Land Of The Lilliput-Putt

The Japanese are mad for minicars, a trend that's boosting Suzuki and others

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Toyota (TM , Nissan, (NSANY ) Honda. (HMC ) For years that has been the market-share pecking order in Japan's giant auto market. But in October a stunning thing happened: Honda Motor Co. was outsold in Japan by Suzuki Motor Corp., an also-ran in the U.S. but a rising power at home. Suzuki's weapon of choice: the kei, or minicar.

While fuel-conscious Americans are snapping up subcompacts from Toyota, Nissan, and Honda, Japanese consumers are buying minicars in record numbers. These models make subcompacts look positively spacious. By law, a minicar in Japan can be no longer than 11 feet, and no wider than 5 feet. The engine of a typical minicar can't kick up more than 60 horsepower. Yet led by Suzuki, minicar makers account for 35% of all new auto sales so far this year, compared with 24% a decade ago. By yearend, sales should top 2 million for the first time. "Perceptions have changed," says Olivier Boulay, head of design at DaimlerChrysler's (DCX )Advanced Design Center in Yokohama. "People have started to understand that with these tiny cars, you can have a nice mode of transportation that's affordable, doesn't use up too much gas, and has a touch of high tech."

That's a big switch from when many Japanese saw minicars as low-quality alternatives to larger rivals. New regulations in 1998 paved the way for stronger, sturdier, and slightly roomier kei. "Quality is improving every year," says Masahisa Ogawa, an executive at J.D. Power Asia Pacific Inc., which has been surveying minicar quality since 2001. (J.D. Power, like BusinessWeek, is owned by The McGraw-Hill Companies.) Just as important, minicar quality has even been gaining ground at a faster pace than regular-size autos.


Intense competition has also forced carmakers to improve specs. Daihatsu Motor Co.'s Sonica, which ranges in price from $9,600 to $13,000, boasts a continuously variable transmission and a turbocharged engine that gets 54 miles per gallon. Suzuki's new Cervo, launched on Nov. 7, includes Bluetooth connectivity, a keyless entry system, and a choice of two- or four-wheel drive. In October, Mitsubishi's stylish i minicar scooped up the Ministry of Economy, Trade & Industry's Good Design Grand Prix Prize for its innovations, which include locating its engine in the rear to increase space. "The impression is that minicars have become as good as ordinary cars," says Iwao Morii, project manager for minicar product development at Mitsubishi Motors Corp.

The growing popularity of minicars is a boon for Suzuki, Daihatsu, and Mitsubishi, but the biggest automakers have fewer reasons to celebrate. Although Nissan and Toyota don't make these Lilliputian wonders, they do profit from the trend: Toyota owns 51% of Daihatsu, while Nissan rebadges minicars from Suzuki and Mitsubishi. Yet the prospect of a minicar future doesn't make the majors happy. "The market is going toward minicars," Nissan CEO Carlos Ghosn told reporters in October. "It's not favorable to us, but we have to recognize it." The reason for Ghosn's concern: Margins on kei are as tiny as their backseats. Sedans make more money, but those sedan sales are awfully pokey. Despite Japan's economic recovery, regular car sales were down 6.2% in October, the 16th consecutive year-over-year monthly decline. Only kei and luxury European imports are bucking the trend.

By Ian Rowley, with Hiroko Tashiro in Tokyo

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