Commentary: Japan's Carmakers: Time To Partner Or Perish

The convoy sails on. That pretty much describes the reaction of the Japanese car industry to the astounding news of a merger between Daimler Benz and Chrysler Corp. Let car executives in America and Europe chatter nervously about the tidal wave of deals about to engulf the industry. The 11 Japanese carmakers are pressing forward, with no sign of a major merger in sight. Yet if megamergers do rearrange the global auto business, Japan's companies risk losing out on the best opportunities for selling or acquiring. For Japan, it's time to partner or perish.

That's because the Japanese are in rough shape. Vehicle sales in Japan in April were down 54% from their level in March. "They are barely breaking even in Japan," says Koji Endo, automotive analyst at Schroders Japan Ltd. "Someone has to be taken over or disappear." Asia is a disaster zone. Sales are down as much as 70% from a year ago. That leaves North America, where results were strong last year. But almost all of Japanese carmakers' profits came from the currency effect of the weak yen. And this year, Detroit's Big Three are getting more aggressive on pricing to blunt the Japanese drive.

So if the carmakers' mating dances continue, Japan could be in big trouble. Look at Ford Motor Co. It already has 33% of Japan's Mazda Motor Corp. and is in talks with two Korean car companies--Samsung Motors and Kia Motors Corp. If Ford moved in on the rest of Mazda and snapped up controlling stakes in Kia and Samsung, it could get a significant Asian presence in a hurry. Far more fanciful are reports of a Ford-Fiat linkup, which Ford denies. Yet that combo would create a huge new company in Europe, just when the Japanese want to expand in the Continent. A tieup between General Motors Corp. and Daewoo Motor Co. would give the Japanese headaches in Asia and Eastern Europe.

Toyota could probably soldier on against these adversities. So could Honda Motor Co., although even this nimble player may have to spend billions more to keep stride with the mammoths. As for debt-laden Mitsubishi Motors Corp., Nissan Motor Co., and the others, it's hard to see a prosperous future in such a world.

DO SOMETHING. A few executives are talking about the need to act. "Until the DaimlerChrysler merger, we were thinking about how to get along on our own," says Taizo Yokoyama, a managing director of Mitsubishi Motors. "Now we have to broaden our options." Toyota is more cautious. "I think there will be more alliances," says Takashi Kamio, a director and member of the board at Toyota. Yet he still does not foresee full-blown mergers.

The possibilities, however, are intriguing. Nissan, for example, has attractive assets such as Infiniti, the Altima sedan, and some of its sport utilities. Daimler is poking around: It may take over Nissan Diesel, which makes the Big Thumb ten-ton truck. Nissan should encourage a full-scale alliance to ease the expense of developing new trucks and vans and maybe win entry into Europe. Nissan's heavy debt might deter Daimler from a full merger--and Daimler has to sort out the details of the Chrysler pact. But Nissan should push for as much as possible from a Daimler connection, even while restructuring on its own.

Honda could look to Germany, too. Honda's motorbikes, minicars, sedans, and recreational vehicles could make a killer lineup alongside luxury cars from BMW--a kind of Japanese version of DaimlerChrysler. Some other mergers could occur if the Japanese just inched closer to existing partners. GM has gained engine technology through its 37.5% stake in Isuzu Motors Ltd. But GM competes with Isuzu's sport-utility vehicles around the globe. How about a GM takeover of Isuzu to create a stronger sport-ute line?

For now, the Japanese are happy to pursue incremental change through alliances and programs to share engine technologies. These moves may be enough to keep auto makers going. But if they don't change soon, they may cease being leaders and turn into followers. Japan's carmakers once revolutionized the industry. Now they have to revolutionize themselves.

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