After two years of relative calm in U.S.-Japan trade relations, American auto executives have launched a major public relations offensive designed to portray the Japanese vehicle distribution networks as closed to foreign imports. As part of their campaign, the Big Three claim they do not have access to a sufficient number of dealer outlets to sell their products. They also charge that Japanese government officials and industry executives are failing to live up to an alleged agreement to meet their "expectations" for a specific number of dealerships and unit sales targets in Japan. As a penalty, the Big Three suggest the possible imposition of unilateral economic sanctions against the Japanese auto companies by the U.S. Government.

This paper analyzes these assertions and seeks to answer fundamental questions regarding market "openness" by comparing the historical record and business dynamics of both countries. The reader is led to three inescapable conclusions:

• The Big Three demands for more sales outlets are disingenuous because the American companies have actually been closing more dealerships than they have opened. The U.S. rhetoric has been designed largely to put political pressure on their competitors in an effort to seek "managed" or "results-oriented" trade.
• Big Three auto vehicles available in Japan do not yet match the range of models, styles and high quality offered by their European counterparts — and expected by consumers. Independent dealers are therefore understandably reluctant to conclude exclusive franchise agreements with the U.S. companies.
• The Japanese market, far from being a closed or static business environment, is alive with possibilities that have been neglected by the Big Three until fairly recently. In fact, the actions of these American companies indicate a far more sophisticated knowledge of these possibilities than the trade rhetoric suggests.

ACKNOWLEDGEMENT
The author would like to extend his deep appreciation to Toyota U.S.A. for providing the funds that made the research and writing of this paper possible.

"There is no question that the number of vehicle dealerships is also not adequate." - U.S. Trade Representative Charlene Barshefsky, Tokyo, July 28, 1997.(1)

"We greatly appreciate the efforts of Honda Motor Co. in selling and servicing our Jeep products over the past eight years. The time has come, however, for us to increase the value of the Chrysler franchise for our dealers by providing them with products that are exclusive in the market. By doing so, we believe we will attract many new dealers who wish to sell our products and, long term, increase our sales volume in Japan." - Robert E. Bowen, president of Chrysler Japan Sales, announcing the termination of a distribution agreement with Honda that supplies 1,877 auto outlets in Japan with Jeeps, Tokyo, September 12, 1997.(2)

INTRODUCTION
Complaints from American trade representatives and Big Three auto executives about access to the Japanese market are nothing new. Just over two years ago, Japan and the U.S. stood on the brink of a trade war as Washington threatened to impose unilateral sanctions of some $6 billion on Japanese luxury car imports into the United States. Only an eleventh-hour agreement hammered out at the bargaining table in Geneva averted a conflict that could have resulted in untold and unwarranted economic damage to both countries.

Now, after two years of relative calm in U.S.-Japan relations, some of the angry trade rhetoric has resurfaced. Once again, Japan is being accused of unfairly restricting imports in the automobile market. This time, most of the criticism has been directed at an alleged lack of access to the various dealer networks in Japan. The claim has also been made that it is the responsibility of the Japanese vehicle manufacturers and the government itself to deliver on the "expectations" of the American side. Andrew Card, president of the American Automobile Manufacturers Association (AAMA), has charged that "only" 132 new direct franchise outlets have been established by the Big Three since the auto accord was signed in August 1995 — 268 shy of the 400 dealerships "expected" by the end of 1997. This, AAMA insists, explains this year's decrease in American car sales in Japan and is tangible proof that Japanese auto dealers are being pressured not to sell foreign vehicles.(3)

"With each month, Japan's government and auto industry fall further behind in meeting the modest expectations outlined at the time of the trade pact's signing," Card said in a typical statement. "We expected meaningful deregulation and a sincere effort to encourage Japanese dealers to sell imported cars and trucks. What we've gotten is a lot of lip service and little to back it up."(4)

Such hyperbole is to be expected in a highly charged political atmosphere, especially since it offers U.S. auto makers a chance to prod their government into extracting concessions favorable to their companies' bottom line. But the auto agreement is crystal clear with regard to Big Three franchises in Japan: it specifically and forcefully rejects all dealer and sales targets. In a statement signed by both former U.S. Trade Representative Mickey Kantor and former Minister of International Trade and Industry Ryutaro Hashimoto as part of the pact, it was jointly recognized that "Minister Hashimoto said the Government of Japan has no involvement in this forecast because it is beyond the scope and responsibility of government. Minister Hashimoto said that these forecasts are solely those of the Government of the U.S."(5)

The two ministers signed a similar statement regarding auto parts,(6) and a third joint announcement asserted: "The two Ministers recognize and understand that the plans newly announced by the U.S. or Japanese companies are not commitments and are not subject to the trade remedy laws of either country. Rather, they are business forecasts and intentions of the companies based on their study of market conditions and other factors. Both Ministers recognize and understand that changes in market conditions may affect the fulfillment of these plans."(7)

Despite this, it has been suggested by AAMA and others in the U.S. that USTR put Japan on its Super 301 "watch list" in the auto sector.(8) This kind of action — if it ever led to the unilateral imposition of sanctions by the U.S. — would clearly be in violation of the auto agreement itself, as well as the internationally agreed-upon rules of the World Trade Organization.(9)

But this paper is not intended simply to repeat in "he said-she said" fashion what is already well known. Instead, it is important to address more fundamental questions about the overall dynamics of the Japanese automobile market so that interested but fair-minded observers can develop a better understanding of the history of the auto industry in Japan, as well as the efforts of foreign manufacturers to sell their products there. In the process, we hope to shine some light in some dark corners so that the mythology surrounding these issues is exposed to a more rigorous examination.

Japan and sometimes even the Japanese people are often criticized as one-dimensional and monolithic — "Japan, Inc." to use the popular journalistic catch phrase. But the Japanese automobile market is without question the most intensely competitive in the world, with a total of 11 domestic vehicle manufacturers, eight of which produce cars, compared to only three domestic companies in the U.S.(10) Moreover, the names of the foreign companies selling autos in Japan read like a "Who's Who" of international car manufacturers — a line-up that includes BMW, Mercedes Benz, Volvo, Opel, Rover, Volkswagen, Audi, Saab, Renault, and, of course, the Big Three entries of Ford, General Motors and Chrysler. Indeed, in 1990, the share of the Japanese market held by European manufacturers surpassed Europe's share in the U.S. and has maintained that edge ever since. Exports from the EU now hold about 7.2% of the Japanese market, compared to just over 4% in America.(11) See chart below:

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Given this level of competition — coupled with the huge annual sales volume of cars and trucks — one should be led intuitively to the conclusion that the Japanese auto market is open to high-quality foreign products. And indeed, it is an axiom of economics that an intensely competitive market does not get that way by shutting out the rest of the world. Companies in highly protected markets or market sectors tend to be failures on the world stage, not trend setters.

This would suggest that a more complex and nuanced view of the Japanese market is necessary to have a better understanding of its dynamics. The deeper one digs into the history and structure of the automotive sector in Japan, the more it becomes apparent that there are many more similarities than differences between the U.S. and Japan in this area. That is especially not surprising when it comes to cars and trucks because Japanese auto executives consciously tried to pattern both their manufacturing systems and dealer networks after America's, which was after all the world leader in automotive technology when Japan began to rebuild its industry.

This does not mean that the two markets are exact duplicates of each other. Over time, new ways of doing things, new technologies and new sales techniques tend to diverge somewhat. But it does mean that market forces are clearly at work in Japan. Companies and individuals are motivated by profit. An independent auto dealer in Aichi or Chiba prefecture — just like his counterpart in California or Kansas — wants to sell cars that customers want to buy. And he wants to do it in a way that will maximize the brand image of his product and provide the highest level of after-sales service to his customers — from which he also hopes to make a profit.

The Big Three complaints about the auto distribution system in Japan focus on the erroneous argument that Japanese vehicle manufacturers insist on "exclusivity" and do not allow their dealers to sell competing brands through what is known in the industry as "dual" outlets. Not only does independent analysis show this to be false, but there is also a wealth of evidence indicating that the U.S. manufacturers are guilty of precisely the practices they single out for reproach. To the greatest extent possible, they have themselves sought to encourage exclusive franchises — not only in Japan, but in the U.S., Mexico, Canada, Europe and other countries of Asia as well. There is nothing ethically or morally "wrong" or "unfair" with this sales approach — indeed it is an accepted marketing strategy the world over. But it does present a serious contradiction and double standard when taken in the context of U.S.-Japan automotive trade.

