaker, Honda relies on the U.S. market. While reverse importing offsets some of the endaka problem, the company's domestic market share is falling.
Sanctions on its Acura will hurt.
Made history with the first postwar closing of a Japanese auto plant, but it hardly put a dent in the company's problems, including heavy investments in Mexico and Spain and a substantial debt burden. Hard hit by tariffs on three models.
Is having trouble. Has a long way to go in the cost-cutting race, and marketing in Japan is not strong. Heavy dependence on exports to the U.S. means profits tumble when the yen rises. Tariffs will hurt two models. Is likely to require more help from major shareholder Ford.
Although both companies are strong in truck sales in Japan and Asia, they are unable to compete in passenger cars. They will likely be forced more deeply into the embrace of Toyota, which owns stakes in each.