Why Asian automakers are in big trouble - Column

Automotive Industries, July, 1998 by Maryann Keller

The Asian automakers have gotten themselves into a fine mess. When things were good, they didn't set aside anything for a rainy day. Now they are paying the price.

The Asian economic crisis collapsed vehicle demand throughout the region, crippled several companies and exposed the fundamental weakness of many automakers. Now they face the combined challenge of improved Western competition while learning how to make a profit, perhaps for the first time for many of them.

That's very similar to what happened in the U.S. 20 years ago, when the auto companies blamed an overvalued dollar, recessions, inflation, government policies and highly paid labor for their problems. In reality, they produced marginally competitive vehicles without regard to the real cost factors, such as vehicle design complexity, factory layout, and employee training.

The domestics enjoyed brief periods of profitability, only to risk bankruptcy when the vehicle market contracted. They were unable to build up cash reserves in rite good times and experienced further erosion when forced to cut back on product investment in the bad times. It was not until they tackled their basic cost and product problems that they became truly competitive.

Meanwhile, Asian automakers, especially the Japanese, had protected home markets, steady growth in production, a substantial increase in the value of the average vehicle sold, and what were known to be the most productive employees and the most cooperative suppliers on the planet. They also had access to capital at low interest rates, which contributed (along with superior cars) to a major competitive advantage. That should have meant tremendous wealth for the industry. But it didn't, as individual companies engaged in inappropriate product and strategies.

Asian automakers were obsessed with growth and market share, but they lacked financial discipline that would have better guided their decisions. Japanese auto companies didn't respond quickly when they began to lose cost superiority in the late 1980s. They were producing too many vehicle platforms, making too frequent model changes and undertaking too much investment that had no chance of making a reasonable return.

Individual companies seemed to follow the lead of Toyota or Honda, rather than develop strategies that reflected their expertise or size. Their lack of financial acumen is now apparent and has left some of them permanently damaged, especially as they face more competitive products made by wealthier U.S. and European makers.

Mazda nearly went bankrupt because management was obsessed with being No. 3 in Japan, and with following Toyota's lead in establishing a luxury car division. Neither goal made any sense for a small, relatively high-cost assembler. Nissan finally announced a restructuring plan that probably isn't enough to address its tens of billions in debt, accumulated in a global expansion that hasn't paid off amid product proliferation that has pushed costs up. Mitsubishi is too small to make everything from small cars to heavy trucks. Yet its management continues to defend a product strategy that marginalizes it in every market sector.

Korean auto industry capacity exploded over the last decade without regard to whether its automakers could earn a reasonable return on their investment. Samsung's future is now uncertain, since it has little to offer a foreign partner unless debts against the business are restructured. is in bankruptcy, and Daewoo is hoping for an investment by General Motors.

Asian automakers can point to bad luck and withering car sales for their problems all they want. But they must remember that GM, Ford and Chrysler didn't turn around until they tackled their fundamental problems -- and stopped complaining about the things they couldn't control.

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