Weak yen masks problems - look at the Japanese automobile industry's failings - Column

Automotive Industries, March, 1998 by Maryann Keller

Japanese managers cling to quaint notions of business that are entirely out of date with the reality of the global market-place.

For years Japan seemed invincible. American automakers benchmarked the managerial and manufacturing processes of the Japanese auto companies, looking for answers.

That's changing. Today, the deficiencies in the Japanese system are increasingly apparent. The Japanese, we are finding out, have had little financial discipline. They relied upon low-interest-rate debt to prop up operations, while losses accumulated in unconsolidated subsidiaries. Balance sheets became highly leveraged. But the drop in the real estate and stock markets exposed the folly of relying on such collateral. Shortly after the bubble burst, automakers turned to their suppliers and employees for cost savings, reworked products to eliminate costs and undertook platform strategies to commonize parts. This worked for awhile, but these measures are not enough to respond to continuing deterioration.

During the 1980s American companies were criticized for putting shareholders ahead of the needs of the business, while Japanese managers were praised for placing the needs of the company before those of shareholders. The truth is, neither American nor Japanese auto companies did much for their shareholders during the 1980s. However, American auto companies generously rewarded them during the 1990s with the launch of superior products and corporate restructuring that brought capacity in line with sales, lowered costs and eliminated unprofitable or non-core assets.

While the transformation of tire traditional American auto industry is not complete, the magnitude of the change in the last six years has been unprecedented. It is in stark contrast to the lethargy in Japan in responding to the prolonged crisis there. Only the weak yen allowed the Japanese to defer meaningful action to respond to the mounting losses in Japan and throughout Southeast Asia.

We now see that Japan's historic success was dependent on predictable production growth, continuous improvement of processes and systems and the ability of managers to fund marginally profitable or money-losing ventures. The Japanese production systems are without peer, and their dedication to quality and engineering excellence ranks many of their vehicles ahead of the competition, despite recent progress by the West. But the Japanese lack the kind of leadership necessary to respond to a crisis. A seniority based system makes it nearly impossible to remove poor managers, while no one at the top wants to admit failure. As more international markets require local investment, the exports that once absorbed Japan's excess capacity could diminish, forcing, Japanese automakers to invest more overseas. All of them are now seeing the results of overly aggressive expansions on Southeast Asia. Even with a cheaper currency, the Japanese will have a tough time maintaining the status quo.

Since little has been done to reduce excess capacity in Japan, companies carry surplus employees and continue to promote unprofitable sales, despite the obvious financial consequences. While North American and European parts producers are consolidating and becoming more skilled and financially strong, their Japanese counterparts struggle to make annual price contributions in support of customers. In a global marketplace, where size increasingly means market strength, Japan seems intent on going the other way.

There are obviously companies, such as Honda and Toyota, that have managerial strength and products that have always set them apart from their rivals. Even Suzuki has been generally more sensitive to the bottom line and careful about how it invests its money. But much of the rest of the Japanese auto industry needs to take some of the lessons learned by the American makers during the past seven years.

A truer picture of the financial state of Japanese industry will be seen in two years when full consolidation of businesses will be required. It won't be a pretty picture.

Maryann Keller is managing director of the New York brokerage firm Furman-Selz Inc