More Bad News for Japan’s Auto Industry

China which is Japan’s biggest export market has shown substantial reductions in demand for Japanese made cars. The drop in demand (by a whopping 41% for Honda, 35% for Nissan, and 49% for Toyota) is the result of the feud between China and Japan over the Senkaku islands. As if to justify this assessment polls have showed Chinese tours of Japan have dropped off by as much as 70%. The loss in revenue for Toyota is estimated at nearly half a billion dollars. Recovery for Japan’s auto industry in China is not predicted until the second quarter of next year. Unfortunately for the U.S. GM has made almost no ground in the wake of plummeting sales for rivals Honda and Toyota. The biggest gainers are BMW and Audi with respective sales increases of 55% and 20%, Mercedes also showed significant growth with a 10% sales increase. One is made to wonder though if other factors are to play since the largest growth is seen in the luxury vehicle sales. Average costs of these vehicle companies are not insignificant.

http://www.foxnews.com/world/2012/10/09/japan-economy-on-shaky-ground-after-island-spat-sends-auto-sales-plunging-gets/

http://news.investors.com/business/100912-628639-toyota-honda-general-motor-china-sales.htm

http://www.nytimes.com/2011/11/15/business/global/in-china-car-brands-evoke-an-unexpected-set-of-stereotypes.html?pagewanted=all&_r=0

10 thoughts on “More Bad News for Japan’s Auto Industry

  1. Dillon Myers

    That is an interesting statistic but one thing you have to watch out for is China’s perception of luxury cars. There is a significant difference between what brands are considered luxury in the US and what is considered a luxury brand in China. From my time in China, I know one of the more high end brands is Buick. There may be some other factors at play but I know Mercedes is not considered a luxury brand in China so it may be other factors other than luxury. A helpful article that describes the differences is: http://www.nytimes.com/2011/11/15/business/global/in-china-car-brands-evoke-an-unexpected-set-of-stereotypes.html?pagewanted=all&_r=0 … it might be helpful to add this to your post.

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  2. myers

    That is an interesting statistic but one thing you have to watch out for is China’s perception of luxury cars. There is a significant difference between what brands are considered luxury in the US and what is considered a luxury brand in China. From my time in China, I know one of the more high end brands is Buick. There may be some other factors at play but I know Mercedes is not considered a luxury brand in China so it may be other factors other than luxury. A helpful article that describes the differences is: http://www.nytimes.com/2011/11/15/business/global/in-china-car-brands-evoke-an-unexpected-set-of-stereotypes.html?pagewanted=all&_r=0 … it might be helpful to add this to your post.

    At a quick glance, a factor at play might be China’s view towards Germany. The three auto brands you mentioned are all German. Germany might be stepping in to take the sales lost by Japan.

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  3. the prof

    A useful post. Here are a few additional points.

    First, I’m not sure GM has much spare capacity in China, they and VW are the two powerhouses, with Toyota and Honda followers. Note that Buicks in China are designed for the market, including the assumption that you’ll have a driver rather than drive yourself, eg, it’s the rear seating that is fancy. Chinese markets are still partly regional in nature, with Toyota in the north and Honda in the south, while GM is strong in Shanghai in the center. But as to luxury cars, even a Bentley still has 4 wheels and all that, while a BMW Mini is a small box with a big price. Brand image is the defining element, you can always switch out the carpet and otherwise tweak with modest differentiating items.

    But back to Japan; the capacity in China is recent but margins there have been high (though now are falling). That means it contributes a lot to the profitability of some firms. In addition, China has the world’s largest new car market, several million larger than that of the US or (combined) the EU. Not being in China can hurt.

    This however is hardly the only shock. The most important one is the strength of the yen, which renders Toyota’s luxury cars (Lexus) not very profitable (and possibly unprofitable) in the US. Second, the domestic market is in decline (the number of licensed drivers is falling) and in addition has shifted towards “kei” (mini) cars that have small prices and perforce small profit margins. Then there was 3/11 on top of the Lehman Shock that hurt demand in markets in Europe (where Toyota has lost money as often as not) and the US, and hurt supply from Japan (compounded by the floods in Thailand that interrupted supply chains a second time, particularly for Honda but also Toyota). [Toyota had the company-specific recall / unintended acceleration issue, not a factor for the other firms.]

