Japanese Automakers Facing New Challenges in Decade Since Earthquake

Second of two parts

Ten years after a massive earthquake struck off the northeastern coast of Japan, triggering a tsunami which brought auto and other manufacturing to a virtual standstill for weeks in some cases, the Japanese auto industry is running like clockwork.

Recent shortages of semiconductors notwithstanding, the industry fixed what could be fixed and decided planning for another once-in-a-century, even a once-in-a-generation event is not a priority.

The biggest lesson learned by OEMs was to get a better handle on their respective supply bases. At the time of the earthquake, for instance, Toyota and Honda did not know the names of many of their Tier 4 and Tier 5 suppliers of chemicals and resins.

The Japan Auto Parts Industries Assn. reported that it took Japanese automakers three months to investigate and begin making adjustments.

Ten years after, Ted Kawashima, director of the association’s U.S. office, says: “They still don’t know 100%, but have nevertheless made dramatic improvements. Making everything more transparent in the supply chain was probably the single most important change that occurred.”

Of other preventive measures considered, Japanese OEMs did not scrap and overhaul just-in-time delivery; they tweaked it. The sense among many in the industry, according to Kawashima, was that if they could get their operations up and running in a relatively short period – in some cases, days – for a once-in-a-century event, the additional costs wouldn’t justify the benefit.

That said, other noteworthy structural changes have taken place.

Japanese automakers currently produce only one out of three vehicles in Japan due to a combination of steadily declining exports and shrinking domestic demand. Exports have fallen to mid-1990s levels, in part because of steady growth in overseas production. Domestic sales have shrunk to the lowest level in more than 40 years, owing to the aging of Japanese society and declining interest in car ownership among younger people.

And with overseas production having grown to nearly 20 million units annually, component manufacturers also have expanded their operations outside Japan. Denso, for instance, now has 80 manufacturing subsidiaries in North America, Europe and Asia. Aisin Group has more than 90 including machining operations, while Bridgestone, Japan’s largest tire supplier, is approaching 60.

The Japan Automobile Manufacturers Assn. reports Japanese auto makers operating in the U.S. purchased nearly $70 billion in parts from U.S.-based suppliers in 2019, a record high. In Europe, the total was estimated at $18 billion.

Meanwhile, only two of Japan’s Big Three automakers, Toyota and Honda, are profitable, although Honda clearly is a distant second to Toyota. Nissan, still reeling from the self-inflicted wound of ousting Carlos Ghosn (pictured below) as CEO and the scandal which followed, is on track to report a $1.8 billion (¥200 billion) operating loss and nearly $5 billion (¥530 billion) net loss when the automaker closes its books at the end of March.

Carlos Ghosn_Nissan 2018 (Getty)

“Nissan is effectively back where it was when Carlos Ghosn arrived in 1999 to restructure and revitalize the organization,” says Koji Endo, veteran auto analyst at SBI Securities. In fiscal 1999, Ghosn’s first year, the automaker reported a net loss of ¥684 billion ($6.3 billion) and was on the verge of bankruptcy.

But even Toyota, although enormously profitable, now trails Tesla in market capitalization. Toyota’s market cap is currently one-fourth of Tesla’s.

And despite Japan still being home for 11 automakers, including truck makers, there are effectively only three automotive groups since Toyota now holds equity in Subaru, Suzuki, Mazda, Daihatsu and Hino as all work jointly in future powertrain and safety technologies while producing cars together where it makes business sense – Toyota with Suzuki in India, Toyota with Mazda in the U.S., and Toyota with Subaru in Japan.

In the components area as well, there has been steady consolidation within supplier groups. As an example, Honda and Hitachi merged parts of their supplier operations in 2019 to jointly develop and manufacture motors for electric cars. Included in the partnership are Hitachi Automotive Systems and Honda suppliers Keihin, Showa and Nissin Kogyo. Other consolidations include Calsonic-Kansei with Magneti Marelli, also in 2019.

Analyst Akihito Fujita of Nomura Research Institute America envisions a further 30% consolidation of suppliers over the next 10 years. Based on previous estimates, today’s total for Tier 1s and Tier 2s could be 900 and 3,500, respectively, down from 1,000 and 4,000 in 2011.

And with the industry’s focus increasingly on BEVs and hybrids along with automated driving and various ride-sharing concepts, there will be more partnerships between Japanese and foreign OEMs and technology companies. Case in point: Honda is working with General Motors on BEVs and fuel cell cars. Toyota is teaming with BMW in Europe on advanced battery technology and with BYD in China on BEVs.

One noteworthy development has been the precipitous decline in the strength of the Japanese battery industry. In 2011, Japan was the global leader on the strength of Nissan’s early lead in BEVs with the Leaf and Toyota’s still-dominant position in hybrids. 

Japan earthquake 10th anniversary (Getty)

That is no longer the case, and by 2030 the Japanese share of the automotive battery market is likely to fall below 10%, some say lower, as Panasonic probably will be the only remaining global supplier.