When In Japan, Do As The Germans Do

For Yoshikazu Yoshioka, a 45-year-old IBM manager in Tokyo, it's time to trade in his two-year-old BMW 325i convertible. He can't make up his mind whether to buy another BMW or switch to a sleek new Mercedes-Benz. But Yoshioka is sure about one thing: "I'm not even thinking about an American car."

With the June 28 deadline for U.S. trade sanctions aimed at opening up Japan's auto market fast approaching, U.S. auto makers could take a lesson: Japanese consumers are buying German cars for good reason. Over the past 15 years, German auto makers have spent hundreds of millions to build up dealer, supply, and service-support networks in Japan. They've adapted their cars to Japanese tastes. As a result, German carmakers have commanded more than 50% of the market for imported cars since 1981--and in some years as much as 80%.

BIG SPENDER. Mercedes alone has spent $355 million since entering Japan in 1981. In 1992, Volkswagen Audi Nippon completed a $320 million import facility on a deepwater port. The operation, which includes an inspection center, a parts warehouse, and a training center, can process 100,000 cars a year--a goal the company expects to reach by 1999. Altogether, German auto makers have invested nearly $1 billion in Japan, while American spending on support facilities is estimated at just $120 million, with $100 million coming from Ford Motor Co. alone. As a result, each of the German "big three"--Mercedes, BMW, and VW Audi--now sells about 30,000 cars a year in Japan.

That is more than twice as many as any U.S. auto maker, although America's Big Three have also recently made inroads in Japan. Aggressive moves by Ford--including competitive pricing and a major advertising campaign--plus Chrysler Corp.'s success selling a right-hand-drive Jeep Cherokee boosted U.S. share from 9.3% to 12.4% of the import market in Japan in 1994. That helped slash 6.2 points off the German auto makers' share, making it 55.2% in 1994. But since the overall market for imports is rising, German unit sales rose, too (chart).

And those sales are highly lucrative, even at low volumes. Because BMW charges more for its cars in Japan, its profit margin is two to three times higher than in Germany, says Lehman Brothers Inc. Japan auto analyst Koji Endo. The most profitable dealerships last year in Japan were those run by BMW and Mercedes.

That's despite the fact that prices are falling. In 1994, Mercedes dropped the cost of its E series cars by $7,300 on average. The sticker price now ranges from $68,640 to $117,160, depending on the model. In February, BMW moved to widen its customer base, debuting a new 318ti compact for about $35,500. The company also offered a flat-fee, three-year service contract on any new car, including parts. "Before, our customers were all company presidents and rich people," says Fumiko Hayashi, manager of a BMW dealership in Tokyo. "Now, we see more families and salaried workers."

ATTENTIVE. Those customers still expect first-class treatment, however. "Even if there's no problem, we have to call now and then and ask, `How's it going?' Otherwise, they think we're cold and uncaring," Hayashi says. Service and sales trainees spend a year at the BMW Academy, gaining specialized knowledge about the company's autos and parts. That can benefit the bottom line. At BMW, service centers generate 10% of revenues in component sales alone.

As the import market in Japan grows, the race will be on to attract new dealers. The German auto makers aren't wasting any time. VW Audi, for example, has expanded its dealer network from 18 outlets in 1991 to 176 today, and it aims for 200 by the end of the year. Its massive investments in the market help. "[Dealers] wonder how serious we are. The import center shows our commitment," says Volkswagen Audi manager Minoru Shimizu.

To be sure, the German auto makers also do their share of complaining about the Japanese market. But they take a more philosophical approach than their rivals in the U.S. "Even a nontariff barrier [is] a real barrier," says Hideo Hohgi, BMW's director of operations. "But nowhere in the world is completely free."

Still, the German auto makers seem determined to hang on to their niche in the Japanese market--and to invest the yen necessary to keep their sales growing. As the U.S. prepares to slap $5.9 billion in tariffs on Japanese luxury auto imports, in a bid to open up Japan's market to more American cars and parts, U.S. companies should consider just what it takes to succeed.

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