How High Can the Asians Go?

Something very unusual happened May 2: When auto makers released April U.S. sales results, Toyota Motor Corp. was in the red.

Vehicle sales for the No.1 global auto maker fell 4% behind year-ago on a volume basis.

Fellow Japanese auto makers Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. also saw U.S. deliveries slump.

Toyota blamed a weak month overall, but the blip got tongues wagging.

Was the April drop-off a sign mighty Toyota and its Asian rivals were not infallible after all? Were they finally running out of momentum?

As a group, Asian auto makers, including South Korea based-Hyundai Motor Co. Ltd., Kia Motors Corp. and the smaller Japan-based Mitsubishi Motors Corp., Suzuki Motor Corp. and Mazda Motor Corp., have seen their U.S. market share surge to 42.9% in the year's first half, from 23.7% in 1996.

After gobbling up market share from the Detroit Big Three for the past 10 years and adding capacity in North America at a breakneck pace, could they all finally be running out of steam?

May and June brought a flurry of speculation, when circumstantial evidence began piling up that Asian auto makers finally had peaked in the U.S.

Unfortunately for Detroit's Big Three, as well as industry pundits who were selling the Asians short, the speculation abruptly ended with the release of June sales.

The Asians were back on track, and April's troubles now look like little more than a bump in the road.

While the top four Asian OEMs in the U.S. each are indeed struggling with specific problems, nothing appears to threaten continued market share gains.

And, lumped in with European OEMs, they now are barreling toward an unprecedented 50% share of the market in the U.S.

North American production for Toyota, Honda, Nissan and Hyundai/Kia will continue to rise as well. Together, they will be producing 5,635,994 vehicles in the U.S., Canada and Mexico by 2014, up almost 1.4 million units from 2007, according to Ward's data.

“If someone told us 20 years ago that Toyota would have stronger retail share than anybody but General Motors (Corp.) and was working on its eighth assembly plant in North America, they would have been called crazy,” says Michael Robinet, vice president-global vehicle forecasts, CSM Worldwide Inc.

CSM's forecast sees each of the top four Asian OEMs continuing to increase market share over the next five years.

Rebecca Lindland, director of industry research-Global Insight Inc. agrees, although she says growth likely will be slower than the swift ramp-up of the past 10 years.

“A lot of (the Asian OEMs) growth over the past decade has come from penetrating new segments, and there are not that many new segments left,” she points out.

What's more, an increasing number of cracks in Toyota's armor are appearing and drawing more scrutiny from the media now that the auto maker is in a battle with GM for the title of world's No.1 auto maker — especially after the year's first-half global sales results found GM only 42,000 units shy of Toyota's 4.716 million tally.

The launch of the '07 Tundra also has put Toyota under the microscope as never before. Most consider the fullsize pickup the most credible effort yet at breaking into Detroit's last and most important stronghold.

Since it first established a sales arm in the U.S. 50 years ago, Toyota's ascent has been breathtaking. Forecasters expect the trend to continue, even as company insiders publicly say a slowdown is looming.

CSM forecasts a 3.5% increase in Toyota's market share between 2006 and 2012, from 15.3% to 18.8%, the biggest increase for the Japanese Big Three and Hyundai in that period.

The all-new Tundra will play a leading role, as the auto maker tries to carve a place for itself in the fullsize-pickup segment the same way it did in the midsize car category with the Camry.

Since launching in February, Tundra sales have climbed steadily over year-ago figures, with deliveries up 44.2% through June. However, sales of 82,840 units in the year's first half were less than half Toyota's 200,000-unit goal for Tundra in 2007, according to Ward's data..

With the goal looming, and generous spiffs on U.S. Big Three pickups, Toyota has begun playing the incentives game heartily, with $3,000 cash back or 0% financing for up to 60 months as of mid-July on all '07 Tundras.

Such deals previously were unheard of for the auto maker, at least this early in one of its model's lifecycles.

“(Toyota has) continuously outperformed expectations on a year-over-year basis, and they did it again in June,” says Jeff Schuster, executive director-global forecasting, for J.D. Power & Associates.

“But the way they got those numbers, meaning the stronger use of incentives, has been creeping into their bag of tricks,” he says, suggesting a looming “incentive war” may be coming if Toyota continues to put cash on the hood more liberally than in the past.

But Global Insight's Lindland says there's no way around it: Pickup truck buyers expect incentives.

“The pickup-truck market is different,” she says.

