Japan's auto success fuels US trade alarmTOKYO - The global automotive industry is on the verge of a historic transition, as Japanese auto giant Toyota, now reaping a massive payoff from its prescient mid-1990s bet on hybrid technology, is set to become the world's No 1 auto maker in terms of vehicles produced, probably by the end of the year.
For the US auto industry, Toyota's move into the pole position is particularly painful, coming at a time when General Motors and Ford, the last remaining solely US-owned auto manufacturers, are both in desperate financial trouble.
The contrasting prospects of GM and Toyota are ironic in view of previous cooperative ventures between the two, such as the joint-venture New United Motor Manufacturing Inc (NUMMI), based in Fremont, California, which produced various Toyota-designed models that were then sold under GM nameplates. In addition, GM's woes have ignited a new round of realignments in the Japanese auto industry, while simultaneously fueling concerns among Japanese policymakers and auto executives about possible renewal of trade friction between the world's two largest economies.
The rising sun
In the latest monthly data, US auto sales edged up by about 1.2% in February from a year earlier as Asian and European auto makers' gains offset declines at GM and Ford. The United States' No 1 and No 2 auto makers lost market share, to 23.6% from 24.4% a year earlier for GM, and to 19.2% from 20.2% for Ford, although DaimlerChrysler AG's Chrysler Group saw its sales rise modestly and market share move up to 16.5% from 15.9% a year earlier.
Meanwhile, Toyota, Honda Motor Co and Nissan Motor Corp all enjoyed continued sales growth in the US, and their market share rose, to 13.2% for Toyota, 8.5% for Honda and 6.7% for Nissan.
The February figures show that the trend last year of Japanese auto makers faring well in the world's single largest auto market at the expense of their US rivals remains unchanged. Increased fuel-efficiency awareness among American motorists amid stubbornly high oil prices has boosted sales of gasoline-thrifty Japanese cars in the US.
In 2005, the combined US market share for GM, Ford and the Chrysler Group fell to an unprecedented low of 56.9%, down from 61.7% three years earlier. At the same time, Toyota, Honda, Nissan and other Asian brands saw their US market share climb to 36.5%. Japanese auto makers alone grabbed a record-high market share of 32.2% in the US.
Toyota's sales were up 10% last year over 2004, with the company's popular gasoline/electric hybrid cars lifting its sales. US drivers' interest in hybrid cars has been stimulated by heightened interest in fuel costs as well as environmental concerns.
Of the approximately 5.47 million autos Japanese makers sold in the US in 2005, roughly a third were shipped from Japan. Led by resurgent exports to North America, Japan's auto exports also rose for the fourth consecutive year. Japan exported 5.053 million autos last year, up 1.9%, marking the first time in 12 years that it had shipped more than 5 million autos abroad. Exports to North America, where a little more than one-third of Japanese exports are shipped, grew for the first time in three years, totaling 1.854 million units, up 7.4%.
Japanese auto makers still assemble almost all their hybrids at domestic plants. In the North American market, Toyota's hybrid sales soared 170% to 151,000 units in 2005, while Honda's rose 60% to 44,000 units. Toyota's operating profit for the October-December period rose 14% to US$4.05 billion, as continued demand for such cars as the Prius hybrid, coupled with a weaker yen, boosted overseas earnings.
Meanwhile, US auto makers were stalling. GM's sales fell 4% for the year. Ford's sales also dropped 4% in 2005, as consumer demand for trucks and sport-utility vehicles (SUVs) fell in the face of high gasoline prices. Higher material and labor costs, as well as a loss of market share to Japanese rivals and a drop-off in demand for SUVs, all contributed to the malaise.
GM posted a jaw-dropping net loss of $4.8 billion for the October-December quarter, a severe deterioration from its loss of $99 million a year earlier. In November, GM launched a restructuring plan involving 30,000 job cuts and nine plant closures in North America.
Following in GM's footsteps, Ford also announced in January that it would close 14 plants in North America, resulting in the loss of up to 30,000 jobs, nearly a quarter of its North American workforce. Ford's share of the US auto market slumped to its lowest level since the late 1920s, to 17.4%.
Credit ratings of GM and Ford have been downgraded to junk status. GM and Ford plan to cut back on vehicle production for the April-June quarter, with GM churning out 3.7% fewer vehicles and Ford rolling out 2% fewer, compared with the same period last year.
