The Decline of the Japanese Auto Industry

Here are three graphs, pulled from a talk I gave at UMTRI in the spring. The Japanese auto industry – that is, manufacturing and retail inside Japan – faces permanent decline.

Two trends interact. First, due to demographics Japan's population is in decline, and so is the number of licensed drivers. I don't have statistics on the latter, but I have used Census data and population projections to calculate the potential number of licensed drivers. (In Japan you can't get a license as young as in the US, and after age 70 it becomes increasingly hard to get your license renewed.)

Second, the vehicle mix is unfavorable. From the production standpoint, exports are important, but the data show that the market isn't increasing, has more low-value vehicles and is very volatile. The third graph is the domestic parc, which is what matters for dealers. Here the story is even worse, while full-sized cars rose in share along with incomes, that process has ended. Instead what we see is a decline in mid-size car sales (compacts in the US context) and their replacement by "kei" minicars.

Here are implications, as I see them.

1. Over time dealers will face extraordinary pressure. That will be accentuated by the geographic aspect of population decline, because population will fall more and age faster in rural areas where car ownership is highest. Rural areas are already distinctly older than the major urban areas (Tokyo-Yokohama-Kawasaki-Chiba, Osaka-Kyoto-Kobe, Nagoya, Hiroshima, Fukuoka-Kita Kyushu, and Sapporo). Their potential market is literally dying off. Dealerships in Japan are also unable to sell across prefectural boundaries, so better-run dealerships can't use the internet to extend their geographic market to offset local decline.
2. Manufacturers will face a smaller market. They have a large number of distribution channels – not including trucks, Toyota has six channels: Daihatsu, Netz, Corolla, Toyopet, Toyota and Lexus, with lineups that overlap and cannibalize each other. (Dealerships are also multi-point, with sales points each trying to buy business from other parts of the same dealership, while the strong players in used cars are independents such as Gulliver.) Rationalizing production and model mix and distribution will be traumatic, as we've seen with the efforts of GM, Ford and Chrysler in dropping multiple brands.
3. Suppliers will have an even harder time. Small Japanese suppliers were slow to internationalize. Even worse, when I've visited suppliers in Japan for engineering presentations – and in sharp contrast to similar visits in the US and France – I've been the only non-Japanese in the room. That hurts in two ways.
   • First, there just aren't that many would-be engineers graduating from Japanese universities. Without international staff they simply won't be able to stay in the game. Honda and Toyota have huge engineering operations in the US that can handle the entire vehicle development process. As far as I can tell, that's not the case with most Japanese-headquartered suppliers.
   • Second, in order to serve their customers on a global basis, suppliers need to have the same global capability. Some will finesse that by being acquired by foreign firms, and thereby globalize their engineering. Others will prove unable to build a global engineering and manufacturing presence because they've been slow to delegate decision-making and build capabilities and staffing outside Japan. They will steadily lose market share to firms with HQs outside Japan. Indeed, my scanning of industry news (in English, Japanese and [less frequently] German) supports that. Toyota is turning more and more to the big US/Europe based global suppliers, because their own "keiretsu" suppliers can't support Toyota's global footprint.
   • Now this is a third bullet, but is speculative so I won't claim it as a 3rd point. My belief is that because of the two factors above Japanese suppliers lag in technology. Casual empiricism turns to the body of finalists in the Automotive News PACE competition, who are chosen on the basis of successful innovation. Japanese firms are largely absent. [Mea culpa: the competition is entering its 20th year, and I've been a judge since the start.] Not having a truly global mindset, not having the bulk of engineers in Japan able to use English as a working language, means that Japanese suppliers are behind the eight ball in technology. Sometimes it's better to be a bit behind where you can learn from other's mistakes and simply not invest spend money on "advanced concept" R&D that leads to dead ends, the "bleading edge" thing. OEMs also want second sources, so even firms that have reasonable intellectual property know they won't have a monopoly. Still, my judgement is that being second source is less profitable. And being second-source based on production in Japan is a losing proposition.
4. Japan, as a geographic entity, is already a shrinking part of the global industry. Of course the growth of the BRICs and ASEAN means the same is true of the Euro zone and of NAFTA. My belief is that slow internationalization will accentuate the impact of a shrinking domestic market. That's particularly good new for non-"Japan" suppliers.