Most recently, as we will see, Ford and Chrysler have announced aggressive plans to reorganize their operations in Japan, actually cutting a large number of dealer outlets in an effort to make their franchises more profitable and therefore more attractive to the independent entrepreneurs they so much desire to represent them. General Motors has similarly introduced a new product — the well-known Saturn line — while relying on a network of exclusive dealerships and intentionally keeping the number of outlets to a minimum. These trends are also evident in the tactics of the Big Three in America and Europe, where they have launched major streamlining, cost-cutting and consolidation programs.

As a marketing strategy, bigger — or, in this case, more — is not necessarily better. It is as easy to have too many dealers in a given market as it is to have too few. Big Three executives in Tokyo and Detroit know this all too well from first-hand experience. Yet so far, AAMA has only talked about the paucity of "new" dealers it has been signing up. They have been completely silent about the ones whose franchise agreements have been terminated. These "missing" dealerships — casualties that have gone unrecorded in the statistical legerdemain in Washington — constitute a mystery the following discussion should help unravel.

In the last analysis, it will become clear that automobile dealers in Japan are free to enter into franchise agreements with the Big Three — or any other importer of foreign cars. Moreover, a close examination of the facts will show why many dealers are not finding such franchises commercially viable, and that there is no evidence that dealers are making their decisions on anything other than commercial grounds.

A study of the automobile dealer network in Japan may not be everyone's idea of a "good read." But the growth and development of an industry — in any country — is also an intensely human drama. From that perspective, the motivations, aspirations and frustrations of the various players often come together to make an interesting story.

LATE TO THE PARTY
One of the most comprehensive examinations of the Japanese automobile market was the so-called MOSS Motor Vehicle Study conducted by a joint consulting team commissioned by the governments of both Japan and the U.S. in 1991-92.(12) At that time, the report concluded, the Big Three had a dealer network in Japan that consisted of 295 "direct franchise" outlets and 2,030 dealerships that they supplied "indirectly" through distribution agreements with Japanese car manufacturers. This latter group also included 335 "exclusive" outlets Ford maintained through its "Autorama" sales channel with Mazda. In essence, these outlets functioned even then as if they were direct franchise dealerships. By contrast, the report said, European auto companies had already assembled a network of 921 direct franchise outlets and 494 indirect sales centers that had franchise agreements with domestic companies.(13)

Because direct franchises are a far more effective way for a company to control marketing and distribution, the Europeans enjoyed a tremendous sales advantage over their American counterparts. As a group, they were outselling their U.S. competitors by a factor of about 10-1, while their dealer efficiency ratio (the average number of cars sold per outlet annually) was pushing 100 vehicles — compared to about six cars per year per dealership for the Americans.(14) This situation prevailed even though the U.S. companies had for many years held substantial ownership positions in several of the leading Japanese car manufacturers. For example, in the years leading up to the MOSS study, GM had a 34.2% stake in Isuzu, Ford had a 25% interest in Mazda, and Chrysler owned up to 24% of Mitsubishi before beginning to divest itself because of a financial crisis in the late 1980s. However, none of these earlier investments led to either a substantial marketing or manufacturing presence in Japan for the Big Three, and there was therefore little in the way of product to attract dealer interest.(15)

The MOSS study reported this neglect in some detail:

With the start of the 1980s, European vehicle manufacturers such as BMW, Volvo, and Mercedes Benz made large-scale investments for the establishment of import companies and launched full-fledged campaigns to expand their sales in Japan. BMW in particular vigorously invested in the construction of a dealer network beginning in the early 1980s, and this network consisted entirely of exclusive dealerships. In 1982, Ford began constructing the Autorama channel jointly with Mazda. By contrast, GM and Chrysler, the other two "Big Three" U.S. vehicle manufacturers, continued to opt for the conventional strategy of using existing networks of Japanese importers and dealers, which entailed a relatively low level of investment, during the 1980s. Their investment in the Japanese market only began to expand in earnest in the 1990s.(16)

This led directly to a situation in which the best candidates for car dealerships had already been secured by European and Japanese manufacturers. Moreover, the huge increase in land costs during Japan's "Bubble Economy," coupled with an extremely tight labor market, made it "increasingly difficult...to recruit high quality dealers and acquire good dealership sites."(17) Compounding these problems, the report said, was the fact that the Big Three had never built a car under 2,000-cc engine displacement — the segment that at the time accounted for more than 80% of the entire market(18) — nor had they designed any cars for Japan with the steering wheel on the right-hand side.(19) Moreover, prices of U.S.- made cars "tend[ed] to be higher by approximately 20% on average than those of comparable Japanese-made cars," the report said, despite the fact that Japan had completely eliminated auto tariffs in 1978.(20) Meanwhile, European cars, because of their much higher brand and quality image, sold at very high prices and enjoyed very large profit margins — in fact, one German auto executive called them "almost obscene."(21) As a result of all these factors, and others, the MOSS team concluded that a majority of Japanese dealers "would be unwilling to add new model lines," particularly if such an arrangement required making another franchise agreement.(22)

While the range of dealer concerns was quite extensive, the report said they "are identical to those expressed by domestic car dealer principals in any country when confronted with the opportunity to handle the models of any foreign vehicle manufacturers. Dealer principals are often skeptical about adding a new imported model line until the foreign vehicle manufacturer has established a solid distribution system, demonstrates an understanding of the market's needs, and can support dealer principals in selling a relatively large volume of cars" — a level of infrastructure and commitment the Big Three had clearly not yet made.(23)

One of the major arguments of the U.S. auto manufacturers during the 1995 auto negotiations — and one that seemed to have the most "legs" among lay observers in the U.S. — was the charge that Japanese dealers were somehow barred, either by practice or regulation, from carrying a line of foreign cars. It is interesting from a historical perspective, then, to see that this complaint had already been dismissed by the MOSS study more than three years earlier. Specifically, the report found that no such "exclusivity" clause had been a part of Japanese vehicle manufacturer franchise agreements since 1980, although up to 1990 some domestic makers required advance consultations before dealers could sell other brands.(24)

Nevertheless, because perceptions are often more important than reality, the MOSS team went a step further and conducted an extensive survey of Japanese dealer attitudes. Indeed, they found that 16% of domestic dealers believed they were "explicitly prohibited" from handling other manufacturers' cars, perhaps because they were unaware of the changes made in the franchise agreement over the years. However, the situation was even more pronounced among imported car dealers. In this case, fully 31% reported they were "explicitly prohibited" from carrying other manufacturers' cars.(25)

In other words, foreign manufacturers may have been exerting more control over their dealers in Japan than domestic companies. And, in fact, this explanation is completely consistent with the stated strategies of the European importers to put together a network of exclusive dealerships to build brand identity and have complete control over marketing and distribution. At the same time, the Japanese manufacturers — under pressure from the U.S. Government — have written numerous letters to their dealers over the years reminding them there is no contractual prohibition in their franchise agreement barring them from selling the vehicles of any company. Another round of letters was sent as part of the 1995 auto agreement.

An attempt was also made by the MOSS team to compare the Japanese and American auto markets by analyzing the percentage of dealers that sold foreign cars of any kind. This led to a very lopsided snapshot — 51% of dealers in Japan selling imported models compared to 94% in the U.S.(26) — that was later used by some critics to reinforce the image of the Japanese dealer network as relatively closed. However, as the MOSS study itself noted, this disparity was caused almost entirely by the huge number of so-called "captive imports" that the Big Three were selling in America. These included cars produced by foreign vehicle manufacturers but then branded and sold as domestic manufacturers' vehicles.(27)

Obviously, such a "meat-cleaver" analysis was not going to provide any kind of accurate picture of relative market openness. Without the captives included in the tally, the report noted, the percentage of American dealers handling imported cars was only 37%. Similarly, in Japan — if one excluded dealerships carrying only domestic brands and Japanese "transplant" imports from the U.S. — the number of outlets selling imported cars was 24%. This was a figure that was not so far removed from the American percentage, especially if one took into account the continued failure of the Big Three to expand their own distribution systems in Japan.

Significantly, the MOSS team found, 17% of all domestic car dealerships in Japan handled both domestic cars and non-transplant imported cars. The analogous total in the U.S. (domestic outlets handling both domestic models and non-captive imports) was only 15%.(28)

Parenthetically, it should be added that even in 1992, the Big Three were importing more cars into the U.S. than their Japanese counterparts, which had invested huge sums in transplant factories in America. Today, with increased investment in the transplants, those figures are even more dramatic. The Big Three imported a total of 2,528,803 cars and trucks from their Canadian, Mexican, German and Korean assembly plants in 1996, while Japan's three leading vehicle manufacturers imported a total of 1,091,167 cars and trucks from their factories in Japan, Canada and Mexico.(29) Over the past 10 years, vehicles imported by Japanese nameplate manufacturers have decreased by a total of 65%, dropping from 3.1 million units in 1987 to 1.1 million units in 1996.(30) These data — showing 2.3 times as many imports into the U.S. by the Big Three last year than the three leading Japanese companies — dramatically refute the frequent claims by American auto executives and trade officials that Japanese companies are "exporting" unemployment to the U.S.(31) They are also completely inconsistent with the oft-stated charge that Japan is primarily responsible for the U.S. trade deficit in the automotive sector.