    So think of this as a fourth shock, hitting another hoped-for contributor to the bottom line.

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  4. reed

    In contrast, Japanese auto makers are gaining market share in the United states, after a strong performance from the big 3 US automakers. Toyota and Honda were hurt by floods and the continued effects of the tsunami in 2011, however they are both projected to both grow and gain market share in the US this year, while Ford, Chrystler, and GM are expected to lose market share for the first time since 2008.

    http://www.businessweek.com/news/2012-02-08/u-s-automakers-seen-losing-market-share-amid-2012-growth-cars.html

    Also, 7 of the top 20 vehicles, by sales, in the UNited states are Japanese, while 9 are American. Notably, the Prius is improving its sales volume by 96.6%, the The Camry and Accord by about 37% each, and the civic by almost 40% since 2011, according to the Wall Street Journal website.

    http://online.wsj.com/mdc/public/page/2_3022-autosales.html#autosalesE

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  5. wilburns

    This is very interesting. Given Japan’s heavy economic reliance upon exports to China, this dispute over the Senkaku Islands could be extremely detrimental. The increasing strength of the yen and failure of the Bank of Japan to meet inflation expectations for several years running only makes this problem worse. Since 2006, the CPI has only reached positive growth 5 times, and even then in short bursts that were only canceled out in following months of deflation.

    http://www.boj.or.jp/en/mopo/gp_2012/gp1210b.pdf

    Still, I agree with Anton that Japanese auto makers’ position in the US is still relatively secure. One comparatively specific point that I Anton did not mention that I think supports his point even more is the fact that during much of the time between 2008 to 2012, Toyota was marred by very public recall scandals that significantly impacted sales. The numbers I’ve found are an 8.7% US sales drop in February of 2010 alone, a 20% US sales plunge of the Toyota Camry in the same month, and a loss of $2 billion in lost output and sales worldwide over the course of the scandal. At the time (Feb. 2010), Ford jumped to the top spot in terms of sales for the first time since 1998.

    http://www.aljazeera.com/business/2010/03/2010330949857842.html
    http://news.bbc.co.uk/2/hi/business/8493414.stm

    Arguably, the American auto makers’ advantages in the US over the past few years were an anomaly owing thanks to the Toyota scandal and tsunami, temporary phenomenon. The US auto companies still have trouble making a dent in the high efficiency vehicle market, with the US companies’ biggest effort–the Chevy Volt–failing to meet expectations. While by no measure a failure, at best, the Chevy Volt had decent sales rather than the stellar sales volume GM execs were expecting.

    http://www.forbes.com/sites/jimgorzelany/2012/09/24/august-chevrolet-volt-sales-redefine-failure/

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  6. the prof

    Toyota has several “quakes” shaking its performance, as noted above.

    1. The strong yen
    2. 3/11 disruptions to its supply chain
    3. Thai flood disruptions to its supply chain
    4. The unintended acceleration cases

    However, Toyota no longer has a cost advantage and many of its products are mediocre. The Prius sells, but not its other hybrids — and the Prius doesn’t outperform the new and stylish (for better and for worse) C-max of Ford. Whether Ford will eat into its share has yet to be seen.

    In the auto industry, absent quakes, shares tend to change only slowly. But there is a natural tendency for the top firm(s) to become complacent, or at least conservative. After all, doing something special with the Camry can’t boost sales much when you’re already on top, but if that somethimg special fails, you can lose sales…so play it safe and bland.