The contrast with Toyota could not be more telling. Toyota is poised to step on its accelerator further in the US and elsewhere, planning to boost its global production to a record high of 9.06 million vehicles this year, putting it on a solid course to overtake GM as the world's largest auto maker in terms of production volume some time this year. Taking subsidiary brands into account, Toyota overtook Ford to become the second-biggest car maker in 2003, and is now zeroing in on GM.
Some Japanese industry officials say that US auto makers have only themselves to blame for the current situation, citing Detroit's failure to develop attractive vehicles as well as the heavy burden of employee health-care costs. In fact, for many years, US motorists have had a well-known penchant for Japanese autos. Japanese models dominated the list of best cars in Consumer Reports magazine's annual vehicle guide, released recently. For the first time, all the magazine's top picks were made by Japanese auto makers.
Meanwhile, in Toyota City ...
Nagoya, the capital of Aichi prefecture in central Japan, is now the most economically vibrant region in Japan. It is also close to Toyota City, home to Toyota headquarters.
Nagoya's ascendancy was shown off by the Aichi Expo held last year; the fair followed the opening of Central Japan International Airport (Centrair) in the prefecture, situated halfway between Tokyo and Osaka, as Japan's third major international airport. Toyota's stellar performance has fueled local economic growth, and the ratio of job offers to job seekers in Aichi is even higher than in Tokyo.
The area in front of the JR Nagoya Station is turning into what has been dubbed the "Nagoya Manhattan", with skyscrapers standing together in large numbers. Among these highrise buildings is the new 247-meter-high, 47-story Midland Square, which is scheduled to open in October and will house the sales headquarters of Toyota. Some 3,000 Toyota staff, including 200-300 foreign-sales staff now based in Tokyo, will move to Midland Square. Analysts say the tower will be seen by foreign visitors as well as locals as the symbol of Toyota's success - and its expected status as the world's top auto maker.
Locating Toyota's international sales division in Nagoya will greatly change the itinerary of visitors to the company: where previously they had flown into Tokyo, then were taken on the bullet train to Nagoya on the way to Toyota City, from October, they will generally fly into Centrair and conduct their business at the company's new offices in Nagoya.
In the driver's seat
A variety of moves have paved Toyota's way to the top spot.
The company has been heavily investing in plants in the United States, and it began production of the Prius hybrids in China in December - marking the first time that Toyota had produced hybrids abroad. Toyota's surging US sales have stretched its US capacity to the limit, leading to new US investments for the firm; Toyota said recently that it will assemble its best-selling Camry sedans at an existing factory of its compatriot partner Fuji Heavy Industries Ltd, the maker of Subaru-brand cars, in Lafayette, Indiana. The Camry has so far been produced in the US at Toyota's plant in Georgetown, Kentucky. Camry production in Indiana is to begin in the spring of 2007.
Toyota plans to invest $230 million to install Camry production processes at Fuji's Indiana plant and hire an additional 1,000 workers to increase Camry production by 100,000 units a year. The move will enable Toyota to use freed-up capacity in Japan to assemble more Prius hybrids. Toyota is also looking for a site in the US to produce four-cylinder engines; a final decision is expected within the next several months.
Early this month, Toyota rolled out a hybrid version of the Lexus GS luxury sedan. This followed the introduction of the hybrid Lexus RX SUV, which hit the US and European markets last spring. Toyota also plans to add a hybrid version to the Lexus LS by the spring of 2007 after the luxury brand's flagship sedan is fully redesigned this autumn. The Lexus GS450h will go on sale in North America as well as in Japan next month, and in Europe in May. The 3.5-liter GS450h has a fuel economy of 7 liters per 100 kilometers, which is equivalent to that of a 2-liter vehicle, according to Toyota. The global sales target through December is 5,700 units.
In Japan, Toyota has spent about 30 billion yen ($254.6 million) to build a new plant on the southernmost major Japanese island of Kyushu to produce engines for Lexus luxury cars and parts for hybrid engines. The new plant went on stream in December.
Hybrids lead the way
Toyota and its domestic rival Honda have both had a head start over their foreign rivals in developing and launching hybrid vehicles, an advantage that has become a key to present success. Toyota led the way with the launch of the Prius in 1997, and now offers five hybrid models, excluding the Lexus GS450h model to be launched next month.
For Honda's part, it launched the Insight two-seater hybrid in 1999, and now sells the Insight and hybrid versions of the Civic and Accord. Toyota sold 235,000 hybrid cars in 2005 globally, while Honda sold 48,000 such cars.