Courting buyers with this dissimilar attitude is one reason Toyota joined the sport dearest to America's heartland: NASCAR.

After earlier tiptoeing into the Craftsman Truck Series, Toyota this season signed up for NASCAR's Nextel Cup Series with the Camry.

Results so far have been underwhelming, maybe even disastrous, with Toyota 100 points behind leader Chevrolet as of mid-July.

Jim Lentz, executive vice president-Toyota Motor Sales U.S.A. Inc., maintains Toyota's entry into NASCAR wasn't a mistake.

“We got into the NASCAR arena, No.1, because we've been competitive in racing in every segment that we've been in,” he says. “But most importantly, when you look at where the largest share of NASCAR fans are, they are in markets that we would like to do better.”

As with Toyota, Honda also has been using incentives more liberally than in the past, largely due to weaker sales of its light trucks, excluding the compact CR-V cross/utility vehicle, that now is the best-selling model in its class.

The No.2 Japanese auto maker has been more cautious than Toyota in its U.S. market share pursuit, vowing to act responsibly, eschewing V-8 engines for V-6 and 4-cyl. mills, for example, and maintaining a higher ratio of domestic production.

Honda, with a strong commitment to small cars, has been the beneficiary of the recent rise in gas prices. Sales of the Fit subcompact and CR-V have grown 85.9% and 36.5%, respectively, in the year's first half.

“When fuel prices are topical, Honda benefits in general, not just small cars but across the board, because we either lead or are among the leaders in every segment where we compete with fuel economy,” says John Mendel, executive vice president-American Honda Motor Co. Inc.

That said, Honda's Achilles' heel has been its desire to move into luxury territory with Acura.

The oldest of the Japanese Big Three's upscale brands, Acura debuted in 1986. Even in good times it was criticized as not up to Tier 1 standards due to its “Honda-plus” brand image and lack of rear-wheel-drive, V-8 passenger cars.

Acura sales through June fell 4.9%, with the top-selling midsize TL down 14.5% and the year-old RDX compact CUV running well below its 40,000-unit annual target.

Unlike Toyota's Lexus, Acura has failed to create a special image for itself, says J.D. Power's Schuster.

“We never fulfilled in our own minds the true luxury purpose of what Acura needed to be,” admits Mendel: “I think in the last two years we've put a much sharper point on our vision.”

Mendel points to the RDX and MDX CUVs as indicative of Acura's product direction, noting with the former that while sales are off to a slower-than-expected start, it's already splitting the segment's sales with the BMW X3, the only other vehicle Honda considers a direct competitor.

Mendel says the RL, which receives a midcycle fix next year with some significant sheet metal changes planned, isn't “as distinctive a vehicle as it needed to be and not as strong a flagship as we hoped it would be for Acura.”

He is hopeful that a new dedicated design center, which opened in May in Los Angeles, will lead to unique products for Acura, separating the brand from mass-market Honda.

But J.D. Power's Schuster doesn't see an image makeover occurring anytime soon and says Acura needs a more upscale product plan.

And even though Honda has the most fuel-efficient fleet in the U.S., Toyota still has consumers convinced it is the most environmentally friendly auto maker.

Schuster says Honda's upcoming dedicated HEV, due in 2009, may prove a match for the Toyota Prius, unlike the underpowered and undersized Insight HEV. He argues it's “still not a given” Honda can be thought of in the same environmentally minded way as Toyota, though.

But Robinet predicts Honda will enjoy success with its upcoming 4-cyl. diesel engine, due in 2009, because the powerplant doesn't require a urea exhaust aftertreatment system that requires periodic dealer visits, as does Mercedes-Benz's Bluetech.

“There's no consumer interface with the diesel other than changing the oil and putting fuel in it,” he says. “We joke about it, but Honda thinks it builds cars just so it can put its engines in them. Honda will always be a leader in powertrain.”

Like Honda, Nissan is struggling with its luxury brand.

Infiniti, which debuted in 1989 in the U.S., is heavily reliant on the G midsize sports coupe and sedan. G35s made up 35,819 of the 63,796 Infinitis sold in the U.S. in the year's first half, according to Ward's data.

“They've been living and dying by the success of the G,” Schuster says of Infiniti. “When the (G) is new the brand does well. When it starts to age a bit, the brand goes back into hiding.”