In the 1980s the US industry feared that domestic firms would disappear under the onslaught of Japanese "keiretsu" suppliers. That's not what we see if we look at the top 100 suppliers today.

Energy Self-Sufficiency: A Realistic Goal or a Pipe Dream?

By Gal Luft for the International Global Security Network

Western publics seem to believe that energy self-sufficiency is an ideal response to those who attempt to wield the ‘energy weapon’. I argue, however, that no state will be able to achieve full energy independence, let alone avoid future spikes in prices, in an economically globalized world.

The desire for self-sufficiency has always been a common trait of human society. After all, no one likes to be dependent upon others, especially for vital commodities and services. From a geopolitical perspective, this sentiment is arguably at its strongest when it comes to energy. The Arab Oil Embargo, Russia’s gas supply cutoffs to Europe and Venezuela’s and Iran’s threats to use the ‘oil weapon’ have all reinforced importing nations’ urge for energy self-sufficiency. No country is more preoccupied with this than the United States, where for the past four decades achieving energy self-sufficiency has been the mainstay of Washington’s energy policy. The only difference between Republicans and Democrats is that the former emphasize supply side solutions (‘Drill Baby Drill’) whereas the latter call for an ‘oil diet’ that uses less oil through taxation or increased fuel economy standards. The result is that the overwhelming majority of Americans believe that energy self-sufficiency will improve national security, alleviate the debt and budget crisis and yield lower and more stable gasoline prices. This worldview is based on myths and poor understanding of how the modern global energy market actually works. True energy security requires both uninterrupted energy supply and affordable prices. In today’s globalized world, energy self-sufficiency guarantees neither.

Is self-sufficiency really possible?

A nation’s energy basket is usually comprised of several commodities. Coal, natural gas, biomass and uranium are responsible for most nations’ electricity generation while petroleum and its products dominate the transportation sector. Some countries can reach self-sufficiency in one of the two sectors. For example, the United States’ electricity sector is practically self-sufficient. Other countries are not far behind when it comes to electric power: nuclear power generates 78% of France’s electricity, and renewables are responsible for 82% of Brazil’s power. But of the world’s 195 countries, very few are truly self-sufficient. Even energy-rich countries like Russia, Saudi Arabia, Venezuela, Brazil and Canada which are well endowed in hydrocarbons import some of their energy in the form of refined petroleum products due to insufficient refining capacity.

With some effort and investment in new refineries, this dependency can be eliminated, but most countries are not that fortunate. Of the world’s top ten economies, only two, Brazil and Canada, can theoretically reach self-reliance. The rest – China, Japan and Germany to name a few – are poor in resources in relation to their needs and their dependency on energy imports is growing by leaps and bounds. This means that as long as hydrocarbons dominate both our electricity and transportation systems, most nations will never be able to achieve self-sufficiency and will continue to rely on the global energy trading system.

Neither reliable nor affordable

While the pursuit of energy self-sufficiency lends itself to tactical solutions - such as increased domestic production or fuel economy mandates - that may have a positive effect on a nation’s trade balance and the environment, it would not have a profound impact upon the global price of crude and geopolitics. The reason is that oil is a fungible commodity whose price is being determined in the world market on a minute-by-minute basis. A price of a barrel of oil is more or less equal to every consumer, and when the price spikes, it does so for everyone regardless of where their supply comes from. (This is not always the case for natural gas: unless it is traded in the form of LNG, its price is pre-determined in long-term contracts)

In 2008, for example, the United Kingdom was virtually self-sufficient in oil. Yet, in keeping with other import-dependent economies, British motorists were affected by a sharp rise in crude prices that led to protests over the rising cost of petrol. Over the past decade, both US oil production and vehicle fleet fuel efficiency have increased sharply. Consequently, US oil imports have decreased from 60% in 2005 to 42% in 2012. Yet, despite the fact the US is the world’s top oil consumer, none of this had any noticeable impact on the price of crude. On the contrary, the burden of imported oil on the US economy has roughly doubled and the share of oil imports in the overall trade deficit grew from 32 percent in 2005 to 58 percent in 2011.