Demand for hybrids, driven by high gasoline prices, is expected to continue growing sharply in the coming years, with one estimate putting the global market for such cars at about 1.5 million units in 2010, nearly ninefold from about 168,000 units in 2004. The US has been, and is expected to remain, the biggest market for hybrid cars. Toyota hopes to see worldwide Prius sales of 1 million units a year by 2010.
US and European auto makers have been belatedly jumping on the hybrid bandwagon. Ford, for example, launched the Escape Hybrid SUV at the end of 2004, beating GM and Chrysler to the hybrid market. However, Ford sells only a fraction of the hybrids in the US, with Toyota and Honda still accounting for about 90% of such cars. Ford built 19,000 hybrids for the North American market last year and sold 17,000. Ford aims to roll out at least seven more hybrid models and to have an annual capacity to build 250,000 such cars by 2010.
This month Ford has launched a three-week 0% financing program on its Escape Hybrid SUVs in California and the District of Columbia, where people traditionally embrace hybrid cars, to spur sales there. Ford is offering as much as $1,000 in rebates and discounts in the rest of the country.
A new era of consolidation
In the last round of consolidation in the Japanese auto industry, seen from the late 1990s to the early 2000s, major domestic and foreign auto makers placed one weak Japanese maker after another under their umbrellas.
In 1999, Renault purchased 36.8% of the then-struggling Nissan for 643 billion yen to become the latter's biggest shareholder. Renault's stake in Nissan has since been raised to 44%. Ford has been the biggest shareholder in Mazda Motor Corp, owning 33.4% since 1996.
In 2001, Toyota made Hino Motors a subsidiary by increasing its stake in the truck maker to a little over 50%. In 2003, Mitsubishi Fuso Truck & Bus Corp was spun off from Mitsubishi Motors Corp and then placed under the wing of DaimlerChrysler. DaimlerChrysler now owns 85% of Mitsubishi Fuso.
GM's current crisis has had the spill-over effect of ushering in a new era of consolidation in the Japanese auto sector, as the company ended or reduced to a negligible level its equity relationship with two Japanese auto makers - Fuji Heavy and Suzuki Motor Corp - since last autumn. In a deal symbolizing the contrasting fates of the biggest US and Japanese auto makers, Toyota acquired an 8.7% stake in Fuji Heavy for $315 million and became Fuji Heavy's top shareholder last October, when GM announced it was ending its alliance with Fuji Heavy and selling its entire 20% stake in the company.
Early this month, cash-strapped GM also sold 85% of the 20% stake it had in Suzuki, mostly to Suzuki itself, for about $2 billion, although both firms said at the time that their partnership would continue, such as their joint-venture production plant in Canada, Suzuki's 11% stake in GM's South Korean subsidiary, GM Daewoo Auto & Technology Co, and cooperation in fuel-cell technology. Thus GM has kept a minuscule 3% stake in the Japanese maker of small cars. Suzuki, which has fared far better than GM lately, expects a 61 billion yen profit for the fiscal year ending March 31.
In a press conference announcing its buyback of the 17% stake GM had held, Suzuki chief executive Osamu Suzuki said he wanted to lend a helping hand to the longtime partner.
"We have been under [the] support of GM for a long time, and this time it's our turn to help GM," Suzuki said, adding: "I don't think the partnership is in deep trouble. It's just that GM needs help."
Now that GM has sold all or most of its shares in Fuji Heavy and Suzuki, speculation is rife in the industry that the US auto maker might sell its 8% stake in Japanese truck maker Isuzu Motors Ltd. Isuzu is jointly producing buses with Hino, in which Toyota has a majority stake. Toyota also owns a majority of Daihatsu Motor Co, a maker of primarily small cars.
Most recently, Swedish auto maker Volvo agreed on March 21 to buy 13% of Japanese truck maker Nissan Diesel from Nissan for $196 million. The deal will make Volvo the biggest shareholder in Nissan Diesel. The firms already have close ties as both are affiliated to French auto maker Renault, which owns 44% of Nissan and about 20% of Volvo.
Growing fears of friction
To be sure, Japan's trade surplus with the United States has been eclipsed lately by China's much larger surplus - China replaced Japan in 2000 as the single country with which the US has the biggest trade deficit.
In 2005, the overall US trade deficit topped $700 billion for the first time, totaling $725.8 billion, of which a quarter, or $201.6 billion, came from trade with China. The focus of US criticism has been on China's alleged unfairly undervalued currency, insufficient protection of intellectual property rights and failure to comply with market-opening obligations as a member of the World Trade Organization. China was admitted to the WTO at the end of 2001.
