Will Japan’s auto industry consolidate?

Toyota deal portends era of shrinking ranks in Japan

Toyota deal portends era of shrinking ranks in Japan

TOKYO (Bloomberg) — Japan’s crowded auto industry is poised to look more like other major markets, with three or fewer carmakers left by the end of the decade.

The 500 trillion yen ($4.4 trillion) economy is home to eight automakers, including the world’s sales leader Toyota Motor Corp., and other global players such as Honda Motor Co. and Nissan Motor Co. That’s more than car-loving Germany, which has three domestic automakers, or the far bigger U.S. market, where Ford Motor Co., General Motors Co. and Tesla Motors Inc. are the only independent companies left.

Toyota’s deal in January to acquire the remainder of Daihatsu Motor Co. for about $3.2 billion in stock may represent the dawn of a leaner Japanese auto industry, according to Takaki Nakanishi. By 2020, the Jefferies Group LLC analyst sees the nation’s ranks of carmakers shrinking to no more than three company groups, driven by the rising costs of competing to make cars cleaner, safer and more connected.

“To have one or two carmakers in a country is not only natural, but also helpful to their competitiveness,” Nakanishi said in an interview. “Japan has just too many and the resources have been too spread out. It’s a natural trend to consolidate and reduce some of the wasted resources.”

Poised to be the largest acquisition in Toyota’s history, the purchase of Daihatsu will reduce Japan’s roster of car companies down to seven. The nation has largely avoided the acquisition activity in Europe led by Volkswagen AG — which has absorbed Porsche, Audi, Lamborghini and others — and championed by Sergio Marchionne, who combined Fiat Chrysler Automobiles in 2014 and has continued courting peers for another deal.

For Japan’s second-tier car companies, the cost of keeping up with investments in cleaner powertrains and automated driving systems is getting prohibitive. Daihatsu President Masanori Mitsui, for one, said the 109-year-old company opted to become wholly owned by Toyota as it struggled to keep up with the rise of electric cars, as well as autonomous and connected-car technologies.

“If we want to overcome the upheaval in our business environment and the fierce competition to develop new technologies and emerge stronger than ever before, we must dramatically strengthen our collaboration with Toyota,” Mitsui said at a press conference on Jan. 29 with Toyota President Akio Toyoda. Daihatsu’s resources are “not enough for us to be called a truly global company,” he said.

Toyota’s edge

Honda, Mazda Motor Corp. and Mitsubishi Motors Corp. have avoided cross-share ownership tie-ups with other car companies, despite ventures with Rover Group, Ford Motor Co. and Chrysler Corp./DaimlerChrysler, respectively.

This is despite none of Japan’s auto companies coming close to the financial firepower at Toyota, which has $45.2 billion in cash and short-term investments. That’s more than the six other automakers combined for the last fiscal year.

The cash edge is also reflected in research-and-development spending. Toyota forecasts its r&d expenditures will reach nearly $14 billion yen for the year ending in March. That’s more than the combined r&d spending projected by Nissan, Subaru maker Fuji Heavy Industries Ltd., Suzuki Motor Corp., Mazda and Mitsubishi Motors.

Fresh alliances may be in the works. Mazda and Toyota last year said the two would broaden technology-sharing for greener cars. Mazda, which no longer counts Ford among its shareholders, hasn’t yet considered a capital alliance with Toyota. However, “we don’t know what will happen in the future,” Tetsuya Fujimoto, Mazda’s executive officer for financial services, told reporters Feb. 4.

Suzuki next?

Both Suzuki and Toyota have rejected reports by the Nikkei newspaper and other Japanese media suggesting the two also are in talks over an alliance. Regardless of the denials, Jefferies’ analyst Nakanishi expects the two companies may collaborate with one another before the end of the decade.

Toyota’s relationship with Daihatsu is “at the stage similar to calling back a wife who’s gone out for night parties and telling her it’s time to look after the kids,” Nakanishi said. “For Suzuki, it’s like they’re just starting to exchange diaries and have yet to hold hands. When Toyota’s starts to hold 5 percent of Suzuki’s shares, this will be like finally touching fingertips.”

Honda also has signaled it’s willing to diverge from its usual strategy, expressing interest in deepening its collaboration with GM. Their cooperation on hydrogen fuel cell technology has gone well and should end up being used in a future vehicle, President Takahiro Hachigo said last month.

Honda’s interests

“Whether it’s electric vehicle technology, artificial intelligence, IT, those kinds of innovative technical areas, we are talking with them to see if perhaps there is some area where there could be a win-win situation for our two companies,” Hachigo told reporters at the Detroit auto show.

Nissan’s history with Renault SA is indicative of both the case for consolidation and the difficulty faced in keeping stakeholders satisfied. The Japanese automaker probably wouldn’t have survived without its alliance partner’s initial rescue in 1999. Still, the two were embroiled in a power struggle last year with the French government that raised the ire of Nissan’s usually passive labor union.

Friction aside, Nakanishi sees more mergers and alliances as inevitable. “Scale has become essential to competitiveness, so you need to consolidate,” he said. “It makes sense to put everything together, because this enhances competitiveness.”


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