Both case studies suggest that the move towards greater self-sufficiency does not necessarily lead to cheaper energy prices. All countries, irrespective of whether they are importers or producers, are part of the global energy market. This also casts doubt over the popular assertion that energy self-sufficiency could, in turn, weaken oil-exporting Middle Eastern states that are hostile to the West. OPEC member-states – who control nearly 80 percent of global conventional reserves -- need a certain breakeven oil price in order to keep their economies afloat. Any increase in non-OPEC oil supply or reduction in demand invites a reciprocal cut in production by OPEC aimed at restoring the price to the level OPEC governments would like it to be.

Equally tenuous is the argument that oil exporters can punish or target their clients with effective embargos for geopolitical reasons. Suppose that for some reason, Saudi Arabia decided to cut its oil exports – currently at 1.3 million barrels a day – to the United States. The effect on the US economy would not be more noticeable than the effect on any other economy. The US government has approximately 700 million barrels in its Strategic Petroleum Reserve (SPR), enough to cover for 18 months of lost Saudi supply. But even without tapping the SPR, the US economy would do just fine. Being dependent on oil for 90 percent of its export revenues, Saudi Arabia would have to sell the oil to someone else, say China. Beijing would possibly forgo some of the oil it brings in from Angola, for example, that may eventually find its way to the US market. On the whole (albeit not without some logistical adaptations) market forces would quickly adjust the supply-demand balance in such a way that all importers receive more or less the amount of crude they need. As long as the commodity is fungible no exporter can target a specific importer for more than a few weeks.

A new paradigm is needed

While achieving energy self-sufficiency remains unrealistic, this does not mean that states should sit idly by in the face of the global economy's vulnerability to oil price spikes. High oil prices wreak havoc in the ailing global economy, and the potential for conflict over access to oil seems to be growing as Asia’s thirst for crude grows. But instead of rooting for energy self-sufficiency, the goal should be to diminish the strategic importance of oil. In the book Turning Oil into Salt: Energy Independence through Fuel Choice (2009), the argument is made that oil today has the same strategic importance that salt held for most of human history. As the sole means of food preservation, salt once determined the course of world affairs. Wars were even fought over it. Competing means of food preservation such as canning and refrigeration stripped salt of its strategic status, turning it into “just another commodity” that no longer has geopolitical leverage. Similarly, the strategic importance of oil does not stem from the amount of it we use or import but from its virtual monopoly over transportation fuel. For the most part, automobiles sold throughout the world can run on nothing but petroleum fuels and thus energy commodities from which competitive fuels can be made are effectively barred from competing against oil. Because of this oil is not substitutable, so consumers cannot shift on the fly to competing products when oil prices become too high.

To achieve true and lasting energy security we must replace self-sufficiency with a competitive fuel market paradigm. This can only be done by opening vehicles to fuel competition. Just as the grid is agnostic as to what type of energy was used to generate the electricity it transmits, our cars and trucks as well as our fuel distribution system should be open to a diversified fuel mix. A variety of liquid fuels like ethanol, methanol and butanol can be made from natural gas, coal, biomass and municipal waste. Some, like methanol, are significantly cheaper than gasoline on an energy equivalent basis. Such fuels, in addition to gasoline, can power flexible fuel vehicles (FFV), which cost manufacturers an extra $100 or less to make compared to gasoline-only cars. Electricity can be stored on board automotive batteries and power pure electric vehicles and plug-in hybrid electric vehicles. Natural gas can be used onboard dedicated vehicles (and of course converted into methanol for use on FFVs). Each of those competitors has pros and cons. Some involve a higher premium on the vehicle side, others require costly infrastructure, and some are not cost-competitive except when oil prices are high. However, the uncertainty over future oil prices requires that the transportation sector opens up to these options as a shield against the economic and security challenges posed by a volatile oil market. This, not elusive self-sufficiency, should be our course.

