Japan Bloodied But Up Off the Mat

Japan finally is joining other nations in rebounding from the crippling 1997 Asian financial crisis. But it's not an easy process - particularly in the automotive sector.

With the gradual return of consumer confidence, the country's automakers had hopes of regaining lost ground during 2000.

But in a year characterized by equity tie-ups galore, currency problems, several scandals and the recall-du-jour syndrome, engineering a full-fledged turnaround proved to be a swim upstream for many carmakers.

The country's economic situation left several manufacturers ripe for the picking in the ever-consolidating global industry. Renault SA's acquisition of a controlling stake in Nissan Motor Co. Ltd. in early 1999 spurred a flurry of strategic alliances. General Motors Corp. since has grabbed a 20% interest in Subaru-maker Fuji Heavy Industries Ltd. and has increased its share in Suzuki Motor Corp. from 10% to 20%. Most recently, DaimlerChrysler AG reached an agreement to take a 34% equity stake in the ailing Mitsubishi Motors Corp.

Some partnerships, such as GM's, are technology-inspired. In acquiring minority stakes in Japan's niche players, the No.1 automaker hopes to increase its presence in Asia and gain a foothold in the highly nationalistic Japanese market. But it also gets access to Suzuki's mini-vehicle platform engineering expertise and Subaru's 4-wheel-drive technology. Both sides likely will benefit from collaborations on the development and production of expensive and complex new technologies being driven by tougher emissions and safety regulations around the world. For the Japanese makers, the equity relationships are tantamount to security blankets that will afford them protection against increasing global competition without too great a loss in autonomy.

The moves already are transforming the face of Japan's automotive industry. The future will see production of such vehicles as the soon-to-market YGM-1, which will be built at Suzuki's Kosai plant starting in September 2001 but incorporate GM technology and carry a Chevy badge. And it eventually could see more Renault, Ford Motor Co., GM and Daimler-Chrysler vehicles plying Japanese roads.

Some of these new-found relationships were forged out of desperation.

Mitsubishi, weighed down by some $14 billion in debt, has had a particularly rough go. Its ongoing financial struggle and subsequent revelation that it had covered up product defects for the past 30 years has led DaimlerChrysler to knock $200 million off the price it will pay for its 34% stake (now $1.9 billion) and install its own chief operating officer at the Japanese carmaker. The defect cover-ups, which involve some 580,000 vehicles, also prompted a costly recall and the resignation of MMC President Katsuhiko Kawasoe.

The Mitsubishi scandal is just one example of what seems to be a recall epidemic, which not only impacted Japan's automotive industry, but its food and electronics sectors as well. Honda Motor Co. Ltd. and Fuji recently announced product recalls. And Japan's Bridgestone Corp. finds itself behind the eight ball in the Ford Motor Co.-Firestone tire fiasco, which has the potential to change perceptions about Japan's reputation for quality.

Companies such as Toyota Motor Corp. and Honda, which have remained independent and have managed strong sales around the globe, face another barrier to a complete, post-crash rebound: currency volatility. All of Japan's automakers blame the robust yen for less than stellar financial results for the fiscal year ended March 31, 2000. The yen surged over the past fiscal year, climbing some 14% before settling at 107/$1.

Japan's automakers, suffering from a weak domestic market, became more reliant on strong profits from overseas markets - especially the booming North American automotive terrain - to compensate. Though sales were strong, profits fell far below targets.

Despite the roller coaster of activity in Asia's largest auto market, automakers have reason to be encouraged. Sales, slowly but surely, are on the rise, and analysts predict an increase in total sales this year that should continue into 2001. And unlike last year, when 0.66L mini-vehicles provided an economical alternative for Japan's hard-hit consumers, this year's sales growth is fueled by the more profitable B segment cars, such as Toyota's Vitz and Bb. Demand for sport/utility vehicles and multi-purpose vehicles is expected to rise by 32% this year.

Carmakers may discover that the recession - if it didn't kill them - only made them stronger. All automakers have implemented aggressive cost-cutting measures, which has translated into a stronger control over suppliers. Nissan, for example, has dismantled its keiretsu and plans to reduce supplier costs by 20% over the next three years.

The greater grip on efficiency, coupled with a growing importance on strategic tie-ups, may forge an even leaner and meaner Japanese auto industry in the long term - outfitted for battle on the increasingly competitive playing field.