The Japanese Auto IndustryA Window on Japan's Economy

Michael Smitka

Professor of Economics

Washington and Lee Alumni College

July 20, 2000

Japan's Car Market…?!

Enjoy the strong yen!

Big Sale Now…!

Price -- a mere ¥16,800,000

• Exchange rate: ¥108 per US$

(Wednesday's rate)

• Price in dollars: $155,555.55

• And this is after the 10% "strong yen" sale

discount!!

Luxury Cars aren't Representative

• Mercedes will sell 50,000 cars in 2000

• 2.8 million -- regular cars

• 2.0 million -- minicars

• 1.0 million -- light trucks

• 0.3 million -- imports

Japanese Auto Firms• Toyota Daihatsu

• Nissan Hino

• Honda Nissan Diesel

• Mitsubishi Motors Suzuki

• Mazda Isuzu• Fuji Heavy Industries (Subaru)

• Defunct: Prince .. Ohta .. Kurogane .. Several others

The Domestic Industry's

Geography

• Firm All Cars Regular Minicars

• Toyota 917,120 917,120

• Daihatsu 286,555 286,555

• Nissan 388,548 388,548

• Honda 375,725 223,506 152,219

• Mitsubishi 307,949 161,815 146,134

• Mazda 165,613 142,436 23,177

• Suzuki 324,059 324,059

• Fuji (Subaru) 151,100 64,799 86,301

• Isuzu 35,529 35,529

• Cars 3.061 mil 2.043 mil 1.018 m

• Trucks & Buses 0.051 mil

Import Brands

• VW 33,078• D/C 28,248• BMW 20,110• GM 14,217• Ford 13,511

• All less than 1% share in a 3 million car market….

Definitions

• Production inside Japan versus global

production

– Honda is almost as much American as Japanese!

– Toyota is rapidly internationalizing

Missing from List?!

• Nissan is owned by Renault

• Mazda is owned by Ford

• Isuzu is owned by GM

• Suzuki, Fuji are partly owned by GM

• Mitsubishi will be owned by DaimlerChrysler

• Hino & Daihatsu are now owned by Toyota

• Nissan Diesel is (?) Volvo

Definitions (ii)

• Production by Japanese firms– Mazda, Isuzu and Nissan are all controlled

by non-Japanese companies

– Suzuki, Fuji Heavy Industries (Subaru) and Mitsubishi have foreign firms as major if not dominant shareholders

– Only Honda and Toyota are "Japanese"

Production outside of Japan

NAFTA

EU

Asian expansion

"The" Auto Industry

• 888,000 Manufacturing (1.3% of labor force)

– 262,000 assembly

– 626,000 parts and body

• 1,280,000 Sales & Repair (2.0% " " ")

• 957,000 Materials (Steel, rubber, paint…)• 1,106,000 Ancillary (Gas Stations, Insurance….)• 3,033,000 Transport services (Truck drivers….)

• 7,260,000 Total -- 11% of Labor Force

• 13% of mfg shipments, 20% of exports

Definitions (iii)

• Parts versus Assembly

– Employment is in parts, not assembly

– Dealerships and repair shops, too

• Dealerships in Japan are unprofitable!

– Gas stations, too?

• Deregulation has overturned the industry!

Japanese Domestic Auto Industry

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

1951 19531955 19571959 19611963 19651967 19691971 1973 19751977 19791981 19831985 19871989 19911993 19951997 1999

Domestic Sales Output Exports

Peak 13.5 mil

Now < 10 mil

Historical Development

• Typical LDC Pattern of Industrialization– Initial domination by foreign producers– Excess entry by "national" firms and extreme

inefficiency under subsequent protectionism

• Industrial consolidation - the Year 2000 theme!– Assemblers going or gone– Now it's the parts sector's turn

Auto sales

• The Japanese market was for trucks until 1968 -– businesses were the predominant customer– many vehicles were 3-wheelers!

• Japan was advanced in the late 1920s and 1930s– Ford from 1925, GM from 1927– Military halted construction of a new, state-of-the-

art integrated Ford plant in 1936– Took 45 years to catch up again!

Motor Vehicle Production1950-1968

Truck & 3-Wheeler Era

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968

Cars Trucks & Buses 3-Wheelers

Cars

Trucks

3-Wheelers

Turning points • 1961 cars surpass 3-wheelers• 1968 cars surpass trucks

Distinctive Features

• Competitiveness– Success in American market from late

1970s

– But in the 1990s poor profitability on a global basis, so-so success in the EU

Management details for Q&A?!

