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Automotive Industry Overview

11, 01. 2004

Current State

The World's Number Two Automotive Powerhouse

'Amlux Tokyo', the standing exhibition pavilion of Toyota Motor at Ikubukuro, Tokyo
"Amlux Tokyo", the standing exhibition pavilion of Toyota Motor at Ikubukuro, Tokyo

    Auto manufacturing is a leading industry in Japan, and the nation is the number two automotive powerhouse of the world. The total value of Japanese motor vehicle shipments in 2002 (including two-wheelers) was 43 trillion 163 billion yen. This accounts for 16 percent of the Japanese manufacturing industry's value of shipments, and 35 percent of the mechanical engineering shipment value. Automotives is one of the important and essential industries that support the Japanese economy.
   Globally speaking, Japanese domestic production, which was 10.29 million vehicles in 2003, accounted for 17 percent of worldwide production (60.65 million vehicles). Although Japan has given up its status as global leader - which had continued until 1993 - to the United States, it still maintains its number 2 position in the world.

   Of especial note is the international expansion made by Japanese auto manufacturers. Toyota Motor Corporation (TMC) and its subsidiaries, Hino Motors, Ltd. and Daihatsu Motor Co., Ltd., combined manufactured 6.82 million vehicles in 2003, surpassing, for the first time, the number of vehicles produced by Ford Motor Company. This made TMC the world's number 2 auto manufacturer following General Motors Corporation (GM) with its output of 8.24 million vehicles. With the popularity of its sports utility vehicles (SUVs) in America, etc., Honda Motor Co., Ltd. leapt into 7th place - following Ford, Volkswagen AG, DaimlerChrysler AG, and PSA Peugeot Citroen of France - by manufacturing 2.96 million vehicles. Nissan Motor Co., Ltd., which was once in financial crisis, succeeded in restructuring the company under the leadership of Carlos Ghosn, formerly of France's Renault S.A. Nissan has recovered its position up to 8th place with 2.97 million vehicles produced.
   Now that companies in the Japanese electronics industry - such as the Sony Corporation, Matsushita Electric Industrial Co., Ltd., and Hitachi, Ltd. - which once led the world, have fallen behind companies like America's Intel Corporation and Korea's Samsung Electronics, automotives has become one of Japan's few globally leading industries.

Comeback Achieved through Globalization and Restructuring

   After exploring capital alliances with Daimler-Benz AG and Renault, Nissan chose to tie a global alliance, including capital participation, with Renault. Operating deficits, caused by recall problems and an uphill battle in U.S. sales, surfaced at Mitsubishi Motors Corporation.

Headquarter of Nissan Motor, Ginza, Tokyo
Headquarter of Nissan Motor, Ginza, Tokyo

The company, which had become independent of American automaker Chrysler at one point, decided in 2000 to conclude a capital alliance with DaimlerChrysler. Furthermore, as a result of the conclusion of capital alliances with GM by Suzuki Motor Corporation and Fuji Heavy Industries Ltd., what was once an industry consisting of 11 auto manufacturers became one of two major groups: companies without foreign capital affiliations (the Toyota Group, consisting of TMC, Hino and Daihatsu; and Honda) and foreign affiliated companies (Nissan, affiliated with Renault; Mazda Motor Corporation, affiliated with Ford of the U.S.; Mitsubishi Motors, affiliated with DaimlerChrysler; and Isuzu Motors Limited, Suzuki and Fuji Heavy Industries, affiliated with GM).

The reason why Japanese automakers, which were behind, were able to catch up under such circumstances was through their promotion of globalization and restructuring.

