Smallest Japanese Auto Firms Being Squeezed in U.S. Market
There is only one auto company publicly traded in the United States that is losing money today--and it’s Japanese. Subaru of America is hemorrhaging red ink.
In the throes of a severe sales slump, the U.S. distributor for Subaru of Japan lost $57.9 million in fiscal 1988, nearly double 1987’s losses, the company reported this month.
In response, Subaru of America has pared its U.S. payroll by “5% to 10%” in recent months, said a spokesman for the Cherry Hill, N.J., firm, while reorganizing and streamlining its distribution system.
Subaru’s worsening financial health is just the latest sign of the turmoil now confronting the smallest Japanese auto makers in the increasingly congested U.S. car market.
With limited product lines, small dealer networks and tight ad budgets--and with their supply of cars restricted by import quotas that tend to favor the largest Japanese auto makers--small Japanese companies like Subaru, Daihatsu, Isuzu and Suzuki are now caught in a squeeze that, some analysts believe, could force them to merge their U.S. operations with larger Japanese firms in order to remain competitive.
“We think it’s likely that a number of the smaller firms will be merged into big ones,” said William Pochiluk, an analyst with Autofacts, a Paoli, Pa., automotive market research firm. “These companies don’t have the strength of a Toyota, and we think the big guys stand the best chance of winning in this market. It’s just a tough time for them.”
The larger Japanese auto companies--Toyota, Nissan, Honda and Mazda--have had the resources to remain competitive in the United States despite the rapid appreciation of the Japanese yen, which has forced all of the Japanese auto makers to hike their prices here.
By investing billions of dollars in new products and new U.S. manufacturing plants, the Big Four of Japan have held onto their share of the passenger car market.
But the smaller companies have taken a beating from the yen. And, with profits plunging, they have been unable to spend enough to match the speed with which the bigger Japanese firms spit out new products.
“The big guys--Toyota, Nissan, Mazda, Honda--have really been making substantial investments in their long-term future with new products,” Pochiluk added. “This has been going on at the same time the small guys have been getting squeezed by the yen and haven’t been able to generate the revenues to support R&D; (research and development).”
For instance, it still takes Subaru at least five years to develop a new car; the larger Japanese auto makers are cutting that to three years. As a result, the company has been saddled with aging cars that must compete against the newest from giants such as Toyota and Ford.
“What we’re facing now is that we are at the end of a relatively long product cycle,” conceded Subaru spokesman Fred Heiler.
Product Line Limited
Finally, the company has brought out a redesigned Justy mini-car with an advanced, “continuously variable” transmission that eliminates gears and increases performance and fuel economy. In the spring, it will also introduce the Legacy, a larger car that will eventually be produced by a U.S. joint venture with Isuzu. The Loyale, a replacement for its current Subaru sedan, will follow next summer.
But Subaru’s product line remains limited. It offers only three models today, and it has pulled out of the light truck market. As a result, its car sales have plummeted by nearly 20,000 units this year.
Now all Subaru can do is grit its teeth until its new products arrive in dealer showrooms. Heiler admits that Subaru of America doesn’t expect to make money in the first half of 1989.
“Certainly we’re concerned,” Heiler said. “But our strategy is to get through the current period with sales incentives, so our dealers will be healthy as our new products arrive.”
But Subaru is hardly the only Japanese company facing tough times. While Isuzu has been relatively successful in the U.S. truck market, especially with its Trooper II utility vehicle, it has taken a beating in its efforts to break into the car business.
In fact, the company is actually forecasting a further car sales decline for itself in 1989--an almost unprecedented act of realistic thinking in the ever optimistic auto industry.
“The (sales) decline has come because our car line is not fresh, as opposed to some other (companies) that do have new cars out there,” acknowledged Isuzu spokesman Jeff Ringsrud. Isuzu will introduce new cars in the fall of 1989 for the 1990 model year, but until then must make do with an aging I-mark subcompact and its Impulse sports coupe. The company projects it will sell just 17,000 cars next year, down from 23,000 in 1988.
Apparently the firm has decided to focus on the truck market, where Isuzu is forecasting a sales gain. Instead of cars, it will build pickups and utility vehicles in the Indiana plant it will share with Subaru. The joint venture facility, in Lafayette, Ind., is scheduled to open next fall.
Tough Developing Image
Meanwhile, Daihatsu, the newest Japanese entrant here, remains almost invisible in the U.S. car market.
“Daihatsu is having a very difficult time developing any kind of image or consumer awareness about their products,” said Chris Cedergren, an automotive analyst with J. D. Power & Associates, an Agoura Hills automotive market research firm.
Daihatsu’s biggest problem is simple--it can’t ship many cars from Japan because of import quotas.
When the Japanese government imposed the quotas in 1981, it gave each of the major Japanese auto makers already in the American market a share of the quota system’s allowable shipments.
So when Daihatsu sought to enter the market, it had to pry loose a tiny piece of the quota allocations from the bigger firms; it was only marginally successful. Today, Daihatsu is only allowed to import about 12,000 cars a year.
With such a limited supply, Daihatsu can barely support a nationwide marketing, distribution and dealer organization. A year after its entry, in fact, Daihatsu’s only model--the Charade mini-car--is still not available in the Northeast, Midwest or Northwest.
“The big factor for us is quotas,” said Ronald Foreman, a spokesman for Daihatsu. At the same time, he conceded, “the company has taken awhile to create an image or an identity for the car. The Charade is like a lot of other cars in a lot of respects, and the average consumer tends to view it as comparable to any number of small, two-door hatchbacks.” Next year, the firm should have its Rocky utility vehicle on the market, plus a four-door version of the Charade. But there is little more Daihatsu can do to expand as long as quotas remain in place.
Needs Part of Quota Back
Suzuki faces the same hurdle as it tries to cross over from trucks to cars. While it was successful in the utility vehicle market with the Samurai, Suzuki has had little luck so far with its new Swift subcompact car. The problem: its dealers have almost no cars to sell.
Introduced this fall, the Swift is similar to the Geo Metro that Suzuki builds for General Motors. In fact, until recently, all of Suzuki’s car quota allowance went to GM; now analysts say, Suzuki must get some of it back.
But under the current quota system, Suzuki is only allowed to bring into the United States 10,000 Swift models annually. The company hopes to expand that if quotas are extended beyond March 31--the end of the current quota year--according to Laura Segall, spokeswoman for Suzuki.
But so far, Swift shipments from Japan have been small and often delayed, Segall acknowledged. “Our sales are not what they should be at this point,” she said. “Of course our sales are low because we hardly have any cars to sell.”
Suzuki’s supply problems will be relieved next spring, when its Canadian joint venture plant with GM opens and begins producing the Swift and Suzuki’s new Sidekick utility vehicle.
But the ability of the smaller Japanese firms to compete with the industry’s giants in the 1990s remains in doubt. Analysts don’t believe that any of the smaller firms will drop out completely, but merged distribution and dealer networks are likely.
“Some of the little guys have had to face the reality that the cost of being in this market is a higher hurdle than they figured, especially now that the situation has been compounded by the yen,” Pochiluk said. “The question now is, will there be enough shelf space for all these brands? The best thing may be for them to forge alliances with the bigger players.”