One other aspect of the MOSS report bears mentioning. This is the so-called "dual ratio" — the percentage of dealers that handle models from more than one manufacturer. The study noted that "the definition of a dual dealer is complicated" and "it is extremely difficult to directly and fairly compare 'dual ratios' of the two countries." The team eventually settled on a definition that defined a dual as a "dealership which handles models carrying the badge of two or more manufacturers regardless of country of origin." Under this definition, the dual ratios of the two countries were virtually the same — 18% for Japan and 22% for the U.S.(32)

The MOSS team noted a huge increase in the number of dual dealerships in Japan in the six years leading up to the study.(33) Whether this momentum has led the lines to cross since then, we do not know — nor, probably, is it very important. Much of the analysis in the MOSS report is interesting from a practical standpoint. It helps provide information about the structure of the dealer networks in each country that could be of some assistance from a marketer's viewpoint: How best can I sell my cars in country X or Y? But from the perspective of "fairness" or market "openness" — issues that tend to dominate the political discussion between trade officials and industry executives — the MOSS report is not very helpful. The controlling principle of international trade that is most applicable is the concept of "national treatment." Are domestic and foreign manufacturers subject to the same laws and regulations in a given country and thus playing by the same rules? The answer for the Japanese auto industry, both the MOSS report and the European auto makers' experience in Japan show, is clearly "yes." "SHOULDA, COULDA, WOULDA"

A tantalizingly brief part of the MOSS Report's Executive Summary flirted with a discussion of the "shoulda, coulda, woulda" issues that were begging for answers because of the Big Three's failure to invest heavily in Japan. The language, however, was very diplomatic and suggested the U.S. manufacturers may actually have been guided in their neglect of the market by sound business principles:

Although some employees of foreign vehicle manufacturers who were interviewed for this study said that it was their belief that their parent companies' commitment to sell vehicles in Japan was not sufficient, it must be noted that the parent companies have many priorities. Capital resources must be allocated among worldwide investment priorities to those areas which can be expected to produce success in the long term. Commitment to Japan must be made for the long term since investments are needed to produce products for the market, develop dealer networks as well as market and service the products. For most of the period covered by this study, it was difficult for many vehicle manufacturers to justify the level of investment necessary to undertake a long-term commitment to Japan.(34)

A similar point was made in March 1994 by David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation. Cole said efforts then just getting under way to introduce right-hand drive cars in Japan were largely symbolic and "related more to overall trade friction than anything else... If the Big Three had the opportunity to go there with huge numbers and at low cost, they wouldn't do it anyway. That's because they need to spend their money in other places in the world that offer greater opportunity."(35)

If Cole's analysis is correct and that is indeed the thinking of Big Three executives, it may help explain why the American manufacturers have still not unleashed the amount of investment in Japan that experts think would be sufficient to mount a serious competitive challenge, not only to the domestic makers but to the Europeans as well. As we shall see in a subsequent section, the number and variety of right-hand drive U.S.-made models is still quite low, and design and product quality are also a continuing concern for both consumers and dealers. Moreover, there are no new products being developed by the Big Three specifically for the Japanese market, a fact that could lead to future sales problems and, in turn, exacerbate tensions and make disruptive and costly trade disputes an even more permanent feature of the political landscape.

ON THE GROUND IN AMERICA

The Big Three have made much of the issues of "exclusivity" and "duals" over the past 10 or 15 years — so much so that the casual observer might think the Japanese market were completely different from the U.S. or, for that matter, anywhere else in the world. But while the latest generation of Americans may not remember a country without Toyotas, Nissans and Hondas, it is instructive to remember that it took decades for Japan's auto makers to establish themselves successfully here.

Shotaro Kamiya, the renowned former president and chairman of Toyota, writes in his autobiography about exporting the company's first two cars to America in August 1957 and watching in dismay some three years later as the Big Three introduced compact cars for the first time. "...sales of imported European cars fell sharply," Kamiya said. "Toyota also took a beating. Our best marketing strategies failed us, and we were forced to withdraw completely from the market. We had to wait until 1964 to export to the United States again."(36)

Kinji Kunieda was one of the "marketing guys" assigned to the task of rebuilding the Toyota sales effort in the U.S. "Toyota had essentially no products at that time that were suited to the U.S. market. So the United States had very few potential dealers who were interested in selling Toyotas," he told a gathering in Washington several years ago. "...we struggled along, recruiting one dealer at a time. We talked to anyone who would listen to us, including owners of gasoline stations and repair garages. I should mention that dealers for the Big Three auto makers generally turned us away at the door. We managed to persuade a few established dealers to handle our Toyotas in addition to their main product lines. But those were dealers for imported cars and for smaller U.S. auto makers, like Studebaker and American Motors."(37)

So building a distribution network in America was by no means an easy task or an overnight success.(38) In fact, it was not until after the first oil shock in 1973 that the new demand for small, fuel-efficient cars began to provide Japanese companies with an opportunity to increase market share and profits. The long history of Japanese auto makers' strategies and operations in the U.S. — and the Big Three's slow reaction and, ultimately, protectionist response — has been thoroughly chronicled by such writers as David Halberstam in The Reckoning.(39) Suffice it to say that in the process, some dealers carrying the less popular American brands began increasingly to accept the imports and, eventually, to covet them. In the shift, multi-line franchises or "duals" were created — but always as a necessity or a compromise, or because the dealer was located in an area where local demand simply could not support a single-franchise dealership. In this, Toyota is no exception. The company has some 1,170 dealerships nationwide, about 30% of which are duals.(40)

Over the years, many American manufacturers, and particularly the Big Three, did not take kindly to their outlets selling other companies' products. In many cases, they still don't. In some instances, law suits have been filed by auto makers to enforce exclusivity, but dealers wanting to sell multiple lines generally found protection under state franchise laws that severely restricted the ability of a manufacturer to impose its will, regardless of the language in the contract and especially if the dealer could prove financial necessity. That is still the situation today. But it is important to understand that "exclusivity" is not an evil thrust upon an unsuspecting entrepreneur by an uncaring and greedy corporation. Quite to the contrary, the dynamics of the marketplace make a single-line franchise — or "de facto exclusive," if you will — the most desirable situation for everyone involved. For example, GM's Saturn division in the U.S. has a completely exclusive network with only 360 dealerships serving the entire country. Needless to say, these dealerships are generally very profitable. In Europe, Canada and Mexico, as well, exclusive dealerships are the norm — so much so that more than 95% of Big Three sales in these countries are made in single-franchise showrooms.(41)

But to get a better feel for these dynamics and the practical business concerns they entail, perhaps it would be better to look at the distribution network in the United States through the eyes of a successful dealer.

Fritz Hitchcock, of Puente Hills, CA, is the former president of the California Motor Car Dealers Association (CMCDA) and former chairman of the American International Auto Dealers Association (AIADA). He owns two Toyota dealerships, one Ford dealership, one Mazda dealership (soon to be a Mazda/Volkswagen outlet), and a Nissan/Infiniti "dual" dealership.(42)

While all of these might have qualified as "duals" under certain definitions considered by the 1993 MOSS report, in actuality Hitchcock maintains completely separate showrooms and completely separate sales staffs for each of these manufacturers' brands — even in the Nissan/Infiniti facility. To do otherwise would be bad for business because of the need to maintain brand identity, customer loyalty and employee expertise.

"Most big car companies encourage exclusivity when possible," Hitchcock says, "and dealers appreciate that because it flows to the bottom line. Usually, this means maintaining separate facilities for each brand, but at the very least exclusive showrooms and staff."(43)

Bob Butler, the owner of the largest Toyota dealership in Indiana, agrees. "A single- franchise outlet is best for the customer, and it's best for the dealer. The level of service and the level of knowledge and dedication of the sales, repair, and marketing staffs is then unsurpassed," he says. "Duals are lines that can't stand on their own."(44)

Butler recalls that in 1976, he made his first trip to Japan. At the time, he had 16 different dealer franchises in three separate facilities in the U.S. — all of them import cars with the exception of American Motors. "I took a tour of the Toyota manufacturing facility in Nagoya," Butler says, "and became convinced that this was the wave of the future."

