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Japan, Germany set to pounce on seismic shifts in auto industry


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The Japan Times

THE VIEW FROM EUROPE

Japan, Germany set to pounce on seismic shifts in auto industry

By JOCHEN LEGEWIE

Last week, the heads of America's Big Three automakers were sitting again before a government panel, begging for money to save their companies. This time, the companies were asking for a total injection of some $34 billion — $9 billion more than just two weeks ago.

They are not alone in their quest. Europe's automakers are also in trouble. Opel, GM's German subsidiary, is already asking for 1 billion euro in loan guarantees.

Although the big European automakers haven't made collective demands, there is talk about a 40 billion euro bailout package being prepared to meet their growing needs.

The emerging markets have not been spared either. The Chinese automotive industry — strong until recently — is unable to deal with the sudden dropoff in sales. So Chinese makers are also seeking government funds to help them deal with rising inventories and plummeting sales.

Japan's automakers are faring relatively better, but not by much: Domestic sales in November fell a whopping 27 percent from last year. But the Japanese haven't embarked on a quest for state money so far.

It is not unusual for automakers to seek bailouts. America's Chrysler once famously underwent a successful restructuring after a bailout package in 1980. Even mighty Toyota once received government aid, back in 1949.

But what is striking — and for some, even terrifying — is that these bailout requests are coming all at the same time. The timing is, of course, closely related to the financial crisis, but a deeper look at the macroeconomic picture of the industry reveals other forces behind the shakeup.

For several years, there's been significant overcapacity in car production. In 2006, 70 million cars were made worldwide but only 65 million found buyers.

In fact, according to CSM Worldwide, an automotive research firm, the average production ratio for all the world's auto plants was only 68 percent in 2000, far below the 80 percent needed to achieve a sustainable profit. By 2005, output efficiency had risen to 76 percent but was still below sustainable levels. Thus, the need for an industrywide revamp has been brewing for sometime — especially in developed markets like the United States.

Another structural reason behind the slowdown is the combination of high ownership rates and rising quality. In the U.S., there are approximately 745 cars for every 1,000 people, which is the world's highest figure. Some estimates put the figure as high as 800.

And the average life span of each vehicle is rising as well, hitting a high of 9.2 years as recently as 2006, according to R.L. Polk, another auto industry researcher.

The U.S. has been the world's leading car market for decades, but in light of these two factors, it is plausible to suggest this dominance is coming to an end. Countries like China have far lower ownership rates — around 45 vehicles per 1,000 — and India's is even lower.

Were these two Asian engines to see ownership levels approach that of developed markets — a development many automakers are betting on — the demand for gasoline would skyrocket. Regardless of the current decline in oil prices, it is only logical that alternative fuels are being extensively researched.

It is therefore clear that two major transitions are under way. First, car demand is moving from developed markets to emerging markets. Second, automakers are shifting from gasoline to other forms of fuel.

These shifts are proving difficult for U.S. automakers to comply with. In the U.S., where the Big Three were long content exploiting the quirks of their home market, fuel was cheap and vehicles were bought for factors other than basic utility.

Of all the world's auto producing countries, Japan appears best situated to take advantage of these trends, a fact companies like Toyota and Honda must surely appreciate. Technologically, the Japanese are leading the pack in fuel efficiency and alternative energy, and are well-represented productionwise in China, India and other countries.

From a financial point of view, Japanese companies are also in better shape than their peers, and in contrast with Japan's services firms — which I argued last month were relatively behind in terms of globalization — the automakers are fully international, with globally recognized brands and complete sales, distribution and production networks.

Even European firms, apart from the success of Germany's Porsche, BMW and Mercedes, do not stand out as prominently overseas as Japanese companies do. France's Renault for example, one of the world's biggest automakers, sold less than 500,000 units outside Europe in 2007. Compare this with Toyota, which sold more than 7 million outside Japan. German automakers still enjoy a clear edge in clean diesel technology, but even here their Japanese peers are catching up fast.

Political pressures are making it appear more and more unlikely that the bailouts proposed for the American auto companies will go through as originally planned. This means that within a year or so, the global market could look drastically different. A likely scenario is for the Big Three to be reduced to the Big Two — or even One.

And even though Toyota is predicting a major drop in profitability this year, it will still be in the black. In fact, the company is predicting it will make a ¥600 billion profit for 2008, which would be enough cash to buy all of GM's outstanding stock and half of Ford's.

A similar picture is emerging in the auto parts industry: Delphi and Visteon of the U.S. are down, while Germany's Bosch and Japan's Denso appear set to further strengthen their industry-leading positions.

In fact, what we are witnessing is a historic change in the industry, one many firms seem eager to hide from. Japan's companies — as well as a few German ones — have put themselves in good position to ride the ups and downs of the changes to come.

Jochen Legewie is president of German communications consultancy CNC Japan K.K.

The Japan Times: Monday, Dec. 8, 2008

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If you really want to make people safe drivers again then simply remove all the safety features from cars. No more seat belts, ABS brakes, traction control, air bags or stability control. No more anything. You'll see how quickly people will slow down and once again learn to drive like "normal" humans.

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