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Japanese automakers shift gears on traditions

Published Oct. 12, 2005

The Nissan Motor Co. has gone to great lengths to give customers what they want.

Japanese buyers of the Nissan Sunny, known as the Stanza in the United States, can choose from nearly 200 variations with different engines, bodies, tires and transmissions. The company has sold fewer than a dozen units of some combinations.

But those days are over. Nissan, which says it will lose money this year for the first time in about four decades, is trying to save money by cutting back on the number of variations it is offering, even it if means sacrificing market share. It is also leaving some models on the market longer than the customary four years. And it is trying to use the same parts in more models. Right now, for instance, there are about 70 kinds of steering wheels used in its automobiles, when far fewer would do.

The move at Nissan is part of a big change occurring in Japan's auto industry. Buffeted by a slowdown in sales and a host of other problems, Japan's automakers are being forced to modify the vaunted system by which they design, produce and sell automobiles, even as this system is being emulated around the world.

The system, first developed by Toyota and often called "lean production," involves rapid introduction of models, a flexible manufacturing system that can make many kinds of cars on the same assembly line, low inventories and long-term relationships with suppliers.

But now, manufacturers are starting to cut the number of products they offer, slow the pace at which they bring out products, reduce their reliance on low prices as a marketing strategy, keep larger inventories and loosen historic bonds with suppliers. And a severe labor shortage in Japan might make it more difficult to attract and retain the skilled, disciplined workers who are a hallmark of the system.

Reworking the Toyota system

"We're looking right now at the most significant shift and the greatest pressure on the Japanese system since it achieved pre-eminence in the early '80s," said Harley Shaiken, professor of work and technology at the University of California at San Diego, who is studying Japanese auto factories. "The Toyota system that powered Japan in the '80s will need an overhaul for the '90s."

No one expects Japanese companies to abandon lean production, only to modify it. And no one expects the big Japanese producers to fade as a force on the world scene, or even to have problems of the magnitude experienced at times by General Motors or Chrysler.

But the Japanese manufacturers could become less invincible than they have been in the past, giving Detroit some breathing room. And they could suffer some decline in market share, as they have this year in the United States, where Japanese share of the car and light-truck market has dropped slightly.

Driving the changes is the fact that Japan's automobile industry is now in its second year of declining sales and production, making this the most severe downturn the Japanese producers have seen in decades. Total production of Japanese cars, trucks and buses in Japan peaked at 13.5-million in 1990 and will probably be less than 12.6-million this year, according to Merrill Lynch. (Overseas production totaled about 2-million cars in 1990, and is apparently still growing, but the calculations for 1991 and projections for this year have not yet been made.)

Because of the economic recession in Japan, sales of passenger cars here have fallen 6.3 percent in the first seven months of the year, after registering a 4.6 percent drop in 1991. The domestic market is particularly important for Japanese companies because it is one they alone control, giving them a revenue base that helps them compete elsewhere.

In the United States this year, sales of Japanese cars and light trucks are down 2 percent, in part because of price increases greater than those of American competitors and because American cars are gaining in quality.

What really worries executives here is the fear that growth might be over for good. Japan's roads can't handle more cars, and exports to Western Europe and the United States are limited by trade agreements. Japanese factories in Europe and the United States can circumvent those restrictions and grow, but in any case, the United States and European markets are also mature.

Time to pay bills

The slowdown has hit just as bills for huge plant investments are coming due, dragging down profits. Toyota, Japan's largest manufacturer, recently announced worldwide operating income for its last fiscal year plunged 56.3 percent to its lowest level in at least a decade.

The slowdown only compounds other problems in the industry. Japanese companies are under international pressure to use more foreign parts, work shorter hours and reduce cutthroat competitive ways. The tumble in Japan's stock market has made it more expensive to raise money, making profits more important to the financing of vital projects like pollution-free engines. And, many experts say, the Big Three automakers in the United States are closing the gap with Japan in productivity and quality.

All this, analysts and executives say, changes the landscape tremendously. "The Japanese industry is at a structural crossroads," said Yoshifumi Tsuji, who has just taken over as the president of Nissan.

