Are Japan’s automakers too U.S.dependent?

May 31, 2016

Automakers seek to rebalance global footprint

TOKYO -- Nissan Motor Co. is cashing in on a booming North America. But its huge profits are suddenly a big concern.

CEO Carlos Ghosn certainly appreciates all the extra car sales. But they are making Nissan too dependent on the U.S. at a time when demand seems to be plateauing.

Nissan, he says, needs to rebalance its global footprint to tap other profit centers.

And Nissan is hardly the most lopsided Japanese player when it comes to leaning on America. Its Japanese rivals also are re-examining their reliance on the North American cash cow, realizing that U.S. growth is slowing and the profit party can’t last forever.

"This is something that we need to continue," Ghosn said in May, referring to diversifying away from the U.S. "Not by reducing the profit in North America but by really having pillars of profit somewhere else because we need to prepare for when the North American market stabilizes or eventually goes down."

Toyota, Honda, Mazda, Nissan and Subaru-maker Fuji Heavy Industries all count North America as their biggest regional market. In fact, Nissan, Honda and Subaru get a bigger percentage of their global sales from North America than even General Motors, which derives just over a third of its volume at home.

Nissan relies on North America for 37 percent of its global sales, and Ghosn speaks of the Japanese industry in general when he says, "When you look at all the profitability of all the carmakers by region, obviously North America is a huge component."

Other automakers are even more reliant.

Honda gets half of its total from North America, while at Subaru, it’s a whopping 66 percent.

No one is expecting the U.S. market to suddenly implode.

Total U.S. vehicle demand is on pace to increase for its seventh-straight year. But some forecasters say growth is slowing and expected to peak.

Any switch into reverse would come at a particularly tricky time for the Japanese. Most are expanding production footprints in North America and entering new vehicle segments. At the same time, their profits are being crimped by an appreciating yen.

"It’s just a matter of time before the U.S. market weakens," says Koji Endo, auto analyst at Advanced Research Japan. "There might be other areas where they can offset the impact."

Nissan has spent much of the past several years preparing for that. It went on a building binge in other markets, adding capacity in Brazil, Thailand, Indonesia, China and Mexico. And it launched the low-cost Datsun brand to jump-start sales in emerging markets.

"Ghosn has transformed the company’s balance of power," says Kurt Sanger, lead auto analyst at Deutsche Securities Japan.

The only problem: Big sales have yet to follow in those markets. And Nissan is not alone in banking on other markets as a counterbalance.

Toyota Motor Corp., which gets 30 percent of its global sales from North America, expects its sales there to stagnate in the current fiscal year ending March 31, 2017. North America sales are seen inching ahead just 0.4 percent to 2.85 million units.

But the world’s biggest carmaker is more bullish about some of the long-beleaguered emerging markets. Asia alone should grow 5 percent.

"In some of those markets, the market seems to be bottoming out," Toyota Executive Vice President Takahiko Ijichi said in May of the younger markets. "We’ll be able to grow volume rather significantly."

"Tipping point’

Underscoring that optimism, Toyota said last week that it will spend ¥49 billion ($447.1 million) to build a plant in Malaysia. It will open in 2019 with annual capacity for 50,000 vehicles.

Honda’s solution is attempting to create a global factory network in which 10 to 20 percent of each region’s output can be geared toward export. This will allow each region to fill in for another when exchange rates swing unfavorably or a market collapses.

In a February report about Japan’s automakers, Standard & Poor’s said their U.S. dependence had reached a "tipping point."

"Global auto sales are almost evenly split between developed markets, which drove demand in the past, and emerging markets, which have expanded rapidly in recent years," S&P wrote.

"We think this tipping point will lead to an inevitable shift away from conventional manufacturing and sales strategies centered on the U.S. and other developed markets."

Subaru may be the Japan brand most in need of a shift. 

Fuji Heavy expects to remain as reliant as ever on its North America sugar daddy -- even out to the fiscal year ending March 31, 2021, the last of its current midterm business plan. 

In that year, it aims to sell 800,000 vehicles in North America, about two-thirds of the 1.2 million it wants to sell worldwide. Japan and China combined will account for 200,000. 

Subaru’s sales to the rest of the world, including what are expected to be some of the fastest-growing markets by then, will grow modestly to 200,000 vehicles from 138,000 in the just-ended fiscal year. For perspective, Toyota sold more than twice that many Camry sedans in the U.S. alone last year. 

"Without the U.S., that company is over," Endo said of Subaru.

Defiant Subaru

Ghosn might agree with that assessment. Small automakers thinking they can go it alone in the age of consolidation will get a nasty surprise when the U.S. market cools, he warns.

"Then you will see who is vulnerable and who is not," Ghosn said in May after announcing his company’s plan to grow larger by buying a controlling 34 percent in Mitsubishi Motors.

"If you’re small, you’re going to be very vulnerable."

Yet Subaru -- the smallest of Japan’s big seven automakers -- remains undaunted. Fuji Heavy President Yasuyuki

Yoshinaga brazenly told Japan’s Nikkei newspaper that even if U.S. demand shrinks this year to as low as 16.5 million vehicles, from 17.5 million in 2015, his company will feel "no impact."

Yoshinaga may have a point.

In 2008, when the global financial crisis hammered the U.S. and torpedoed the sales and profits of such stalwart behemoths as Toyota and Nissan, Subaru actually rallied.

It was the only Japanese brand that didn’t experience a sales slump. Instead, sales rose, and the brand gained share. And since then, Subaru has only solidified that base: In 2016, it expects its eighth-straight year of record U.S. sales.