But Japan's trade surplus with the US is still so huge - at $82.6 billion in 2005, of which about 60%, or $50.6 billion, came in the autos and auto-parts trade - that it could turn into a politically charged issue at any time, as even the specter of GM or Ford going belly-up has loomed over the horizon. This is a particularly worrisome year for Japanese government officials in charge of US policy as well as Japanese auto executives. Auto trade could spark political tensions in the run-up to mid-term US congressional elections this autumn. The auto industry is symbolic of the United States and different from other industries, many analysts agree.
The tenacious US demand - and Japan's rejection - for Tokyo to set numerical targets for imports of US auto parts brought the two countries to the brink of an unprecedented tit-for-tat trade war in 1995. The US decided to slap a prohibitively high tariff of 100% on imported Japanese luxury vehicles under Section 301 of the Trade Act of 1974, and Japan filed a complaint with the WTO against the US measure. Japan and the US saw tensions in bilateral trade relations rise to their highest point between the 1980s and the mid-1990s.
Bowing to US pressure, Japan imposed voluntary export restraints on US-bound autos from 1981 to 1994. But now fierce Japan-US trade friction is a thing of the past, although some more minor problems pop up occasionally.
Amid the protracted beef dispute, however, the US Congress has begun to take a harder look at Japan over trade. In a meeting with Japanese Foreign Minister Taro Aso in Sydney, US Secretary of State Condoleezza Rice accused Japan of reacting to the issue of US beef imports in an excessive manner.
US Ambassador to Japan Thomas Schieffer also warned Japan soon afterward that if the two countries cannot settle their row over Japan's new ban on imports of US beef, the situation could grow into a trade war. "If we are not able to resolve this issue very soon, I'm very concerned that the United States Congress will lose its patience and we could set off a trade war as a result of this issue," Schieffer said.
As a consequence of such statements, there is growing alarm among Japanese policymakers and auto executives that protectionist pressure could mount over US trade with both China and Japan, which together account for nearly 40% of the overall US trade deficit. This alarm has been fueled by a continued sharp rise in Japanese auto exports to the US so far this year.
However, after assiduously moving production facilities to the United States to cope with the stronger yen and trade friction since the 1980s, Japanese manufacturers now employ many people locally. Toyota, for example, boasts more than 200,000 people on its payrolls in the US, including workers employed by parts suppliers. The increased number of workers hired locally by Japanese companies has also contributed to an easing of trade tensions between the two countries. Toyota has accelerated such efforts in an effort to preempt any further rising of trade tensions.
Toyota's decision last year to build its seventh North American plant in Canada was one example. The new plant in Woodstock, Ontario, just 40km from Toyota's existing Canadian assembly plant, will produce 100,000 RAV4s annually beginning in 2008, the firm said at the time.
Toyota has also announced that it will begin to produce hybrid Camry sedans at its plant in Georgetown, Kentucky, this year and that capacity will allow for 48,000 hybrids a year, just a few thousand fewer than total Prius sales in the US last year. As noted above, Toyota is looking for a site in the US to produce four-cylinder engines and transmissions, and Michigan has emerged as a leading candidate to host the plant.
But the potential for friction remains evident. In a move seen by some pundits as aimed at indirectly holding Toyota's aggressive sales offensive in check, the US International Trade Commission (ITC) said last month that it would investigate a complaint filed by Florida-based Solomon Technologies Inc that Toyota's popular Prius and Highlander hybrid models infringed on Solomon's patent related to motor and transmission systems.
Toyota is evidently keen to avoid stoking US resentment amid the deepening woes of GM and Ford.
"We do not want to be focused on whether we are the No 1 seller in the world," Toyota president Katsuaki Watanabe said. "There are still lots of problems we need to fix to do our job."
This month, Toyota chairman Hiroshi Okuda, who concurrently serves as chairman of the Japan Business Federation, the country's biggest business lobby, reiterated a willingness to lend a helping hand to the ailing GM, although he did not elaborate. "We would like to do whatever we can," he said.
Toyota has sought stronger business relations with GM in hopes of averting another auto-trade war. But in a step in the opposite direction, GM announced early this month that it would end its research collaboration with Toyota on hydrogen fuel-cell technology at the end of March, although it will continue to work with the Japanese auto maker on technology related to safety, collision mitigation and traffic congestion.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economics. Masaki's e-mail address is [email protected].