Carlos Ghosn, President & CEO of Nissan Motor
Carlos Ghosn, President & CEO of Nissan Motor

    TMC further reinforced its local manufacturing in the United States while also embarking on local production in France and Asia. At the same time, TMC has been aggressively launching its hitherto scarce SUVs on the U.S. market. Honda has also reinforced local production in North America, and the company is also enhancing its SUV model lineup, including the Odyssey. Meanwhile, Nissan, which came under Renault's umbrella, advanced the restructuring of the company by reorganizing its domestic production framework (closure of the Murayama Plant, etc.), implementing significant downsizing, reconsidering its parts manufacturing affiliations, and so on. At the same time, Nissan is actively constructing new plants in the U.S. and launching pickup trucks.
   TMC has posted profits of more than 1 trillion yen in its consolidated net profit for FY2003, and with the exception of Mitsubishi Motors where problems related to recalls has been uncovered, business performance is turning up for Japanese automakers. Japan's automobile manufacturers have made a comeback.


Tenfold-plus Growth Achieved in 10 Years through the Family Car Boom

Kiichiro Toyota(right) , the founder of Toyota Motor and Sakichi Toyota(left), the inventor of an automatic loom and his father
Kiichiro Toyota(right) , the founder of Toyota Motor and Sakichi Toyota(left), the inventor of an automatic loom and his father

   In only 30 years after the end of World War II, Japan's automotive industry achieved what can be said to be miraculously high growth. In 1983, Japan surpassed the United States to become the biggest automotive powerhouse of the world. The engine for growth was the blossoming of motorization in Japan and the growth of exports.
   Not long after the end of WWII, manufacturing was limited to small-scale production centered on trucks. However, after the "People's Car" plan of 1955 and the 1961 enactment of the Installment Sales Law, motorization blossomed in Japan during the high-growth era of the 1960s. Domestic sales of automobiles, which were only 400 thousand vehicles in 1960, hit the 1 million vehicles mark in 1963, and expanded to 2 million vehicles in 1966.

   When motorization first began, the market primarily consisted of corporate demand for vehicles such as trucks. Passenger cars, too, were often utilized as hired limousines, taxis, etc. However, after the launch of the Nissan Sunny and Toyota Corolla, an all-out family car boom erupted in Japan from the latter part of the 1960s. In 1968, domestic sales of passenger and commercial cars combined exceeded 4 million vehicles. And in 1969, the number of passenger cars sold surpassed, for the first time, the sales volume of commercial vehicles. With the expansion of domestic demand, the number of automobiles manufactured in Japan, which was only 480 thousand in 1960, exceeded 5 million in 1970. Tenfold-plus high growth was achieved in only 10 years.

Domestic Manufacturing Hits 10 Million Vehicles through Increased Exports

   Exports grew at a rapid pace from the latter part of the 1960s through the 1970s and became a driving force for the expansion of domestic production. Especially large expansion was seen in the export of passenger cars such as the Corolla and Sunny. In 1965, the Japanese export of automobiles came to a halt at 190 thousand vehicles. However, once core automotive exports switched to passenger cars, it expanded at a rapid pace, hitting 1 million vehicles in 1970 and the 2 million in 1973. The momentum of exports showed no sign of slowing down, and exports were close to 3.71 million vehicles in 1976, and 6 million in 1980.

Toyopet CROWN RS ,the first full-scale mass-production passenger car in Toyota, announced in January of 1955
Toyopet CROWN RS ,the first full-scale mass-production passenger car in Toyota, announced in January of 1955

   With such expansion of exports in the background, domestic production expanded from 5.28 million vehicles in 1970 to 11.04 million in 1980. Japan became an automotive producer second only to the United States. The status of automobiles manufactured in Japan also rose as domestic production expanded.
   In the beginning, Japanese cars gained shares of the U.S. market by leveraging its lower cost as compared with American automobiles. However, the appreciation of the value of the yen advanced after the transition to a floating exchange rate system triggered by U.S. President Richard Nixon's 1971 declaration. Furthermore, the first oil crisis erupted in 1973, and costs rose in Japan, which was an importer of raw materials. Despite such circumstances, the Japanese automotive industry was able to greatly enhance the international competitiveness of Japanese cars.