"When I came back, I sold all of my franchises and bought a new store — and I never looked back. I was more profitable with one franchise, and customer satisfaction skyrocketed. All of my energies were focused on Toyota, which at the time was just beginning to make its mark in the U.S. with a full line of automobiles, which is a key ingredient to having a single-line... I built my current facility in 1978 but later spent more than a million dollars upgrading it and adding a body shop to the service garage. I felt justified in making this investment because of Toyota's commitment to me."

All of the dealers interviewed for this paper agreed that one of the big problems in multiple-line showrooms is a phenomenon known in the industry as "sales migration." Simply put, if salesmen are responsible for two or more brands, they will naturally "migrate" to whatever happens to be the hot vehicle of the moment. The net result is that if one brand does well, other marks go begging. Moreover — and this is extremely important — the overall sales figures for multiple-line showrooms also tend to reach a certain level and then stagnate. In this respect, an interesting variation of Parkinson's Law seems to be in operation. If, as the British historian wrote, "work expands to fill the time available for its completion," then the volume of car sales tends to run inversely to the number of different models in the showroom. Sometimes it is the salesmen who lose their focus, and sometimes it is the customers who "cross-shop" or migrate to another brand.

With that said, with some product lines that are weak and in some areas of the country where the population cannot support a plethora of outlets — or with small-volume specialty cars like Porsche — there are indeed what might be considered "bona fide" duals — showrooms and outlets with multiple lines on sale. In addition, as noted above, state franchise laws (which vary widely across America) usually have provisions that allow dealers to expand their existing line even if a manufacturer objects to a loss of de facto exclusivity.

"In practice, dealers who are not doing a good job, or have inferior products, or are in difficult locations can usually get their franchise board to let them set up a "dual" line if business is bad," Hitchcock notes. But again, as he points out, this is decidedly a second- best policy. Says Hitchcock: "I would no more add anything to a Toyota franchise in my market in southern California than I would fly to the moon!" And Butler: "There is nothing in my franchise agreement with Toyota that imposes exclusivity. It is simply my decision to keep it that way."

If a dual must be set up, dealers and manufacturers try to establish a hierarchy of what might be called "natural duals." For example, if a Chevrolet "exclusive" is not viable in a particular location, the brand might be paired with Oldsmobile — particularly if there is no Cadillac dealer in the area. Similarly, GM might also typically encourage a Pontiac- Buick-GMC truck lineup. A Chrysler business model might pair Dodge cars and trucks, have single-line franchises in big towns and cities, but use a so-called Chrysler "six- pack"(45) in showrooms in small towns or rural areas.

But pressure from the Big Three remains. Indeed, just three months after the U.S. and Japan reached agreement in the 1995 auto talks, GM sent a memo to all of its American dealers in which it outlined its plans for what it called "better differentiation of our brands and products, more customer-friendly processes and attitudes, and further strengthening of our dealer networks." Noting that "our analysis of the market has made it clear that we will have fewer models," the memo said GM's "goal is to assure that sales are individually more profitable both for ourselves and our dealers." Accordingly, GM said: "General Motors should have a single-line, exclusive dealer conforming in image and customer practices to the norm established for that brand. Further, General Motors brands are not commodities and should never be offered to the public from facilities that also offer competing brands."(46)

While clearly a good business strategy, this is precisely the opposite of what AAMA, U.S. trade officials, and Big Three executives have been prescribing for domestic dealers in Japan.

Another major problem faced by the Big Three in the U.S. is "over-dealering" — quite literally having so many dealers competing in a given location that they cannot possibly all make money. Butler traces this phenomenon to the 1970s and 1980s, when U.S. domestic manufacturers gradually fell into a trap that was partially the result of intense competition between the Big Three — matching each other outlet for outlet in a kind of "tit for tat" race to unprofitability — and partially because of poor production flexibility and inventory control. The two dynamics negatively reinforced each other. Often, manufacturing schedules were set in stone and new cars kept rolling out of the factories and piling up on dealer lots even when customers weren't buying. Then, new outlets were opened to help "move" the excess production — outlets that were sometimes of necessity owned directly by the manufacturers themselves. "In that kind of situation," Butler says, "facilities tend to get shabby, you can't hire or keep the best people, and things just generally slide a bit... I feel strongly that manufacturers cannot run retail auto dealerships. They need a local entrepreneur who has his own money invested in those stores and who knows the local community. People want to be able to talk to the owner, to have a sense of history about the business. In a large operation, you're dealing with a corporation."

Hitchcock agrees. He said there are about 70 Toyota dealerships in his territory in southern California, compared to about 116 Ford outlets, but annual sales figures for both marks are virtually the same — 115,000 cars and trucks per year. But obviously, sales per outlet and dealer profits are vastly different for the two brands in this market. The National Automobile Dealers Association (NADA) computes the country's average dealer efficiency at 55 units per month, or 660 vehicles per outlet per year. Network consolidation starts to take place when annual sales dip significantly below this level. To take another example, in 1995 Saturn sold a monthly average of 79 cars per dealer through more than 300 outlets. By comparison, Oldsmobile had nearly 3,000 dealers nationwide and sold a monthly average of only 14 cars per dealer.(47)

By contrast, Butler says, auto importers in the U.S. largely avoided this trap through a fortuitous combination of luck and good planning. Luck, because a vastly smaller market share dictated more conservative sales strategies, and planning, because a conservative sales strategy automatically meant fewer outlets. "Toyota was particularly good at this," Butler says. "They consciously designed a system so as not to 'over-dealerize.' They chose excellent locations for their franchises and protected dealers' profits by limiting the number of direct competitors in their primary sales areas."

This set up a powerful virtuous circle. "Toyota created a sense of family," Butler says. "They wanted the most profitable volume dealers in this country. Bigger dealer profits led directly to nicer facilities, better services, more experienced and loyal employees, and good customer satisfaction."

All three American manufacturers are currently in the process of implementing a consolidation plan to ameliorate the over-dealering problem in the U.S., but this will probably take years to carry out. GM has also announced plans to consolidate its manufacturing and marketing operations in Europe, hoping to slice between $100 million and $300 million in administrative costs as it trims its sales organizations.(48) In the process, GM expects to cut European dealer outlets to 174 from 207 over 18 months and to pair its Cadillac and Chevrolet brands in some cases.(49)

Back in Indianapolis, meanwhile, Butler says, "There are about 17 Ford/Lincoln-Mercury dealers, and Ford wants to cut this back to a total of five single-line Ford dealerships and two Lincoln-Mercury 'superstores.' The surviving dealers will be happier, but others slated for the chopping block will resist. Progress will be slow because of the state franchise laws [that protect dealers]. There will be attrition over time."

Hitchcock concurs: "The imports came late to this country; they were being careful," he says. "That is the major reason why GM, Ford and Chrysler have embraced Republic Industries and its plan to buy up franchises.(50) It helps with the companies' overall consolidation plans. Toyota and Honda, on the other hand, are concerned about maintaining the high level of customer service and satisfaction they have achieved, as well as the entrepreneurial spirit of independently owned dealerships."

Nevertheless, the new consolidation plans will mean that manufacturers once again assume a controlling interest in some of their franchises. Butler says the Ford plan in Indianapolis calls for just such a program — patterned somewhat after the efforts of Republic. "They're offering the surviving dealers stock in their new capacity as managers, but what's to prevent them from cashing in? They're no longer owners, they're shareholders," Butler says. "The supreme test will come during a downturn in the economy. It takes a tremendous amount of cash to get through a downturn."

MISSING IN ACTION

A downturn is precisely what the auto industry in Japan has been experiencing of late, as the Japanese domestic economy slowed dramatically from its 1996 calendar year growth rate of 3.6%. Japan's Ministry of Finance reported GDP shrank at an 11.2% annualized rate in the April-June quarter, and many economists do not envision renewed momentum until at least the end of the year.(51) While the overall passenger car market grew 5.1% in the first six months of 1997,(52) sales have generally been depressed since a new sales tax increase went into effect in April, and all of Japan's leading domestic manufacturers posted sales drops in July.(53)

Unit sales of Ford, Chrysler and GM have also suffered, dropping 15.4% from January through July compared to the same period last year. Big Three executives seized on the decrease to dramatize their long-standing market access complaints. "...U.S. auto exports to Japan have declined, and the opening of Japan's automobile dealer network has stalled," AAMA president Card said in a recent statement, once again laying the blame for the decline squarely on the Japanese distribution system and the Big Three's alleged lack of sufficient sales outlets.(54)

It should be noted that many industry and trade experts predicted a slackening sales pace for American vehicles in Japan this year.(55) The huge increases — at least in percentage terms — in unit sales racked up after Ford and Chrysler finally introduced right-hand drive vehicles into Japan in 1993-94 could not possibly be sustained without a steady supply of appealing new models.

