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The United States has become the most desirable location in the world to build cars. Despite the revival of the Big Three, new entries continually appear, with two European makers, BMW and Mercedes-Benz, setting up plants in the United States. At the same time, cracks are apparent in the vaunted Japanese manufacturing system. Exports to Japan are growing, albeit from a small base, and imports from Japan continue to plummet, having fallen in volume terms every year since 1986.1 Chrysler and Honda produce right-hand steering vehicles in the United States for export; Ford, Saturn, and Toyota have announced plans to do the same. Among parts producers, eighty American parts firms have representation in Japan, and there are more than two hundred U.S.-based, Japanese-run plants that are also potential exporters. Driving this reversal are two fundamental shifts in our relative competitiveness: a reformation of American manufacturing management and the tripling of Japanese labor costs in U.S. dollar terms. These changes, of course, extend beyond the U.S auto industry into many sectors of manufacturing and affect our position relative to the European Community (EC) as well.
Evidence of Reversal
In 1981, Japanese automakers raised car prices in the United States by as much as 25 percent. The Big Three responded by raising prices too. Market shares shifted rapidly, as imports made inroads on the Big Three. The Japanese earned high profits; indeed, Toyota earned the moniker “Toyota Bank” from the horde of cash it accumulated. The Big Three automakers were at best able to stem their hemorrhage of red ink.
In 1992 and 1993, Japanese car companies again raised prices in the United States, with increases averaging 12 percent to 13 percent. The Big Three followed suit but with hikes only half as large. Market shares again shifted rapidly. This time around, however, the Japanese are trying to staunch the flow of red ink, while the Big Three — particularly Chrysler — are pulling in profits. Likewise, American producers are eating into Japanese market share, which dropped from 36.1 percent of the car market in 1991 to 32.3 percent in the first half of 1993.
Why the change? One reason is that this time it is Japan that is in the grips of a steep recession, rather than the United States. Sales within Japan began falling in 1991 and were still declining in June 1993. Recovery is likely to be slow.
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1. This and other data on the North American market are drawn from various issues of Automotive News. For background on Japan, I rely on Nikkei Kogyo Shimbun.
2. Chrysler, however, also produced almost 1.2 million trucks, including 548,000 minivans.
3. Including Canadian operations, these are: the Big Six producers (GM, Ford, Chrysler, Honda, Toyota, and Nissan) and the eight second-tier producers, Auto Alliance (formerly Mazda, before Ford’s recent equity purchase), Diamond-Star (Mitsubishi), NUMMI (Toyota-GM), Saturn (GM), SIA (the joint venture of Subaru and Isuzu), CAMI (Suzuki), and the near-moribund Hyundai and Volvo operations. BMW and Mercedes-Benz are both set to enter.
4. M.A. Fuss and L. Waverman, Costs and Productivity in Automobile Production: The Challenge of Japanese Efficiency (New York: Cambridge University Press, 1992).
5. For details of this estimation, see:
M. Smitka, “The Decline of the Japanese Automotive Industry: Causes and Implications” (Cambridge, Massachusetts: MIT International Motor Vehicle Program, paper, June 1993), p. 27.
6. Historically, the most important aspect of JIT is reducing inventories in order to highlight bottlenecks in the production system and hence focus engineering attention on systemwide productivity. But in Japan, with small plants and few warehouses, it is also a scheduling and logistics system, and it is in this aspect that costs are rising.
7. For an extended discussion of this and other problems facing the Japanese industry, see:
R. Johnson and M. Maskery, “Rx for Japan,” Automotive News, 17 May 1993, pp. 1, 18–20.
The same issue also contains a series of articles on General Motors. See: P. Frame, “Smith Remakes GM for Today’s World,” Automotive News, 17 May 1993, pp. 1, 22–23.
8. In fact, from the beginning, Toyota and Nissan have shared about one-third of their suppliers. Others were small local suppliers for whom geographic constraints mattered. It was only for the few parts firms in which Nissan and Toyota had substantial equity that the taboo was meaningful.
9. For more on the relationship of car producers and parts firms in Japan, see:
M. Smitka, Competitive Ties: Subcontracting in the Japanese Automotive Industry (New York: Columbia University Press, 1991).