By Scott Latham of Latham & Associates

[This is a non-JAMA report.]

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EXECUTIVE SUMMARY

For years, the business strategies of the Big Three auto makers in Japan have been at odds with U.S. industry and government trade rhetoric. Having disdained re-entering the Japanese market on the grounds that it would never be significant enough to warrant serious effort, the American companies relied on their enormous domestic market and focused international efforts on building a major position in Europe. Trapped by their own neglect in the late 1970s, they embraced a range of protectionist measures at home and — more recently — pursued an aggressive agenda of so-called "results-oriented" trade policies designed to pressure Japan to meet highly specific targets for both sales and the number of outlets in the Big Three distribution network in Japan. With the introduction of the first American right-hand drive vehicles in 1994, hopes soared as sales of U.S.-made Big Three autos nearly tripled over the next three years — although from a very low base.

But last year's slowdown in the Japanese economy exposed the weak strategic position of the American manufacturers for all to see. Sales of U.S.-made vehicles dropped nearly 18% and were off even more sharply in the first quarter of 1998. This has once again raised the specter of potentially divisive and economically damaging trade disputes, as U.S. government officials and executives blame Japan for the decline. This study — based on an in-depth analysis of the Japanese distribution system and extensive interviews with auto dealers and industry executives in Japan — shows this would be a mistaken course for America. Specifically the study reveals that:

• Since the U.S.-Japan auto agreement was reached in June 1995, the Big Three have been engaged in an active process of "churning" franchises, closing and/or opening a total of about 360 showrooms — a number representing more than half of the 600-plus outlets in their Japanese distribution network. Despite this, and contrary to years of complaints about the need for more outlets, the American makers ended 1997 with fewer showrooms than they had three years ago — not the 177 "additional" stores that have been claimed. This level of turnover is quite large for a mature market and clearly unsustainable over the long term.
• Ford Japan — paradoxically, because it has made by far the biggest commitment and investment among the Big Three — faces the most severe challenge because of strategic and product shortcomings. The company suffered nearly a 40% drop in sales of its U.S.-built vehicles in 1997, and many of its dealers are openly angry about the lack of appeal of current models, the paucity of financial support from the manufacturer, and the apparent lack of exciting new products in the pipeline.
• Because of these problems, Ford has just recently announced a 180-degree strategy shift in Japan, and its new president has publicly embraced sales and marketing changes that largely validate the conclusions of this study and an earlier paper published in October 1997.
• Chrysler has substantially increased its investment in the Japanese market, but now faces the critical and daunting task of rebuilding an independent dealer network after terminating a lucrative arrangement with Honda for the distribution of the well-known Jeep models. Chrysler also faces serious questions about future product suitability in a fast-changing sport utility market.
• General Motors continues to play out a conservative and largely uninspired strategy that, if left alone, could drop it into third place behind Chrysler in unit sales of U.S.-made vehicles in Japan. Moreover, its Saturn Japan division, launched in April 1997, is off to a very slow start — again, because of severe limitations in product quality and variety.
• In 1997, the three leading German auto makers sold more than two and a half times the number of cars as the Big Three in Japan — with about the same number of outlets. Japanese auto dealers, therefore — in spite of severe competition and a clear need for new models — have little incentive to sign exclusive franchise agreements with the American manufacturers. With average sales of just seven vehicles per month per outlet, independent dealers of American cars are not — and cannot — be profitable.
• The current import share of the Japanese auto market is 9.6%, not the lower 5.4% reported by the Big Three and the U.S. government. Their calculation divides total import car sales, including gray market imports, by the total number of vehicles sold in Japan, including mini-vehicles, trucks and buses — which the American manufacturers do not even make for Japan. The rest of the world calculates market share simply and cleanly: by dividing imported passenger cars sold by the total number of passenger cars sold.
• Japanese auto dealers are a widely diverse and dynamic group who provide an exceptionally high level of customer service in a fiercely competitive environment. While the internal structure of day-to-day business operations is different in many respects from that of dealers in the U.S., they share a high degree of interest with their American counterparts in testing and pursuing many kinds of new systems and marketing tools. Debates over the effectiveness of "one-price" showrooms are particularly intense and quite similar to trends in America.
• General Motors, Ford and Chrysler — ranked number one, two and seven respectively in the Fortune 500 list — all have the financial resources to make a major commitment in Japan if they so choose. Chrysler, if its announced merger with Daimler-Benz is successful, will be even more formidable than it is now. Moreover, the fate of Big Three efforts to expand market share in Asia may depend ultimately on a successful presence in Japan. The financial weakness of many Japanese dealers — faced with intense competition and weak domestic sales — presents a golden opportunity for the Big Three to reach out to Japanese consumers. But they key question remains: will they do it?