Many analysts have no doubt that Japan will adjust to these problems, as it has in the past. "What they're doing is transforming themselves into companies that will be profitable in a no-growth environment," said Maryann Keller, an analyst at Furman Selz in New York. Eliminating excesses from their system and increasing profits will only strengthen the companies, she said, providing more money to invest in new products and technology.

Other experts say the talk of gloom and doom in Japan these days _ and of a resurgence by Detroit _ is merely part of an effort by Japan to defuse trade tensions and head off bills in Congress for even stricter limits on Japanese sales in the United States. "Detroit would wish they had so many problems," said Joseph T. Gorman, chairman, president and chief executive of TRW Inc., a major auto parts supplier.

A shrinking work force

The Japanese companies have already been hurt by a long-term shortage of labor, owing to the shrinking population of young people and the fact that those prosperous youngsters shun assembly-line work. That has forced them to invest heavily in automation and to move plants to more remote areas where it's easier to recruit workers. But that has made it harder for the companies to coordinate with suppliers for the delivery of parts in the small quantities needed for the just-in-time inventory system.

If auto sales no longer rise steadily, it will also be harder to ensure lifetime employment, the underpinning of worker loyalty.

The supplier system, in which each company has a network of suppliers, is also coming under stress from lack of growth. Some suppliers are expected to fold and others are selling outside their corporate group.

Another hallmark of the Japanese system has been the rapid introduction of new models. Japanese companies often introduce a new model after the old one has been on the market for four years, in contrast with five or more years for American companies. Moreover, while Henry Ford, the pioneer of mass production, once offered customers one type of car in any color as long as it was black, the Japanese system allows for a greater variety of products in smaller production runs.

Between 1985 and 1991, Nissan increased its number of models to 60 from 39, but diluted its average sales per model to 22,364 from 26,771, according to Baring Securities.

Now the growing financial pressure is causing a retrenchment in this practice. Fuji Heavy Industries, which makes Subaru cars and has suffered heavy losses, said recently that it would cut in half its number of models. Nissan, while not cutting back on the number of models, is cutting the number of variations of each model.

"The variety has gotten beyond the ability of factories and suppliers to handle it," said Michael A. Cusumano, a professor at the Sloan School of Management at M.I.T.

"The countermeasures to all these problems is to take a step back to something that looks more like conventional mass production," he said. "In some ways, they're becoming more like us." Such a change, he said, could increase profits but would probably reduce market share and lessen the chances for a hit niche product like the Mazda Miata.

To make things easier on their suppliers, the auto companies are diverting a bit from the just-in-time inventory system.

A longer product life

The Japanese companies are looking at increasing product life cycles. A joint venture of Mitsubishi and Volvo said it would operate on a five-year cycle. When Nissan announced its new March, a small car to be sold in Europe as the Micra, it said the product would have a 10-year cycle.

Auto companies also are trying to raise prices, but the Japanese market is so depressed that it is proving impossible.

To what extent the automakers are departing from past practices depends on their situation. Nissan, the second-largest automaker here, has been the boldest; it is in perhaps the toughest situation among the major companies. It has lost market share in Japan and the United States in the last decade. And it has run up high debts for new factories.

Mazda is also stretched too thin, analysts say. It introduced 12 models in the last two years and has five sales channels in Japan. But sales through June fell 8.5 percent, the greatest drop among Japan's major manufacturers. But spokesmen say it has no plans to reduce sales channels and models.

Honda was early in bracing for low growth. Its major investments in new plants are behind it, so they won't drag down earnings. In March, it announced a reorganization aimed at cutting costs, in part by giving manufacturing experts a greater say in car design.

Still, Honda's market share in the United States, its main market, has been dropping and the Ford Taurus is now threatening to topple the Honda Accord from its three-year reign as best-selling car in America.

With vast financial resources and optimism about sales growth, Toyota is trying to get through the downturn by "accumulating minor efforts" to cut costs, said president Tatsuro Toyoda. The company is trying to use more common parts and might consider reducing the number of models.

The problem is that if one company, especially Toyota, keeps fighting with low prices, numerous models and short model cycles, other companies might feel compelled to do the same. And, if the overall market is not growing, the only way a company can grow is by increasing market share.

Japanese automakers "don't know how to adjust ourselves to such a market," said Taizo Yokoyama, a managing director of Mitsubishi Motors. "Our experience is we can survive only through expansion."