This was a result of active measures such as dealing with high-mix low volume production through the introduction of numerical control machine tools, industrial robots, etc.; responding to energy-saving needs through cost reduction and quality improvement brought about by in-house suggestions systems, improving engines and fuel consumption as well as rational design of the car body; and dealing with auto emission regulations.

The Escalation of Trade Friction Leads to the Age of Local Production

  The 1980s was the golden age of the Japanese automotive industry. The global share of Japanese automobiles expanded, and Japanese manufacturing systems, as represented by the Toyota Production Method attracted American and European attention.

Nissan Motor Zama commemoration garage that accommodates many historic or racing cars
Nissan Motor Zama commemoration garage that accommodates many historic or racing cars

   Trade friction became an issue from the latter part of the 1970s when Japanese automakers greatly increased their share of the U.S. market. Trade friction escalated further in 1980, when the Big Three (GM, Ford and Chrysler) posted massive deficits. Voluntary export restrictions (VER) were brought about in May 1981. As a ceiling was placed on the U.S. export of Japanese automobiles through the VER, Japanese manufacturers maintained their profit margins, on the one hand, by switching from popularly-priced automobiles to mid- to high-end cars, while also successively launching local production in the U.S.

 This began in 1982 when Honda started manufacturing its Accord model in Ohio. This was followed in 1983 by Nissan's opening of a plant in Smyrna, Tennessee. In 1984, TMC began local production in California through a joint venture with GM. In the latter part of the 1980s, Mazda launched local production in Michigan, Mitsubishi Motors advanced to Illinois through an alliance with Chrysler, and Fuji Heavy Industries and Isuzu began jointly managed local production in Indiana. Meanwhile, although there had been concern that the domestic market was heading towards maturation, it showed growth through the spread of multiple car ownership.

In the bubble economy of the latter part of the 1980s, sales of even more luxurious cars expanded rapidly. It included the record luxury-class car sales marked by the Nissan Cima, released in January 1988. With the progress of the appreciation of the yen triggered by the Plaza Accord, exports peaked at 7.63 million vehicles in 1985, and fell greatly thereafter. Domestic sales, however, grew from 5.02 million vehicles in 1980 to 7.78 million in 1990. Domestic production also expanded, with a record 13.49 million vehicles produced in 1990.

Supply Glut after the Collapse of the Bubble Economy

   While the automotive industry had been a symbol of "Japan as No.1," the 10 years following the collapse of the bubble economy became a challenging time for the industry, and a period in which it bided its time toward the coming 21st century. Domestic production, which had hit 7.78 million vehicles in 1990, fell to 6.47 million by 1993. Meanwhile, American automakers had implemented, from the latter part of the 1980s, thorough restructuring, shortening of the development period through the adoption of Japanese systems from the development stage, and revitalization of car designs. Cars emphasizing quality, such as the GM Saturn and Ford Taurus, were launched on the market. In 1993, Chrysler began sales of the Neon, a car that was priced less expensively than Japanese cars, and the company caught up in the American market. In 1994, Japan's export fell below the 5-million-vehicle mark. Domestic production declined heavily due to a slump in domestic demand and exports, and production fell from 13.49 million vehicles in 1990 to 10.55 million in 1994, a drop of more nearly 3 million vehicles.
   Mazda's expansion of its Hofu Plant, Nissan's new Kyushu Plant and TMC's new Kyushu Plant - which had been planned during the bubble era - were operating by this time, and added to the surfacing of a supply glut. In 1995, Nissan was forced to close its Zama Plant.

Global Reorganization Advances; The 11-company Framework in Japan Collapses

   Although Nissan's business performance picked up temporarily, poor sales in the United States became evident in the latter part of the 1990s. As seismic events, such as the financial system unrest of 1997 and the 1998 merger of Germany's Daimler-Benz and America's Chrysler, took place in Japan and abroad, Nissan announced its capital alliance with France's Renault in 1999.

