Carmaker quandary: shrink but also grow

Local capacity vs. global glut


Japanese carmakers are facing a dilemma. They have to trim their global output capacity amid a stagnant world economy that has weakened their financial health while trying at the same time to gain stronger footholds in emerging markets, experts say.

Particularly in the fast-growing Chinese auto market, slow-starting Japanese automakers must focus on producing affordable cars without ruining their brand image.

“Japanese makers focused extensively on North America, but because of the Lehman shock, it will take a few years for the market to start recovering,” said Yasushi Terasawa, chief strategist at SC-ABeam Automotive Consulting, noting the importance of the Chinese market.

Growth in China is robust despite the slowdown in many other markets.

In September, vehicle sales there surged 78 percent from a year earlier to 1.33 million units, widening the lead over the U.S. market after topping it for the first time in January, according to the China Association of Automobile Manufacturers.

That growth is attractive to foreign carmakers. The motor show in Shanghai in April drew more than 1,500 domestic and foreign companies, including 77 automakers. In Japan, only 10 automakers are expected to participate in the Tokyo Motor Show, which used to be one of most major international shows along with the one in Detroit.

Japanese makers lag behind the growth in China, experts said.

“Their sales increase has not caught up with the market growth,” said Mamoru Kato, senior analyst at Tokai Tokyo Research Center Co.

Volkswagen AG of Germany and General Motors, at more than 10 percent, are vying in China for the top market. Meanwhile, Toyota Motor Corp., the world’s largest automaker, had a mere 6.4 percent share in 2008. Honda Motor Co. and Nissan Motor Co. were hovering around 5 percent.

One reason for their low share is the Japanese makers’ relatively late entry into China, partly due to their cautious approach to finding partners for joint ventures, experts said.

Honda in 1998 became the first Japanese carmaker to establish a beachhead in China, a market VW had been exploiting since the mid-1980s.

To increase their shares, Japanese makers must continue to improve their brand power, mainly in the compact segment, the experts said.

“What they have to prioritize is quality” and not price competitiveness, Tokai’s Kato said.

“They mainly sold high-quality cars before, but they will have to produce compact, lower-priced cars because that’s where demand will be in the future,” he said.

The Japanese will also have a hard time improving their overall market share at a time when they are being pressed to curb global production capacity by about 20 percent, Kato added.

Toyota indicated it wants to debut affordable cars. President Akio Toyoda said in June he will review his company’s aggressive global expansion and focus more on strategies based on each region.

In his first news briefing after being appointed president, he said emerging markets, including rapidly growing China, will need a new low-priced car that meets regional demand.

One big reason for Japan to target China is the receding market at home.

Japan’s shrinking population means car sales are in a long-term downward trend, said Osamu Kobayashi, an analyst at Standard & Poor’s in Japan.

“The domestic market has that structural problem, and then it suffered from a sharp downturn last year” when the economy was hit by a series of financial failures starting with that of Lehman Brothers Holdings Inc., he said.

“If steps aren’t taken, the market will just keep falling. All they can do is create attractive products in the ‘green car’ and compact segments,” Tokai’s Kato said.

The domestic market has shrunk in the last decade. New car sales in September came to 477,807 units, about half the number in China. Between January and June only 2.19 million units were sold, down by about 30 percent from the same period in 2000.

Domestic sales will likely peak this year and start weakening again as the government’s financial aid for buyers of environmentally friendly cars ends in a few months, Kato said.