    Which “new entrants” are succeeding in the US? Except for Hyundai/Kia, which were affiliates (respectively) of Mitsubishi and Ford, and so could “borrow” strenghts, both the German and Japanese manufacturers come from markets more competitive than ours. We had the Detroit 3 [the Big Three today consists of GM, Ford and Toyota … then come the middle 3, Honda, Chrysler, Nissan and Hyundai-Kia]. Germany had VW, Ford, Opel and imports such as Peugeot and Citroen and Renault and Fiat, plus BMW and Mercedes with rivals Saab and Volvo. Count them up! Japan had Toyota and Nissan, the Big Two, but then Honda, Mazda and Mitsubishi, plus Subaru and Daihatsu and Suzuki and 3 firms that made primarily trucks with the odd venture into passenger cars (Isuzu, Hino and Nissan Diesel).

    But what’s happened to these 11 Japanese firms? Toyota now owns Daihatsu and Hino plus a large stake in Isuzu and Subaru [which is a brand, Fuji Heavy Industries is the company]. Nissan is owned by Renault (which in turn is owned in part by the French government, ironic because at one time Nissan was the “national champion”). Mazda was controlled by Ford, but they sold their stake in the financial crisis, and are in a challenging strategic position. Mitsubishi was controlled or had sizeable minority stakes by Daimler and before that Chrysler [both bailed out], though both bailed out and MMC is floundering, having exited some lines of vehicles and closed plants. (Daimler kept control of its truck operations.) Suzuki had ties with VW (but now is in the midst of a messy divorce). Nissan Diesel is owned by Volvo (the truck maker, the car company is owned by a Chinese firm). Only Honda has neither acquired nor been acquired. So what we’ve seen is a de facto consolidation, with Toyota looking more and more like a general motor company, from minicars (“kei” cars) to heavy trucks and (through related companies) a trading firm, a textile equipment maker, parts operations (Denso, Aishin) and even a residential house construction firm. By implication … well, I won’t provide counterarguments here, you can try to fill in the blanks.

    And why manufacture in Japan? After all, with an aging population the structure of the economy will perforce shift toward services. Those workers can’t be making cars…and maybe an aging population won’t be buying them, either!!

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  7. wilburns

    It seems that with all of the consolidation and acquisition outlined by the Professor, Japan’s auto industry is going the way of the American auto industry in that it is becoming less and less competitive. This may explain why the products produced by Japanese firms are decreasing in quality when compared with the quality they had when they first entered the international marketplace, and particularly during the 1990’s. Now, rather than having 11 very strong, very competitive auto companies producing products designed to sell in the brutal Japanese marketplace, all that is left are a few firms owned in whole or in part by several companies that now produce mediocre products for sale in a noncompetitive American market.

    Furthermore, and as the Professor implied, it is becoming harder and harder to justify building these mediocre products in Japan any longer, given the aging population and the cost of rebuilding old factories destroyed/disabled by the 3/11 earthquake. As such, a crucial part of Japan’s economy is slowly disappearing and outsourcing all over the world, particularly to my own home state and other right to work states in the American South, where labor costs are cheaper given the lack of labor unions, and it is easier to sell less than stellar products in the less competitive American market.

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  8. CribReusessut

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  9. wilburns

    Suzuki has fallen victim to what the Professor outlined as problems within the Japanese auto industry: complacency. After years of poor sales and unfavorable exchange rates, Suzuki has decided to call it quits in the USA. The strong yen–as the professor mentioned–proved too much an obstacle for Suzuki to overcome here in America, as rising prices for weaker and fewer models made it harder for American consumers to justify investing in a Suzuki when they could purchase a better, stronger model for the same price.

    http://www.guardian.co.uk/business/2012/nov/06/suzuki-pulls-out-us-car-market

    Fortunately for Suzuki, its Indian subsidiary Maruti Suzuki still holds a 44.9% share of India’s passenger car market. Perhaps Suzuki’s lack of innovation and relative stagnation when compared to other auto markets will have less of an impact on a market like India where your average consumer isn’t really looking for many bells and whistles in a car.

    http://www.marutisuzuki.com/Maruti-charts-plan-to-retain-its-50-market-share.aspx

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