– Just-in-time kanban methods of production control– Rapid product development cycle– Quality control techniques– Supplier management / purchasing strategy– Labor relations patterns distinctive from those of

the US. "Lifetime" employment system, annual wage hikes, biannual bonuses

US-Japan Topics (I)Japanese success was due to US!

• Japanese entry rode a small car wave

• We paid Japan off!! – VER - voluntary export restraint - cum - cartel

• Our subsidies financed – Japan's mid-sized cars

– Japan's overseas plants

• Absent US policy . . . . no Japan??

US-Japan Topics (II)American revitalization was due to Japan

• Until Japanese entry in the 1980s, the Big Three

formed a tight cartel

• Competition forced a reformation the last 15 years

• Japanese inroads are almost exactly matched by GM's

decline

• US firms' superior financial controls helped offset poor

manufacturing

The "Bubble"

• Japan would rule the world in autos…

• Exports, domestic market boomed in mid-1980s

• Low interest rates fed the boom

• So what do you do? -- add capacity!– 1.5 million units in a shrinking market– Now 15 mil units capacity, 10 mil units output– Toyota alone has 1 mil units excess capacity

The "Bubble"Denouement

• Plaza Accord of September 1985– yen appreciated– exports fell

• Domestic asset bubble broke– home demand fell

• Foreign producers recovered– skills improved– light truck / minivan boom favored them

Today’s status

• Huge excess capacity within Japan– 10 years of delay while hoping for recover (cf. GM)– Little restructuring until 2000, and then only at a

few assemblers• Aging labor force & population

– costs will rise– demand won't

• Debt, poor profitability– can Japanese firms invest abroad profitably??

Looking Forward

• Improved efficiency in Japan??– continued exit / restructuring esp. at parts firms

• Maturation in other markets– international expansion will slow, firms will see occasional

sales downturns

• How to manage a global firm?– few precedents in Japan– US firms don't always do well, either! (in 2000, Ford in EU)– Firms with high export shares (Honda, Mazda) remain

vulnerable to exchange rate swings

Summary & Lessons

• Many features of Japan reflect its economic transition from a developing country

• The "bubble" legacy is still present 10 years later

• Maturation will not proceed smoothly

• How similar are the US? Korea? China?

Addenda• GDP growth chart

– GDP– Unemployment

• Big 3 cartel (oligopoly) era

• Today's structure -- competition galore!

• Major parts suppliers– Sales size– Nationality (by headquarters location)

GDP growth

Mfggrowth

U

Old Vs New: the Old

GM

Ford

Chrysler

AMC(imports < 10% of market)

VW (Briefly in Pennsylvania)

======

Big 3

(+ 1-2 little firms)

Old vs. New: the NewNAFTA Producers

• GM Subaru BMW

• Ford Isuzu VW (Mexico)

• Toyota Mitsubishi Saturn (GM)

• Honda Mazda (AutoAlliance) (Hyundai*)

• Chrysler Suzuki (CAMI) (VW - US*)

• Nissan Mercedes-Benz (Volvo*)

• Big 6 plus The Little 9 firms (plus 13% imports!)

Top Suppliers - A MultinationalBase (1998 OEM sales; *Subsequent M&A)

• Delphi $26 bil Dana $7 bil• Bosch$18 bil Aisin Seiki $7 bil• Visteon $18 bil Valeo $7 bil• Denso $12 bil Yazaki $6 bil• Lear*$9 bil Magna $6 bil

• JCI $9 bil Mannesmann $6• TRW* $7 bil LucasVarity* $5• US German Japanese Other

Bibliography

• David Halberstam, The Reckoning. 1986.– A good read, and a good depiction.

• Maryann Keller, Rude awakening : the rise, fall, & struggle for recovery of General Motors. 1989.– Another good read. See also her Collision: GM, Toyota,

Volkswagen and the Race for the 21st Century, 1993.

• Japan Automobile Manufacturers Association: http://www.jama.or.jp– Includes auto industry overview .pdf file and current statistics

• Mike Smitka, Competitive Ties. Columbia University Press, 1989.– The parts sector in Japan

• Department of Commerce, Office of Automotive Affairs: http://www.ita.doc.gov/td/auto/– US data, links, trade data

• Keizai Koho Center Japan: An International Comparison (Annual, 1998-2000 available online)www.kkc.or.jp/english/activities/publications/aic2000.pdf– Handbook of statistics on social / political / economic facets of Japan.

100 pages of downloadable tables & graphs, most with comparative data for the US and EU.