Used cars for sale
Used cars for sale

   Mitsubishi Motors, which had closed in on Nissan at one point through the popularity of its SUV, experienced a slump in U.S. sales, while domestic sales stagnated due to recall issues. As a result, business performance rapidly deteriorated, and Mitsubishi Motors made a decision to come under the umbrella of DaimlerChrysler in 2000. Furthermore, GM lowered its investment ratio in Isuzu and Suzuki, and a capital alliance was formed between GM and Fuji Heavy Industries. As a result of a spate of reorganizations, the map of the industry was transformed.

   Since Nissan merged Prince Motors, Ltd. in 1966, the automotive industry in Japan had been a framework led by two major companies. However, the 11-company framework that had continued since then - TMC, Hino, and Daihatsu (the Toyota Group); Nissan, Nissan Diesel Motor Co., Ltd., and Fuji Heavy Industries (the Nissan Group); independents: Honda, Mitsubishi Motors, and Suzuki; and foreign affiliates: Mazda (Ford) and Isuzu (GM) - collapsed. (Note: Mazda came under Ford's umbrella in 1979, and Mitsubishi Motors became independent of Chrysler in 1993)

Metamorphosis into a Global Company through the Expansion and Reinforcement of Local Production

  As the value of the yen appreciated to a level below 90 yen to the dollar at one point, the Japan-U.S. auto talks broke down in 1995, and Japanese automakers were driven into a situation wherein the U.S. announced a list of sanctions on Japan (i.e. imposition of a tariff duty of 100 percent on 13 Japanese luxury-car models). The sanctions on Japan were circumvented by the Global Plan, which were voluntary business plans established by TMC, Nissan, Honda, Mazda and Mitsubishi.

  In the beginning, it was thought that the enhancement of production capacities in North America and the expansion of the sourcing of foreign-made parts that were contained in the voluntary plan would place a burden on Japanese manufacturers. But, in reality, it provided a favorable opportunity for Japanese automakers to metamorphose into global companies. In addition to enhancing the production capacities of existing plants, TMC and other Japanese manufacturers not only reinforced local production but also began strengthening local production of important parts such as engines. TMC's advance to Indiana and Honda's advance to Alabama are two examples.
   What should be noted here is that the car models that Japanese automakers decided to manufacture in new plants or expanded production lines were luxury cars - which had been the realm of expertise of the Big Three U.S. auto manufacturers - as well as SUVs, including pickup trucks. This enabled Japanese automakers to lay out a way to counter the pursuit by American manufacturers, whose mainstream products were SUVs. Furthermore, the Global Plan allowed Japanese automakers to strengthen their management base by commencing local production of important parts.

Three Key Points towards the Future

Point 1
Can Japanese Automakers Continue to Manufacture Sellers?

  Although U.S. automakers rapidly caught up to Japanese automobile manufacturers by the late 1990s, the biggest reason why they are once again behind is that they neglected to manufacture cars that sell. In the 1990s, SUVs, including pickup trucks, replaced conventional passenger vehicles as hot sellers in America.
   Under such circumstances, TMC launched a series of large SUVs to compete against the SUVs of automakers such as GM and Ford. enhanced its SUV lineup, an area that had not been exploited by Japanese manufacturers up to then, as it made an effort to gain a share of the U.S. market. Meanwhile, the Big Three were content with their existing SUVs, and it cannot be denied that they neglected to develop new SUV models.

The plant of Toyota Motor at Valenciennes in France
The plant of Toyota Motor at Valenciennes in France

  Furthermore, even though SUVs became the mainstream, sedans remain to comprise a large market. Here again, the Big Three were unable to promote the development of new model cars. In the case of the Ford Taurus, which unseated the Toyota Camry and Honda Accord to become the American bestselling car in the mid-1990s, the expansion of sales to the rental car market resulted in the fall of used Taurus prices. Coupled with negligence in the development of new car models, sales fell at a rapid pace in the 2000s, and this became one of the factors for the decline in Ford's market share. On the other hand, TMC and Honda implemented full model changes of the Camry and Accord, respectively, and maintained their sales volume. For this reason, the success of the SUVs led to an increase in market shares.