Unfortunately, all of the new Big Three entrants into the Japanese market have been met with a lukewarm reception by consumers. This response was foreshadowed at the 1995 Tokyo Auto Show, when the Chrysler Neon and Ford Taurus prototypes failed to stir excitement.(56) By the following year, both models were well behind projections. The Neon, carrying the unfortunate moniker of "Japan car killer," sold only 994 units during its initial six-month run in 1996, way below the 4,000-unit sales target announced by Chrysler. In the first seven months of 1997, only 988 copies of the Neon were sold.(57) The Taurus, launched in February 1996, chalked up sales of about 700 units a month through the end of the year, compared to the target of 1,500 units set by Ford. This year's sales have also been sluggish. On July 31, Ford issued a recall for more than 10,000 Taurus cars imported between 1989 and 1995, because of overheating problems.(58)

Meanwhile, 1996 sales of the "re-badged" GM Cavalier fell more than 8,000 vehicles shy of its 20,000-unit target despite an aggressive advertising and promotion campaign mounted by Toyota. Last December, General Motors recalled three-quarters of the cars Toyota had sold for GM in Japan because owners complained they were stalling in traffic.(59) Cavalier sales for 1997 have been about on a par with 1996. GM's Saturn, launched only last April 5th, has yet to command a popular following. Worse, there appears to be nothing in the Big Three design pipeline that can turn this trend around.(60) For the foreseeable future, the U.S. auto makers will pretty much have to live with the line-up they have already introduced into the market. In contrast, a Salomon Brothers analyst noted in May, "the Japanese have introduced 11 new car models in the last 15 months."(61) The New York Times concluded: "The slow starts for the Big Three's big three strategic vehicles show that merely introducing cars with the steering wheel on the right — as Japan repeatedly urged Detroit to do — will not be enough to succeed in Japan." The Times observed that while the Cavalier sales "by themselves more than double[d] G.M.'s imports of American passenger cars... the failure to meet the targets could make it difficult to attract new dealers... Hiroyuki Yoshino, executive vice president of the Honda Motor Company, said the American manufacturers would not succeed until they designed cars specifically for the Japanese market, as opposed to modifying an existing car, as was the case for the Neon, Cavalier and Taurus."(62)

For the most part, Japanese consumers have continued to cite problems in design, quality, price and after-sales service for Big Three products. A survey of 7,023 car buyers conducted earlier this year showed only one American model — the Cadillac Seville at #18 — in the "Top 20 Most Popular Imported Cars." That was an improvement over the 1996 "Top 20" — when no American models made the list.(63) Moreover, despite a 9.3% drop in the overall market for imported passenger cars in the first six months of 1997, Volkswagen/Audi, Mercedes Benz, BMW and Opel vehicles registered a 6.2% increase in unit sales over that period.(64) German cars occupied nine slots in the 1997 "Top 20" list, including eight out of the top ten. Other European offerings from the UK, Sweden, Italy and France were also represented. The overall import share of the Japanese market was 10.6% in 1996, while imports enjoyed more than an 18% share in the key Tokyo metropolitan area.(65)

A survey by the Japan Automobile Dealers Association conducted in December 1996 reported that 36.2% of Japanese dealers felt there were "certain problems" in handling imported cars. The most common problems cited were "quality" (68.9%); "slow response to complaints," (45.6%), "unreliable supply of replacement parts" (25.4%), "pricing" (19.2%), and "small profit margin" (19.2%). When the dealers were asked under what circumstances they would handle imported vehicles, the most common responses were "their introduction of competitive models" (72.6%), "fast, reasonably priced supply of replacement parts (62.8%), "assurance of adequate margins" (61.5%), "competitive pricing" (58.1%), and "fast complaint processing system" (55.6%).(66)

Japan-based Western observers have also been quite critical of the U.S. manufacturers' efforts. "There is little sympathy for the AAMA's arguments in Tokyo," reported the Financial Times. "Both Japanese and European carmakers say Ford, Chrysler and GM are not selling more cars because they are approaching the market in the wrong way, with the wrong products, and expecting unrealistically rapid progress." The paper, noting that the European importers also found building up a distribution network a slow process, quoted David Blume, vice president of Rover Japan, as saying: "This is not something the government can just mandate — it cannot order an independent businessman to risk his livelihood."(67) The situation is reminiscent of Toyota's first misadventures in marketing in the U.S.

In fact, the comments and perceptions of leading independent Japanese dealers sound remarkably similar to their American colleagues, Fritz Hitchcock and Bob Butler. First and foremost, they are concerned with maintaining brand image and service levels for their existing line and will do nothing that could compromise that enterprise. Even when they are interested in selling another manufacturer's vehicles, this entails constructing an additional showroom and service facilities and — just like in America — hiring a separate staff to market and sell the new products. This comes at enormous cost, especially in the major Japanese cities like Tokyo, where community opposition and zoning regulations in residential neighborhoods make it particularly difficult to construct new commercial facilities.

"It is not practical to think of building dealerships without service garage facilities, and unthinkable that a Toyota dealership would sacrifice its Toyota business in order to open a Ford dealership," Motoh Katsumata, president of Ford Chiba, recently told a delegation from the U.S. Embassy in Japan. "Therefore, the problem of building new dealerships is essentially a structural one."(68)

Katsumata, the largest privately owned auto dealer in Japan, should know. His father was a Ford dealer in the 1920s and 1930s, but since 1962 the company has been selling only Toyotas. Then, in November 1994, Katsumata began a pilot program to sell Fords in five of his outlets. "We estimated that in the future, imports can capture 15% of the car market in Japan(69), and as we thought Ford was good, we thought we should give it a go," Katsumata said, although he — like many others in Japan — was extremely disappointed in the jelly-bean design and what he called "fox-eyed" headlights of the Taurus.

In the past, Katsumata has been extremely critical of all the U.S. manufacturers, especially their demands for exclusivity and their insistence on what he considers petty regulations. "They tell you that if your building is this size, your sign has to be this big and so on," Katsumata said in a 1995 interview. "To break down that system of very detailed regulations seems to come as an attack on their pride. In Toyota's case, it's different. All you are required to do is put up one neon tower and the rest of the dealership is left to your individual discretion."(70)

Today, he has modified his views — somewhat. "The other day I was able to see the Ford line-up in the United States planned through the year 2000. This encouraged me to keep at this business for a while. If I hadn't had the chance to see the upcoming models, I might not be inclined to stick with Ford."(71)

Other dealers have not been convinced. Naoki Yamaguchi, president of the independent dealership Aichi Toyota Motor Co. Ltd., has said he rejected Ford's overtures because the company insisted he make huge new investments in real estate, infrastructure and personnel. "...dealers in Japan simply don't have the resources to spare for building separate sales outlets to handle American cars. Nor can they be sure they could earn a profit on the American vehicles if they did set up sales outlets," Yamaguchi said. "If the question were one of selling American cars alongside Japanese cars in their existing outlets, dealers might be more enthusiastic. But the American auto makers have resisted that option."(72)

"What is important," says Toshio Nakamura, president of the Ford Tonichi dealership in Tokyo, "is for Ford to create cars that will fit Japanese consumers' tastes."(73) Nakamura also speaks from experience. His independent chain of Nissan dealers started selling Fords in two of its showrooms in 1994. But by late last year, his company had sold just 400 cars and piled up debts of some $2.8 million.(74)

Nobuhiro Shionoya, a director of the independent BMW Nakamitsu Auto outside Tokyo, enjoys life on the other side of the coin. "...BMWs have been the car of choice for young people, and are now beginning to appeal to older buyers as well," he told the Embassy representatives. "However, even if the range of appeal is expanding to other groups, the important thing for us is to recognize the allure which Japanese customers feel toward imported cars, and to build our strategy around that. It is important to decide first where U.S.-made cars fit, and then formulate a marketing strategy.

"Our initial customers were often private entrepreneurs, doctors, and lawyers. As a result, 10 years ago we took few customers away from Chiba Toyota across the street. But things have changed now, with salaried managers also buying BMWs, and we now have many customers coming to us after visiting or buying cars at Chiba Toyota."

Perhaps nothing demonstrates the validity of dealer concerns about profits better than a comparison of efficiency ratios — annual sales per outlet — for Japanese, European and Big Three cars in Japan. GM, Ford and Chrysler products are not even close to being competitive in this area. Based on 1996 sales data, the Big Three averaged sales of between 110.9 and 112 cars per dealership. Meanwhile, Volkswagen/Audi racked up an efficiency ratio of 339.3 for its direct franchise dealers, and achieved a rating of 302.7 for its exclusive DUO channel with Toyota. VW/Audi's combined average totaled 318.9 cars per outlet per year. The UK's Rover had a ratio of 247.1 cars a year; BMW dealerships came in at 227 vehicles; Mercedes Benz dealerships sold 165.6 cars a year; and Volvo outlets had a 1996 ratio of 159.2 cars. See chart on following page.

