An Endurance Test For Japanese Carmakers

Is Japan's long-suffering auto market poised for a rebound? For the moment, yes. Sales in the world's second-largest car market rose last year for the first time since 2000. Among the best sellers: Toyota's (TM ) Sienta minivan, Nissan's (NSANY ) Cube subcompact, and Honda's (HMC ) latest Odyssey minivan. And carmakers are readying a slew of new models in the coming months to lure customers back into showrooms.

Sales will probably continue to move higher in the next couple of years. But because of Japan's rapidly aging population, few analysts expect a return to the heady days of the early 1990s, when sales topped 7.5 million vehicles a year.

Still, the rising numbers are gratifying. Sales hit 5.83 million vehicles in 2003, up 0.6%, and ING Securities estimates demand will continue to inch higher this year and next. Baby steps, yes -- but the climb beats a steady drop over the previous three years, down as far as 5.79 million in 2002, the lowest level since 1986.

Some of the behavior in the showrooms is a direct reflection of Japan's increased sense of economic well-being. In March, sales of pricier cars with engines of 2.0 liters or more soared nearly 20%. Sales of Toyota Motor Corp.'s upscale Crown model have been clocking 10,000 a month, double the company's target. "Things are definitely improving, especially in terms of the product mix toward pricier models," said Takeshi Yoshida, head of Toyota's luxury-car development group, while attending the New York auto show in April.

Even so, this cyclical recovery is unlikely to fuel the steep rebound needed to stave off cuts in Japanese production capacity. With a graying population that will start shrinking in 2006, Japan holds slim prospects for a sustained increase in car buying. "The long-term demographic trends are not a recipe for growth," says Kurt Sanger, an analyst at ING in Tokyo.

Indeed, the name of the game these days is simply maintaining production levels and safeguarding market share. Most Japanese carmakers will find that tough as long as Toyota owns more than 40% of the domestic market and effectively sets prices for all car categories. Indeed, pressure on smaller carmakers just increased, with Toyota declaring it will go after a 45% share to keep its domestic plants humming. The difference is likely to come out of the already sagging share of cash-poor rivals Isuzu Motors Ltd. (ISUZF ) and Mitsubishi Motors Corp.

Toyota, Honda, and Nissan are all offsetting soft sales in Japan by boosting exports, streamlining production, and building factories overseas. "They're raising productivity on a global level and expanding the gap with their weaker domestic rivals," says Noriyuki Matsushima, an analyst at Nikko Citigroup Ltd (C ). Given the downbeat demographic trends, in the long run only the strongest may survive.

By Chester Dawson in New York

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