On the horizon, Infiniti will launch its RDX and X3 competitor, the EX, this fall, and is developing a new flagship to replace the discontinued Q. Thomas Lane, corporate vice president-product planning and strategy for Nissan Motor, told Ward's last fall the Q didn't have a “clear enough advantage in meaningful areas.”

Dominique Thormann, senior vice president-administration and finance for Nissan North America Inc., says despite a sales slump in 2006 and parent company Nissan missing its profit target for the fiscal year, the auto maker in the U.S. is “in growth mode, and that is both in the number of cars that we sell, as well as the footprint we have.”

He also points out the increasing number of models in the auto maker's U.S. lineup, now at 16 from “six to seven” in 2000.

However, more than half are midsize or large body-on-frame utilities and trucks. Slowing demand for those thirsty vehicles sapped Nissan's total U.S. gains this year. While Nissan and Infiniti passenger car sales rose 18.3% through June, light truck deliveries fell 10.7%.

“They are a little too focused in the full-frame side of the business,” Robinet says, pointing out Nissan doesn't build any CUVs in North America (its Nissan Murano and Infiniti FX models come from Japan, as will the new Nissan Rogue compact CUV).

“Compare that to what Toyota will have in the future, (and) I think that's something Nissan is going to have to rectify quickly,” Robinet adds. Nissan suffered a black eye in the U.S. several years ago, when the vehicles built at its newest North American plant in Canton, MS: the Titan fullsize pickup truck; Armada SUV; and Quest minivan; suffered some of the worst quality of any models in the first 90 days of ownership according to J.D. Power's Initial Quality Study.

The auto maker took drastic steps, most famously by bringing in teams of engineers from Japan, to remedy the problem.

But Nissan's biggest challenge going forward may be deciding if it's a small-car or truck brand.

“(The) Titan (fullsize pickup) obviously was a miss,” says J.D. Powers' Schuster. “Where they go with that in this very competitive segment is certainly going to give us a picture” of what Nissan's future brand image will look like.

Unlike Nissan, Hyundai-brand quality scores have continually improved, placing second only to luxury marques Porsche and Lexus in last year's J.D. Power IQS.

But that hasn't translated into increased sales. After eight consecutive years of gains, Hyundai's deliveries in the U.S. grew only 0.1% last year, and 2006 marked the second straight year Hyundai missed its sales targets. The brand wanted to sell half a million units by 2006; first-half 2007 sales are up just 1.1% vs. prior year.

“Interestingly, I don't think it's time to hit the panic button” on Hyundai, says Robinet. “I think we all knew their trajectory was so strong upwards for a while that there had to be a point of inflection, where they did slow down to an extent.”

Hyundai's U.S. executives want to create a buzz around the brand and move up-market, partly through the debut next year of a large rear-wheel-drive sedan and the just-launched Veracruz large CUV.

But surveys show Hyundai is winning more Buick, than Toyota, buyers, suggesting conquesting Lexus and BMW owners will be a stretch.

Kia is one of the newer brands marketing in the U.S., arriving here in 1994. Since that time, deliveries have risen every year, with first-half sales at 154,392 units, up 5.3% from year-ago as Kia strives to break the 300,000-unit mark this year.

The Korean auto maker's problem is the reverse of Toyota's: lots of middle-America buyers but not enough on the coasts and in metropolitan areas.

“The battleground we move toward is the big cities: L.A., New York, Miami, Chicago — top 10 markets where a lot of affluent people live,” says Kia Motors America Chief Operating Officer Len Hunt.

Hunt says “design-conscious cars” is Kia's next step to entice new-car buyers in these areas. The upcoming Soul CUV, due in late 2008 as an '09 model and slotting between the subcompact Rio and compact Spectra cars, will be Kia's first means of attracting hip urban dwellers, he says.

Most analysts agree the largest Asian brands will continue to see sales increase, but they don't envision an entirely smooth road ahead.

While he sees “fairly strong” sales from Asian makes over the next five to seven years, Schuster predicts the rate of growth will slow as interbrand competition rises.

Global Insight's Lindland says Baby Boomers, the group that first embraced the Asian brands 20 years ago, and their children will keep the Asian auto makers on an upward trajectory, although the domestics, especially GM, have some good products in their pipelines.

“Baby Boomers are only 41 to 61 (years old),” she says. “They've got 40 more years until the last is out of the (new-car) market.”

Laughs Lindland: “I don't mean dead, just out the new-car market. So I think that's something to consider.”
— with Eric Mayne, Tom Murphy, Byron Pope and Drew Winter