1. The Japanese Auto Industry A Window on Japan's Economy Michael Smitka Professor of Economics Washington and Lee Alumni College July 20, 2000

2. Japan's Car Market…?! Enjoy the strong yen!

3. Big Sale Now … !

4. 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!!

5. 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

6. Japanese Auto Firms ToyotaDaihatsu NissanHino HondaNissan Diesel Mitsubishi MotorsSuzuki MazdaIsuzu Fuji Heavy Industries (Subaru) Defunct: Prince.. Ohta.. Kurogane.. Several others

7. The Domestic Industry's Geography

8. FirmAll CarsRegularMinicars Toyota917,120917,120 Daihatsu286,555286,555 Nissan388,548388,548 Honda375,725223,506152,219 Mitsubishi307,949161,815146,134 Mazda165,613142,43623,177 Suzuki324,059324,059 Fuji (Subaru)151,10064,79986,301 Isuzu35,52935,529 Cars3.061mil2.043mil1.018 m Trucks & Buses0.051 mil

9. Import Brands VW33,078 D/C28,248 BMW20,110 GM14,217 Ford13,511 All less than 1% share in a 3 million car market ….

10. Definitions Production inside Japan versus global production –Honda is almost as much American as Japanese! –Toyota is rapidly internationalizing

12. 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

13. 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"

14. Production outside of Japan NAFTA EU

15. Asian expansion

17. "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

18. 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!

19. Peak 13.5 mil Now < 10 mil

20. 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

21. 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!

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

23. 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

24. 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

25. 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??

26. 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

27. 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

28. 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

29. Todays 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??

30. 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

31. 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?

32. 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)

33. GDP growth Mfg growth U

34. Old Vs New: the Old GM Ford Chrysler AMC (imports < 10% of market) VW (Briefly in Pennsylvania) ====== Big 3 (+ 1-2 little firms)

35. Old vs. New: the New NAFTA Producers GMSubaruBMW FordIsuzuVW (Mexico) ToyotaMitsubishiSaturn (GM) HondaMazda (AutoAlliance) (Hyundai*) ChryslerSuzuki (CAMI)(VW - US*) NissanMercedes-Benz (Volvo*) Big 6 plus The Little 9 firms ( plus 13% imports !)

36. Top Suppliers - A Multinational Base (1998 OEM sales; *Subsequent M&A) Delphi$26 bilDana$7 bil Bosch$18 bilAisin Seiki$7 bil Visteon$18 bilValeo$7 bil Denso$12 bilYazaki$6 bil Lear*$9 bilMagna$6 bil JCI$9 bilMannesmann $6 TRW*$7 bilLucasVarity* $5 USGermanJapanese Other

37. 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 http://www.jama.or.jp –Includes auto industry overview.pdf file and current statistics

38. 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/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.