Japan carmakers in Europe in high-, low-end squeeze

by William Hollingworth

LONDON (Kyodo) Battered by the global economic downturn, Japan’s automakers are finding life difficult in the European market as competitors old and new pile on the pressure, according to industry analysts.

While at the lower end of the market, they are being undercut by the likes of the South Korean maker Kia, the manufacturers are facing formidable marques such as Ford and Volkswagen, which are working hard to woo European consumers with good design and technology, the experts said.

They noted that many of the Japanese manufacturers have also failed to fully take advantage of the various car-scrapping programs that have been introduced by European governments to stimulate demand.

Japan’s share of the auto market in Western Europe has stayed relatively stable at around 13 percent to 14 percent over the last few years. However, it has dipped to 12 percent for the last two months, according to figures from business information group IHS Global Insight.

Indeed, since 2000 up until the recession, only Toyota Motor Corp. has seen its market share go up in Western Europe, by about 7 percent.

Now, however, carmakers are facing declining markets worldwide and Japanese manufacturers in Europe have cut jobs and slowed production to match demand.

But while they struggle with the global downturn, analysts believe some of the problems Japanese manufacturers face are more fundamental in Western Europe.

“The Japanese are caught between a rock and a hard place. The (South) Koreans are out for a kill, trying to take the low-price position in the market, while the Europeans have strengthened their design and technical capabilities, thereby squeezing the Japanese,” said Christoph Stuermer, automotive analyst at IHS Global Insight in Frankfurt. “This has particularly affected Toyota, which has been extremely conservative with its technology, except for the Prius.”

Particularly in Germany, the midprice market is also moving away from the Japanese, who have tended to produce boring, yet reliable, cars, Stuermer said. “You now have the VW Polo and Ford Fiesta (both small cars) that are full of technology, space and style and hard for the Japanese to compete with,” he said.

Garel Rhys, a Cardiff University professor, said the Japanese automakers have “gone off the boil” in Europe since around 2000, when rivals started to catch up with them.

“Until the end of the 1990s, the Japanese selling point was reliability, but the rest of the world caught up. Customers then look at things like performance and design and, in this respect, many European manufacturers have fought back,” said the car industry expert. “I think the Japanese have been held back by the sheer amount of competition.”

But David Bailey, professor at Coventry University Business School, is more upbeat about the Japanese. “Perhaps they have not innovated recently as much as their European counterparts, but the Honda Civic and the Nissan Qashqai (sport utility vehicle), for example, are modern designs. However, they certainly don’t have a car at the moment selling in the same volumes as the Ford Fiesta, and have no model in the U.K.’s top 10 best-sellers list,” he said.

But because consumers in general are downsizing, small cars are the way forward, Bailey said, adding that the Japanese automakers are already competing in that market with cars such as Nissan Motor Co.’s Micra and Toyota’s iQ.

One way in which European governments have tried to stimulate demand is to introduce plans whereby the owners of old vehicles can scrap them, in return for a discount on the purchase of a new car.

This has been successful in many countries, but analysts agree that many of the Japanese firms — with the possible exception of Nissan — have failed to fully exploit its potential.

Bailey said the Japanese makers were slow off the mark in responding to the scrapping program. “Some companies, like Peugeot, have been very aggressive and really cut profit margins. But the Japanese have not gone as far and are not going for maximum market share. Instead, they are looking to recover costs, which they have already tried to reduce, and make a return,” he said.

But analysts admitted that many of the Japanese models were never very likely to be bought under the scrapping program anyway, as the new buyers are tending to go for small models, where companies like Fiat prevail. Nissan is quite strong in this market as well.

According to Rhys, Toyota has fared worst in Europe during the downturn, losing 100,000 sales in 2008 compared with 2007. Nissan, Honda Motor Co. and Mazda Motor Corp. sales in Europe have fared better during this difficult period.

Honda’s midsize Civic and Jazz, and Mazda’s small car named 2, have been particularly profitable models, experts say, with Toyota’s Auris — a rival to VW’s popular Golf — one of the least successful.

As to the future, Bailey believes Toyota has overexpanded the most and will need to look at slowing production and reducing costs further.

He said Honda is in better shape because it has a “more interesting product range” and has a keen hold on production costs.

“All the Japanese manufacturers are going to face the challenge from the (South) Koreans coming from the bottom of the market and doing what Japan did 30 years ago, and then there will be pressure for them to focus more on the mid- to higher end of the market, as well as investing in new technologies for fuel-efficient cars,” Bailey said.

Japan has been leading the way in terms of the gasoline-battery hybrid cars, most notably with the Toyota Prius, analysts agree, but they point out that sales are now falling for that vehicle as many would-be consumers feel it is too expensive and European-based carmakers are developing vehicles that emit ever-lower levels of carbon dioxide.

Despite the recent falls in demand, experts believe it is unlikely any of the Japanese firms that make cars in Europe will close plants.

“When a manufacturer leaves a country, there is normally a tendency for it to lose market share there — look at Ford when they moved out of the U.K. I think they will try and hang on to the factories they have got there. They may reduce capacity, but everyone is also getting ready for the rebound,” Stuermer said.

The carmakers may well have to wait some time for the upturn. A recent report stated the European car industry will have to wait at least five years before sales return to prerecession levels and faces recording heavy losses during that period.