These figures are even more striking when one considers that the European models — with the exception of the VW "Golf" and "Polo"(75) — all sell at a high premium in Japan because of their special cachet and appeal as exotic, finely crafted imports. The Big Three vehicles, on the other hand, must compete head-to-head with many of the standard Japanese models, which are fiercely price-competitive. Because of the resulting lower margins, the dealer networks for the domestic manufacturers need to sell very large volumes in order to make a profit. For example, Toyota dealers in 1996 sold 377.2 cars per outlet. Nissan and Mitsubishi were close behind with ratios of 364.9 and 326.3, respectively. Only Ford-controlled Mazda — alone among the Big Five domestics — sold fewer than 200 cars per dealer annually.

DIRECT FRANCHISE OUTLETS, SALES AND EFFICIENCY RATINGS FOR THE JAPANESE AUTOMOBILE MARKET

Notes:

1. 1992 figures are from the MOSS Report
2. Includes 335 exclusive Ford 'Autorama' outlets.
3. GM sales do not include approximately 12,000 Cavaliers sold through 1,000 Toyota outlets.
4. Chrysler sales do not include approximately 11,000 Jeeps sold through 1,877 Honda outlets.
5. VW/Audi sales do not include 32,086 cars sold through 106 Toyota DUO outlets.
6. The drop in dealerships for VW/Audi is due to the auto maker's decision in 1992 to terminate its exclusive distribution agreement with the Japanese company Yanase in order to exercise more direct control over sales and marketing.

Sources: MOSS Report, Ford, Chrysler, GM, JAIA, JAMA, AAMA, Nikkei Handbook.

What then, is a Big Three dealership worth to an independent entrepreneur in Japan? Not much in these terms. Certainly, the Big Three "expectation" of selling 300,000 cars annually in Japan by the year 2000 appears ludicrous on its face.(76) And indeed, Tokyo- based executives for the U.S. manufacturers have begun to acknowledge this — and even to admit that their pickiness may have rubbed some dealers the wrong way in a market economy.

In early 1996, Konen Suzuki, president of Ford Japan, told a Japanese newspaper: "Although we have received applications from more than 70 domestic-affiliated dealers, the powerful dealers we want still haven't come forward... Nonetheless, we have been stepping up our re-investment in existing dealers to the point where we can add about 40 outlets within the year. We will also set up about 40 outlets with domestic-affiliated dealers. However, we will close 20 non-profitable outlets, so the net increase will be around 60 outlets."(77)

By the end of the year, however, Suzuki acknowledged to the New York Times that Ford's own publicly announced sales goal of 200,000 units by the year 2000 "was sort of propaganda" and that it would take at least until the year 2010 to achieve that target.(78) Ford also hasn't come close to meeting its targeted increase in dealerships. Indeed, the most recent statistics show that Ford has only increased its numb er of dealerships in Japan since 1995 by nine. Over the same period, GM has added 17 direct franchise outlets, and Chrysler has shut down 10 — for a net gain of only 16 for the three manufacturers combined.

But how can this be if AAMA and the Big Three say they can document 132 new dealerships since the auto agreement was signed? Something is missing here.

Let's take another look at the numbers. The Big Three had 622 direct franchise outlets in Japan in 1995. Since then, they've added 132. So now they have — 754, right? Well, not exactly. As of April 1997, the Big Three confirmed they had a total of only 638 direct franchise outlets. That leaves 116 car dealerships "missing in action."

Actually, it's not hard to tell where they've gone. Ford Japan president Suzuki has already given us a hint: they have been eliminated because they are no longer profitable. This presents an entirely different picture from the image of market barriers AAMA has been piecing together:

AAMA's math:

What is particularly striking in this analysis is that for the past six years, the total number of direct franchise dealerships controlled by the Big Three in Japan has remained fairly constant. There have been slight fluctuations from year to year, but nothing of any significance. This is to be expected in a mature market, where either relative stability or even slight consolidation might occur. A second crucial point is that the total number of dealership changes in the past two years comes to a total of 248. This includes 132 so- called "new" outlets, plus 116 "old" franchises that were terminated. Presumably, these were either shut down by the Big Three themselves or by dealers unable to make a profit because of low sales volume. Finally, this "turnover" in dealerships represents nearly 40% of the Big Three's entire dealer network as calculated in 1995.

Movements of this magnitude do not occur in a static, "closed" economy. Only in a flexible, fluid and dynamic business environment are changes like this even imaginable, let alone possible. The inescapable conclusion is that while the Big Three certainly need to find ways to sell more cars in Japan, the last thing they need is more outlets — at least not until they can find a way to enhance the value of their franchises so that better, higher-volume dealers might be willing to sign up. It turns out that "over-dealering" is not just a problem in the United States and Europe, it is also a problem in Japan. As the European manufacturers have demonstrated, independent Japanese dealers are more than happy to sell foreign cars if people want to buy them — and if the auto makers pursue a growth strategy that insures that an individual dealer's territory and interests will be protected to some extent. Just like in the United States.

If you are still not convinced, consider the following. On September 12, the Chrysler Corporation announced it was canceling its seven-year distribution agreement with Honda Motor Company to sell Jeeps through the Japanese auto maker's dealer network. This will have the immediate effect of removing 1,877 indirect franchise outlets from Chrysler's sales system in Japan, but not a word of this was broadcast by AAMA. Last year, these Honda dealers accounted for two-thirds of the 16,170 Jeeps that Chrysler sold in Japan.(79)

Why did they do it? According to Robert E. Bowen, president of Chrysler Japan Sales (CJS), "The time has come...for us to increase the value of the Chrysler franchise for our dealers by providing them with products that are exclusive in the market. By doing so, we believe we will attract many more dealers who wish to sell our products and, long term, increase our sales volume in Japan."(80) Bowen added, "Our strategy is to provide our dealers with an exclusive line-up in a protected territory."(81) A Chrysler spokesman said that backing out of the Honda deal will hurt sales in the short run but strengthen Chrysler's sales channel over time.(82)

Behind the scenes, however, there was a revolt brewing among the new independent dealers Chrysler had been signing up over the past couple of years. These franchise owners complained vociferously that they were losing customers to the Honda outlets because the Jeep sport utility vehicle was better known than any of Chrysler's other products in Japan. "Some general managers of Chrysler dealerships actually confronted CJS board members," reported Nikkei Sangyo, adding that the nationwide downturn in car sales had made the over-dealering situation even more acute recently. The report also noted that "Chrysler is said to take the strongest position against Japan among the Big Three, and has been repeatedly insisting that the slow sales of American cars in Japan is due to the closed nature of the Japanese market." The report quoted Chrysler Chairman Robert Eaton as saying at the 1995 Tokyo Motor Show: "We must put more efforts into introducing better-suited products only after the Japanese market has completely been deregulated and opened."(83)

Another recent surprise came from Ford, which announced it will begin manufacturing Ford-designed cars at the Mazda Motor Corp. plants it controls in Japan. Despite the decision, Ford Vice Chairman Wayne Booker said the company "wants to keep the Mazda identity and the Ford identity separate," adding that Ford will sell its vehicles in Japan only through its own outlets and will not use Mazda sales centers.(84) This was entirely consistent with an announcement made a year and a half ago by Henry D.G. Wallace, the Scottish Ford executive who took over the reins at Mazda when Ford acquired a 33.4% stake in the Japanese auto dealer. Saying he would not allow Ford to use the Mazda dealership network consisting of some 2,500 outlets, Wallace declared: "I'm the custodian of the Mazda image and the Mazda company."(85)

On the GM front, meanwhile, Donald W. Hudler, president of the Saturn Division, remarked last year: "It's more important to build an outstanding dealer network than to have a large number of dealers."(86) He expanded on this theme in an interviewthe following day: "Saturn has only 360 sales outlets in the U.S.... Although Saturn has only 14 sales outlets in Japan, it would not necessarily be good to increase this number. The Japanese market is different in terms of the operating environment and driving distances. If you can introduce high-quality cars that meet customers' needs, you will have enough access to succeed."(87)

A week earlier, President Hideo Hohgi, of Chrysler Japan Sales, said he "has given up attaining the target of 200 sales outlets within the year and is emphasizing quality and sales power more than numbers."(88) But that strategy may have gone by the boards already, since Chrysler management blamed Hohgi for the failure of the Neon in Japan and dismissed him last March after only about a year on the job."(89)

So a rather surreal situation has developed. In Japan, Big Three executives concede through both word and deed that their sales strategies must be changed to adjust to the realities of the market. This means building exclusive dealerships like the Europeans and closing down unprofitable ones — even if it insures a short-term loss of revenue. In the U.S., meanwhile, Big Three spokesmen turn up the rhetoric, demanding an ever-increasing number of Japanese sales outlets that their colleagues in Tokyo don't want or even need. Indeed, it seems the only companies not "allowed" to have exclusive franchise agreements in Japan are the ones that are Japanese.