Gal Luft is co-director of the Institute for the Analysis of Global Security (IAGS) and senior adviser to the United States Energy Security Council. He is and co-author of the books Energy Security Challenges for the 21st Century (2009), Turning Oil into Salt (2009), and Petropoly: the Collapse of America's Energy Security Paradigm (forthcoming 2012).

Is there a GM without Opel?

Can GM sell off assets such as Opel and remain a going concern? I have my doubts.
At one time, while GM assembled cars in most major markets, these operations were largely autonomous. After all, GM expanded outside the US more by acquisition than by organic growth. For example, it entered the UK market through the 1925 acquisition of Vauxhall, which had started producing cars over two decades before, in 1903. Similarly the core of its continental operations is Opel, which began producing cars in 1900 but was not purchased by GM until 1929, while it acquired the Australian firm Holden in 1931. The most recent such acquisition was in 2002, when GM took over the core operations of the Korean-based firm, Daewoo (which turned out its first motor vehicle in 1937, during the Japanese colonial era).
That is no longer the case; GM is now a global firm, rather than a collection of national operations. Beginning in the mid-1990s it began to focus more carefully on developing a set of core platforms to serve as the basis for the vehicles it manufactured around the world. The next step was to lessen duplication, reducing the number of platforms, and then creating engineering centers that concentrated on specific products. Holden in Australia worked on rear-wheel-drive cars (though those programs are currently in abeyance); Opel in Germany worked on compact and mid-sized cars. The US focused on light trucks and larger front-wheel-drive vehicles. Finally, Daewoo focused on subcompacts. And consistent with that, Vauxhall in the UK no longer develops its own product; instead its vehicles are all engineered in Germany.
The geographic lines reflect in part the nature of the markets in which the engineering takes place; Europe, not the US, is the core market for compact cars, while subcompacts are more important Asia, Eastern Europe and the developing world, where Daewoo's strengths lie. In the current global structure each of these design centers then works with the various regional and national operations (such as North America) to develop vehicles specific to those markets. In the US the new Aveo is from Daewoo, which now handles the Gamma II platform, while in 2005 the engineering of GM's Delta platforms (e.g., the Malibu) was centralized in Germany. Paralleling this development of "world" platforms is the globalization of GM's supply chain; companies that wish to sell parts to GM need to be able to work with the relevant engineering centers, and to be able to produce their parts in multiple regions.
So, can GM then sell off Opel, and remain an ongoing operation? GM will be beholden to the new owners for core vehicles, as it will lose all independent ability to engineer small and mid-sized cars. Opel's products are a real strength to GM; they are one core of its surge in China, where sales jumped 50% in April 2009, and are essential in the US as well if (when!) high gasoline prices return. Unless the purchaser of Opel cooperates wholeheartedly with GM — grudging fulfillment of a contractual obligation won't do the trick — then, sooner rather than later, GM will collapse.
Now such cooperation is not impossible. Fiat's revival under Marchionne was dependent on product engineered jointly with GM's Opel subsidiary. They can and have worked together successfully, culture clashes or no. Second, Fiat has no presence in North America, and so can only gain from continuing to develop vehicles for GM in its home market; Fiat is also weak in China, where GM is the market leader. (They do compete head-to-head in Brazil, where Fiat is the market leader.) Should Magna, the other bidder for Opel end up carrying the day, there in fact are no such conflicts, as it has no independent OEM operations.
Losing Opel does not necessarily spell the end of GM as an ongoing business. But any car company that ceases developing new product has in effect declared that sooner rather than later it intends to close its doors. GM truly is a global business, and splitting itself up puts all of the pieces at risk — including Opel — because they are no longer standalone operations. The German government is nervous contemplating Fiat as the new owner of Opel. It should in fact be nervous about anyone other than GM owning Opel — and Obama's car czars should be as well.