Because GM, Ford and others who were forced behind will undoubtedly take measures to catch up, the key point that will determine whether Japanese automakers will be able to continue their good performance is whether they can continue to develop new car models without becoming complacent with their hit models.

Point 2
Development Race for the Next Generation Engine

F1 in 2004 Monaco Grand Prix
F1 in 2004 Monaco Grand Prix

   While gasoline engines were the predominant automobile engines of the past, energy-efficient cars came to be sought due to tighter environmental standards, such as auto emission countermeasures, and issues related to global warming. In 1997, TMC launched the Toyota Prius, a hybrid car. This resulted in a conversion of the automobile engine paradigm. The Prius, a car that alternates between a gasoline engine and an electric motor for its power, became a hit shortly after its launch. 160 thousand were manufactured by 2003. TMC implemented not only a full model change of the Prius in the autumn of 2003 but also introduced hybrid engines to some of its other models, such as in the Estima Hybrid and the Crown Sedan Mild Hybrid.
   The automaker is advancing the strengthening of its hybrid car lineup. Furthermore, Honda has already released its hybrid car, the Insight. The company has also introduced hybrid engines to the Civic, one of its leading models.
   Making things difficult here is the fact that it is still unknown what type of engine will become the mainstream engine replacing gasoline engines.

The greatest focus is placed on fuel cell vehicles since it is fueled by hydrogen and is low in the emission of carbon dioxide, high in heat efficiency, and produces little noise and vibration. However, it will not only take some time before they become commercially viable but will also necessitate the setting up of an infrastructure, such as a "hydrogen stations," in order for them to spread. Furthermore, even if fuel cell cars should be popularized in developed countries, a prerequisite for such cars to sell in developing countries like China and India is that the income level rises to become one on par with developed countries.
   Although TMC and other Japanese automakers are ahead of others in terms of hybrid cars, it is unknown whether Japan will be able to maintain its edge through other types of next-generation engine vehicles such as in fuel cell cars. This is one of the points that an eye should be kept on from now on.

Point 3
Can Japanese Automakers Develop Emerging Markets such as China?

  Now that the automotive markets in developed countries and regions such as the U.S., Europe and Japan have entered a state of maturity, the new battleground for automakers around the world will be emerging markets such as BRICs (Brazil, Russia, India and China) and Eastern Europe. Among them, the most important market will be China.
   At 4.50 million vehicles n 2003, the production of automobiles in China surpassed that of France. This placed China in the number 4 position following the United States, Japan and Germany.

Showroom of Nissan Motor Co., Ltd. at Ginza 4-chome, Tokyo
Showroom of Nissan Motor Co., Ltd. at Ginza 4-chome, Tokyo

It is thought that high growth will continue yearly with automobile production reaching 10 million, a level similar to that of Japan, by 2010. Partly because Japanese automakers had no choice but to prioritize local production in major export markets such as the U.S. and Europe, European and American manufactures have taken a lead over Japan in China. Germany's Volkswagen manufactures the Passat, Jetta, etc. in China through a joint venture with the Shanghai Automotive Industry Corporation and First Automobile Works, and it has a high share of the Chinese market.

Meanwhile, Japanese automakers, which got a late start, launched their strategies for China from the late 1990s. Honda manufactures the Accord and Odyssey in China through a joint venture with Guangzhou Automobile Group Co., Ltd., and Nissan is producing the Sunny in Guangzhou City and Szechuan Province through a joint venture with DongFeng Motor Corporation. TMC, which began joint-venture production of the Vios with Tianjin Automotive Xiali Co., Ltd., an affiliate of First Automobile Works, also established a joint venture with Guangzhou Automobile Group Co., Ltd. TMC is now preparing for the local production of the Camry in China.
   The success or failure of a strategy for China, which has the potential of becoming the biggest market in the 21st century, will be a key that will greatly influence the future map of the global automotive industry.

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