Japan tries to keep its spluttering car industry on the road

World-class engineering and quality will not be enough to protect Japan's car makers from the pandemic - and may even make it a target

Toyota cars on display in Bangkok this month 
Toyota cars on display in Bangkok this month  Credit: DIEGO AZUBEL/EPA-EFE/Shutterstock

Japan’s automotive industry has long been admired globally. Building up from a shattered post-war economy, it was at the forefront of the country becoming a manufacturing superpower and is worth 21 trillion yen (£150bn) a year.

Its annual production hovers at about nine million, making Japan the world’s third-largest producer, with half being exported. Millions more vehicles roll off factory lines at foreign plants owned by Japaneses firms every year. 

Marques such as Toyota, Nissan, Honda, Mazda and Mitsubishi are all household names thanks to their clever engineering and reliability, obsession with efficient production processes and often ground-breaking design.

But there are increasing signs Japan’s car industry is spluttering, with some parts possibly headed for a crash as coronavirus exposes new problems or exacerbates existing ones as car sales tumble.

The most recent quarterly results across the industry highlighted how Japan’s automotive sector is stalling. Toyota, which battles with Volkswagen Group for the title of the world’s biggest automotive business with each producing close to 11m vehicles annually, reported its smallest profit in almost a decade.

Nissan also sounded the alarm, warning it faces a record 470bn yen annual loss. The company is undergoing a painful restructuring to take out excess global capacity, with 11,000 jobs going worldwide. Its troubles are complicated by aftershocks from the arrest of former boss Carlos Ghosn over alleged financial crimes, and its difficult relationship with partner Renault.

Nissan is still reeling from the Carlos Ghosn scandal

Mitsubishi, a junior partner in the Nissan-Renault alliance, warned of a 140bn yen annual operating loss, and pulled back from some markets, including the UK. 

Management at Honda said they needed to “reshape” the business and they worried investors with a 80.8bn yen loss in the first quarter.

Coronavirus was to blame for much of the red ink, with buyers sitting on their hands as they ponder the future direction of the economy. But the losses also revealed how some Japanese manufacturers had been aggressively discounting to win market share and shift excess production, increasing strain on their balance sheets. As sales ebbed because of the pandemic, they were left exposed.

About 5.5m people - almost a tenth of Japan’s workforce - are employed in the automotive or related industries, and signs that such a key sector is no longer ticking over smoothly is a major concern to the Tokyo government.

Although fiercely denied by the companies, reports that the Japanese government tried to force a merger between Nissan and Honda to protect them in the face of falling sales would appear to have some logic to them.

Such a tie-up would follow the Japanese tradition of keiretsu - often competing companies with cross-holdings in each other - which encourages stability in the markets, reduces the chances of takeover attempts and allows long-term planning free from such worries. 

But how Honda, which unlike Nissan remains independent, would function within such a framework is questionable.  Nissan itself has enough of its own problems to deal with at the moment, without the cost and trouble of trying to integrate a different corporate and engineering culture to become a combined business. 

Toyota is a different case given it has about £60bn of cash - enough to see it through the crisis. 

A sign of its confidence was news at the start of the year that Toyota plans to build its own “city of the future” on a 175-acre site at the base of Mt Fuji.

The “living laboratory” called will be an incubator for new forms of transport and technology such as robotics, autonomy, hydrogen fuel and smart homes.

The so-called "Woven City" is named in both a nod to the company's origin making automatic weaving looms in 1867, as well as the development's plans to combine future technology.

Toyota - which has been a laggard in the development of electric cars - made a statement at last year’s Tokyo motor show with boss Akio Toyoda telling the world that the company was becoming a “mobility business”, not a carmaker. It has the cash to back such a pledge, something that many of its rivals - both domestic and foreign - may not.

The global car industry is facing a revolution. Self-driving cars, mobility services such as ride sharing and the move to electric - and potentially hydrogen - power mean that the days of personal ownership of vehicles with traditional internal combustion engines are almost certainly numbered.

The challenge for Japan’s automotive companies is what to do with their numerous factories making vehicles whose time may soon be up. 

There’s no better warning than comparing Toyota with Tesla. The former makes 11m cars annually and is profitable (just), while Elon Musk’s company has made just over one million cars since being founded in 2003 and has only the vaguest familiarity with profit. Despite this Toyota is valued about $215bn, while Tesla is not far off double at $391bn

The market is pricing in the disruption that is coming to the sector and the cost of transforming legacy businesses into something fit for the future.

While Toyota looks unlikely to be a target for foreign buyers, Japan’s smaller and more troubled automotive manufacturers could get snapped up by cash-rich companies from China - the world’s largest car market with annual sales of more than 20m vehicles.

Backed by Beijing - whether directly or in less eveident ways - they’d be happy to get their hands on Japanese institutional knowledge that could bring China's own engineering and manufacturing standards up to a level where they not only matched, but potentially exceeded, much of the rest of the world.

It’s already happening elsewhere but on a smaller scale. Chinese conglomerate Geely has snapped up Volvo and Lotus, both of which are thriving under the new ownership, while Shanghai Automotive Industry Corporation acquired MG and works with VW and Chevrolet to build cars for its home market.

Perhaps the biggest danger for Japan’s much-admired car industry is that focusing attention on resolving its internal troubles means it stops innovating and becomes vulnerable.