The Japanese Auto Industry A Window on Japan s

The Japanese Auto Industry A 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 • Toyota 917, 120 • Daihatsu 286, 555 • Nissan 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 • Fuji (Subaru) 151, 100 • Isuzu 35, 529 • Cars 3. 061 • Trucks & Buses 0. 051 mil Minicars 286, 555 324, 059 64, 799 86, 301 2. 043 mil 1. 018 m

Import Brands • • • VW D/C BMW GM Ford 33, 078 28, 248 20, 110 14, 217 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 Daimler. Chrysler • 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 • 957, 000 Materials • 1, 106, 000 Ancillary • 3, 033, 000 Transport services (2. 0% " " ") (Steel, rubber, paint…) (Gas Stations, Insurance…. ) (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!

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 1920 s and 1930 s – Ford from 1925, GM from 1927 – Military halted construction of a new, state-of-theart integrated Ford plant in 1936 – Took 45 years to catch up again!

Turning points • 1961 cars surpass 3 -wheelers • 1968 cars surpass trucks Trucks Cars 3 -Wheelers

Distinctive Features • Competitiveness – Success in American market from late 1970 s – But in the 1990 s 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 1980 s, 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-1980 s • 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 Mfg growth 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 New NAFTA Producers • GM Subaru BMW • Ford Isuzu VW (Mexico) • Toyota Mitsubishi Saturn (GM) • Honda Mazda (Auto. Alliance) • Chrysler Suzuki (CAMI) • Nissan Mercedes-Benz • Big 6 plus The Little 9 firms (Hyundai*) (VW - US*) (Volvo*) (plus 13% imports!)

Top Suppliers - A Multinational Base (1998 OEM sales; *Subsequent M&A) • • Delphi Bosch Visteon Denso Lear* JCI TRW* US $26 bil $18 bil $12 bil $9 bil $7 bil German Dana $7 bil Aisin Seiki $7 bil Valeo $7 bil Yazaki $6 bil Magna $6 bil Mannesmann $6 Lucas. Varity* $5 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 21 st 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/aic 2000. 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.