A better understanding of these market dynamics in Japan and the United States — and the history behind the development of the auto business in both countries — could contribute significantly to a reduction in trade tensions both at the government and industry levels. In the last analysis, global competition between auto makers has been of great benefit to the world's consumers, who now enjoy access to literally hundreds of different vehicle models in countless styles and price ranges. Relative calm and progress have marked the past two years in relations between the U.S. and Japan, with Japanese companies continuing to expand manufacturing capacity in the U.S., while the Big Three have begun to make modest but unmistakable inroads into Japan's domestic market. Auto executives and government officials should build on this goodwill, not return to the confrontational policies of the past.

1. Linda Sieg, "Japan Rejects U.S. Criticism on Auto Trade," Reuters, July 29, 1997.

2. Chrysler Press Release, Tokyo, September 12, 1997.

3. On July 17, Card gave a speech in Tokyo to the Foreign Correspondents Club of Japan in which he criticized what he called "the lack of action on the part of Japan to open vehicle distribution channels" and said, "We seem to be headed right back to where we started [in 1995]." On July 30, in the August AAMA Japan Report, Card issued another statement in which he said, "We are concerned that the Japanese Government's commitment to opening its market to imported autos and auto parts has disappeared... The Japanese Government appears to be sliding into its old pattern of protecting its market..." Historically, the Big Three and U.S. trade officials have charged that Japanese auto manufacturers limit the freedom of their dealers to sell other companies' products. See, for example, the April 1996 AAMA Japan Report that argues that "access to the market remains restricted through Japanese auto manufacturers' control of dealer networks in Japan." See also the August 1996 AAMA report that cites "specific concerns about remaining barriers in Japan's vehicle distribution system, particularly the continued control of dealer networks by Japanese auto manufacturers." In addition, the 1996 National Trade Estimate Report on Foreign Trade Barriers published by USTR charges the Japanese companies "maintain their control through financial ties (equity, loans, rebates, personnel transfers to dealerships), by allocating the most desirable models, and through other forms of cooperation and technical support. In many respects, dealers function as captive distributors of vehicle manufacturers rather than independent businesses."

4. AAMA press release, March 21, 1997.

5. U.S.-Japan Automotive Agreement and Supporting Documents, August 23, 1995, p. 87.

6. Ibid., p. 85. See also letters from William C. Duncan, General Director of the Japanese Automobile Manufacturers Association, to then Acting U.S. Trade Representative Charlene Barshefsky, dated December 18, 1996, and July 18, 1996.

7. Ibid., p. 84. For a more detailed account of the 1995 auto negotiations and their policy implications, see Scott Latham, "Market Opening or Corporate Welfare? 'Results-Oriented Trade Policy Toward Japan," Cato Institute, April 15, 1996.

8. AAMA made a formal request to put Japan on the "watch list" in early July, shortly before the Card speech in Tokyo, but USTR in its report of October 1 did not take such action.

9. Besides the language in the auto agreement specifically excluding the business plans of Japanese and American companies from the "trade remedy laws of either country," legal experts have noted that unilateral actions taken under such mechanisms as Super 301 would violate the national treatment requirement of Article I of the GATT and Article 3.7 of the WTO Dispute Settlement Understanding, to which the U.S. is a party. GATT Article I sets forth the "most favored nation" treatment principle under which individual countries agree that "any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties." Discriminatory retaliation against a single target country would therefore violate this requirement. Article 3.7 of the WTO states that the principles of national treatment can be suspended only as a last resort and then only if the WTO dispute resolution panel finds such an action justifiable and specifically authorizes such measures.

10. The use of the word "domestic" is not quite precise. The U.S.-based subsidiaries of Japanese and other foreign car companies are technically American corporations, and the vast majority of their employees are also American. However, since the term does help explain the divisions over nationality that underlie trade politics, it is used here in a looser context.

11. Japan Automobile Importers Association (JAIA) and Japan Automobile Manufacturers Association (JAMA) statistics. It should be noted that the Japanese and American auto industries have historically calculated market share in Japan quite differently. AAMA computes this figure using Japan's entire motor vehicle market as a base, including so-called "mini-vehicles" with engine displacement under 660-cc that constitute about half of all car sales in the country. This has the effect of making total foreign (or American) share appear smaller—an important point in trade negotiations. JAIA and JAMA, on the other hand, exclude mini-vehicles from their calculation on the grounds that no foreign manufacturers make them for Japan. For example, the August 1997 AAMA Japan Report states that imports for July 1997 were 5.13% of the total market, while Japanese industry statistics showed foreign share at well over 10%. This paper treats the latter calculation as the proper one, since it makes little sense to compute market share for a product that does not exist.

Interestingly, American trade officials have been of two minds on the subject of late. In the 1996 National Trade Estimate Report on Foreign Trade Barriers, USTR used the JAIA method and excluded mini-cars [see NTE, p. 199]. This year's NTE reverts to the U.S. industry calculation and therefore computes foreign market share at only 6% of total sales [1997 NTE, p. 214].

12. MOSS Motor Vehicle Study, Revised December 1993, by Booz-Allen & Hamilton Inc., Bethesda Md., and Nomura Research Institute, Tokyo, Japan. The acronym MOSS, which stands for Market Opening Sector Specific, was the name given to a series of trade negotiations between the U.S. and Japan.

13. Ibid., Volume 3, "Appendices," p. III-5.

14. Ibid., Vol. 2, p. VI-28. By 1993, the European efficiency ratio had climbed to 125 cars per dealer, while the Big Three averaged only 10.

15. For a more detailed discussion, see Latham, "Watch Out for Roadblocks: The Tortured History of the Japanese-American Trade Dispute," Chicago Tribune, Tuesday, June 13, 1995.

16. MOSS Report, "Executive Summary," Volume 1, p. 12.

17. Ibid.

18. Ibid., p. 13; Volume 2, pp. VI-9 and VI-31.

19. Ibid., p. 13.

20. Ibid. p. 10; Vol. 2, p. VI-11. The U.S. imposes a 2.5% tariff on all automobiles and a 25% tariff on commercial vehicles such as trucks and buses. The EU tariff on cars is 10%, with commercial vehicle tariffs ranging from 10.% to 22%.

21. Michael Berger, "Detroit's Deception: What U.S. Carmakers Don't Tell You," Japan Scope, Spring 1995, p. 48.

22. Ibid., p. 7.

23. Ibid., Vol. 2, p. III-48.

24. Ibid., "Executive Summary," p. 4.

25. Ibid., Vol. 2, pp. II-15 and II-16.

26. Ibid., Vol. 2, p. III-10.

27. Ibid., Vol. II, p. III-11. According to the MOSS report, "The Big Three began to import captive imports to add small fuel-efficient cars to their product lines after the Oil Crisis. To the Big Three, captive imports have the advantage of filling out their product lines with low-cost products, and to the foreign manufacturers that supply them, they offer the advantage of gaining market access at low cost. The system works when the benefits and losses of the two companies balance. In contrast, in Japan captive imports are very rare mainly because Japanese vehicle manufacturers tend to pursue a full product line strategy producing small cars to full-sized cars rather than captive imports."

28. Ibid.

29. The Polk Company statistics, April 15, 1997. Interestingly, the Big Three imported only 4,520 cars from Japan in 1996.

30. JAMA.

31. In the last several months, this complaint has been raised by U.S. Trade Representative Charlene Barshefsky, Commerce Secretary William Daley, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Lawrence Summers, Secretary of State Madeleine Albright, and President Clinton himself.

32. MOSS Report, Vol. 2, pp. III-13 to III-15.

33. Ibid., Vol. 2, p. III-16

34. Ibid., "Executive Summary," p. 14.

35. "Big Three Steer to the Right: Auto Makers Gear Up with the Entries for the 'Wrong Side of the Road,'" Ward's Auto World, March 1994.

36. My Life With Toyota, Shotaro Kamiya, Tokyo, 1976, p. 79. Kamiya, who worked with General Motors until Toyota lured him away in the 1930s, patterned his post-war distribution system on the American model. See also, Seisi Kato, My Years With Toyota, Tokyo, 1981, for the story of one of Kamiya's protˇgˇs and ultimately his successor as chairman. In the foreword, then-Toyota President Eiji Toyoda took note of Kato's remarkable marketing abilities: "It was he who thought of having Toyota's first passenger car race with what was then the Japanese National Railway's fastest train, the 'Tsubame.' Photographs and movies of the Toyota speeding along in a cloud of dust neck-and-neck with the Tsubame are still in our files."

37. Kinji Kunieda, Managing Director of Toyota National Dealers Advisory Council, speech to 41st Congress of the International Organization for Motor Trades and Repairs, June 1993. Both Studebaker and American Motors have since gone out of business.

38. The MOSS Report makes a similar point in its examination of the Japanese marketing experience in the U.S. See Vol. 2, p. VI-63.

39. The Big Three were generally supporters of free trade until the end of the 1970s, when a combination of foreign competition, quality problems and the second oil shock led them to seek protectionist legislation in Congress and pursue similar goals with U.S. trade officials. In May 1981, under severe pressure from Washington, the Japanese manufacturers agreed to a so-called Voluntary Restraint Agreement (VRA) restricting exports to 1.68 million vehicles per year. Japan was the only auto exporting country singled out for such treatment.

For some other accounts, see Doron P. Levin, Behind the Wheel at Chrysler, Harcourt Brace & Company, New York, 1995; John B. Rae, Nissan/Datsun: A History of the Nissan Motor Corporation in U.S.A, 1960-1980, New York, McGraw Hill, 1982; Mary Walton, Car: A Drama of the American Workplace, New York, W.W. Norton & Company, 1997; James C. Abegglen, Sea Change: Pacific Asia as the New World Industrial Center, New York, The Free Press, New York, 1994, pp. 32-36; James C. Abegglen and George Stalk, Jr., Kaisha: The Japanese Corporation, Basic Books, Inc., 1985; Eiji Toyoda, Fifty Years in Motion, Kodansha International, Tokyo, 1985; and Anne O. Krueger, American Trade Policy: A Tragedy in the Making, The AEI Press, Washington, D.C., 1995.

40. Toyota Motor Sales, U.S.A., statistics.

41. An executive with the Canadian Auto Dealers Association reports that "dual" franchises are almost non- existent in Canada—so much so that if he ever drove past one, "I'd stop the car to investigate." See also Latham, "Market Opening or Corporate Welfare?", p. 7.

Distribution networks in Europe, Canada and Mexico may eventually see the introduction of more "dual" outlets, but this will arise from consolidation and cost-cutting programs and not from any relaxed desire to maintain single-line franchises and brand identity.

42. The Nissan Motor Corporation manufactures both Nissan and Infiniti, but they are completely separate divisions.

43. A number of in-depth interviews were conducted with American dealers in preparation for this paper. Some principals were happy to be quoted on the record, others wanted their comments to remain anonymous. The interview with Fritz Hitchcock occurred on September 4, 1997.

44. Interview with Bob Butler, conducted September 3, 1997.

45. This industry "term of art" refers to the line-up of Chrysler, Plymouth, Dodge, Dodge Truck, Jeep and Eagle models that would appear in a multiple-line showroom. The Eagle line is about to be phased out, however, so the "six-pack" will soon become a "five-pack."

46. Memorandum from Richard L. Zarella, General Motors Executive Vice President, to all GM dealers, October 5, 1995.

47. The Wall Street Journal, October 17, 1995.

48. "GM Begins Cost-Cutting Study In a Bid to Save Millions Yearly," Rebecca Blumenstein and Robert L. Simison, The Wall Street Journal, September 10, 1997.

49. "Cadillac Unveils New Seville to European Audiences," Todd Nissen, Reuters, September 9, 1997. See also, "Detroit Peddles Big Iron at Frankfurt Auto Show," Todd Nissen, Reuters, September 10, 1997.

50. Republic Industries, the country's largest car dealership owner, has been pursuing an aggressive expansion strategy to acquire dealerships across the country.

51. Bill Spindle, "Japan's Trade Surplus Grows; So May U.S. Ire Over Exports," The Wall Street Journal, September 17, 1997.

52. JAIA, JAMA.

53. Toyota's domestic unit sales fell 9.7% in July, compared to the same month in the previous year, while Nissan dropped 14.2%, Honda 2.8%, and Mitsubishi's July sales fell 8.8.%, according to data released by the companies.

54. AAMA Japan Report, August 1997.

55. See, for example, "Import Car Market May Slow Down Next Year; Product Competitiveness Is in Question," Nikkei Sangyo, December 27, 1996; see also, "Market Opening or Corporate Welfare?", p. 13.

56. Satoshi Isaka, "Detroit Autos Debut to Hype, High Hopes and Mixed Reviews at Tokyo Motor Show," Nikkei Weekly, November 13, 1995.

57. JAIA, JAMA.

58. Bethan Hutton, "U.S. Carmakers Hammer on Japan's Door," Financial Times, August 1, 1997.

59. For additional background, see Andrew Pollack, "A Tough Sell for Detroit: In Japan, U.S. Auto Makers Fare Worse Than Expected," The New York Times, December 12, 1996; Rebecca Blumenstein, "GM Plans Recall of 1996 Cavaliers in Japanese Market," The Wall Street Journal, December 13, 1996; "GM Recalls Cavalier Sedans in Japan," The New York Times, December 14, 1996; "GM Resorts to its Right- Hand Drive Car," Asahi Shimbun, November 21, 1996.

60. The Big Three have made no announcements of new models for Japan since Chrysler's Voyager mini- van, an import from Graz, Austria, was introduced earlier this year. See also, "Import Car Market May Slow Down Next Year; Product Competitiveness Is in Question," Nikkei Sangyo, December 27, 1996.

61. Jack Kirnan, Salomon Brothers, Automotive News, May 12, 1997.

62. Pollack, "A Tough Sell for Detroit." It should also be noted that sales of the Neon and Saturn have been flat in the U.S. Chrysler announced on August 24, 1997, that it would suspend production of its Neon line and lay off 2,800 workers for two weeks—the fourth time this year the plant was closed temporarily. On September 2, 1997, Saturn announced it would cut production by 17% because of sagging sales volume. See, for example, "The Small-Car Wars Are Back: Japan regains market share from the worried Big Three," Business Week, September 22, 1997; and "Chrysler to Curtail Production of Neons," The New York Times, August 25, 1997.

63. Motor Magazine, March 1996 and March 1997 issues.

64. JAIA, JAMA.

65. JAIA, Japanese Auto Dealers Association (JADA) statistics.

66. JADA.

67. Financial Times, August 1, 1997.

68. Katsumata and several other dealers in the Tokyo metropolitan area hosted a tour of their facilities for U.S. Embassy officials on August 22, 1997. These and other dealer comments are taken from a transcript of their conversations.

69. The current import share is 10.6%.

70. Motoh Katsumata, "What to Do to Sell US Cars in Japan," Internet Netscape News, June, 1995; see also "Roadblocks, Roadblocks Everywhere: Ford dealer Katsumata isn't moving many Mustangs for now," Business Week, June 19, 1995.

71. "Embassy Tour" discussion.

72. Naoki Yamaguchi, speech to Foreign Correspondents Club of Japan, June 20, 1995.

73. Valerie Reitman, "Can Swagger Sell Tauruses to the Japanese?", The Wall Street Journal, April 23, 1996.

74. "Selling US cars in Japan: more than a matter of trade policy," Financial Times, September 19, 1996.

75. The Volkswagen "Polo" was introduced in the Japanese market on August 19, 1996, and received 2,200 orders in the first two weeks, the most successful entry for import cars to date. For additional information, see "Volkswagen Group Japan—Lucrative Japanese Market; 130,000 level by the Year 2000," Nikkei Business, September 30, 1996.

76. This target was announced independently by AAMA shortly after the auto agreement was reached in 1995.

77. Chukei Shimbun, January 29, 1996.

78. Pollack, "A Tough Sell for Detroit."

79. Nichole M. Christian, "Chrysler's Distribution Deal with Honda Will Soon End," The Wall Street Journal, September 12, 1997.

80. Chrysler Corporation press release, September 12, 1997.

81. "Chrysler, Honda part in Japan," Automotive News, September 15, 1997.

82. Christian, "Chrysler's Distribution Deal with Honda Will Soon End."

83. "Chrysler Terminates Joint Sales With Honda," Nikkei Sangyo, September 14, 1997.

84. "Ford says it will make cars at Mazda plants in Japan," Reuters, September 15, 1997.

85. Andrew Pollack, "New Mazda President Vows Separate Identity from Ford," The New York Times, May 10, 1996.

86. Tokyo Shimbun, November 21, 1996.

87. Nihon Kogyo Shimbun, November 22, 1996. Saturn hopes to have a total of 20 sales outlets by the end of 1997.

88. Nihon Kogyo Shimbun, November 12, 1996.

89. Nikkei Sangyo, September 14, 1997.