A historical perspective on the success of the Japanese auto industry Essay

A historical perspective on the success of the japanese auto industry

INTRODUCTION
From a very humble beginning, the Japanese Auto Industry has grown to become the leading automobile manufacturer in the world. The industry has gone through a continued evolution which started with the revival of infrastructure destroyed during the World War II and the introduction of legislative measures to stimulate growth in the motor vehicle production. The industry that started with domestic sales gradually went regional through several globalization phases and collaboration with other international manufacturers. The Japanese auto industry then greatly penetrated the export markets including the ones that were initially dominated by European and American manufacturers whose productivity had steadily deteriorated since the 1970’s oil crisis. After World War II the auto industry revolutionized the standard of living for the Japanese people and became the main driver of the economy. Nissan and Toyota were among the very first companies to enter the Japanese motor sector and they have stood the test of time to become part of the world’s most preferred car models. The development of the Japanese auto industry amidst many domestic and international challenges to a successful world class venture has been through a combination of several factors. This paper examines the historical trends through which the industry has evolved, with an aim of identifying the factors that contributed to its successful rise to become a world leading industry.

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HISTORICAL BACKGROUND
The onset of the automobile industry in Japan can be traced back to the early 20th century when a number of trial model cars were produced. The first such car was produced in 1902 by Yoshida and Uchiyama using a lower powered American automotive engine. Two years later Torao came up with a 2 cylinder steam powered auto mobile that was succeeded by a car model known as Dattogo in 1912 a creation of Hashimoto. After several experimentations, Hakuyosha came up with a more advanced model called Otomogo that produced 250 Japanese cars in 1923. This was the first Model to have such a big number of production units, but the number was still low for profitable ventures. The cars imported from foreign markets at this time, particularly from America were still cheaper and of a higher quality than the home made models. General Motors (GM) and Ford took advantage of the growing automobile market in Japan and opened subsidiary assembling companies there in 1925. The importation of foreign car models grew steadily and by 1929 about 16,000 units were being imported every year. In the meantime the Japanese domestic production was expanding and in 1933 the sector pumped 1000 domestic units into the market[1]. However, due to the low levels of industrial technological base in Japan at that time, the automobile industry could not catch up with such countries like America and Great Britain that were using more advanced technology. After World War 1 (WWI), there was increased pressure from the military for more established companies like Mitsubishi to step up domestic automobile production. However, due to the high risks involved in the business especially in sourcing quality raw materials and lack of fabrication skills, the companies remained non-committal towards large scale engagement in automobile industry.

For the period after WWI, the Japanese automobile industries were focused in the production of military vehicles. The government issued subsidies to encourage companies to engage in the motor vehicle research and manufacturing and some new companies namely the Toyota and Nissan came in to face the technological challenges bedeviling the industry. Nissan was initially part of the Tobata Foundry but it had independently patented the Datto car model that was in 1933 branded as new Nissan model. Toyota which came up in 1933 was part of Toyoda until in 1936 when it was established as an autonomous entity. Toyota and Nissan received authorization to operate in the automobile industry and enjoy protection, benefits and incentive as outlined by the automobiles industrial law of 1935[2]. There were great restrictions in the manufacturing of foreign vehicles as the wartime came up and their operations were brought to a complete halt in 1940. In the mean time, the local manufacturing companies were engaged in production of trucks of medium size and improving on the spare parts industrial growth guided by the industrial strategic plans from the military. Jidosha Kogyo (Today’s Isuzu) later joined Toyota and Nissan but specialized in the production of diesel run vehicles.

During WWII, the Japanese local auto-industry manufacturers played a significant role in the fabrication of weapons and trucks. This production was allowed to continue after the war albeit in limited quantities, so as to serve internal transportation requirements and after the first year only around 20,000 vehicle units had been produced. The rising demand for passenger vehicles in Japan around 1952 coupled with the Korean War that hiked the demand for military trucks and artilleries rejuvenated the industry that had been adversely affected by the effects of the WWII. The major players in the industry sought for technical mergers with European companies to upgrade on their technological expertise in automobile production. The transfer of technology was successful and it included the fabrication of spare parts, engineering designs and the actual vehicles’ production processes. The mergers were however temporary for they had only focused on the transfer of technology. The government of Japan through the relevant ministries introduced support mechanisms aimed at shielding the local industries from foreign competition and ensuring appropriate allocation of foreign currency into advancement of innovative automotive technologies. The liberation of the Japanese economy in the 1960s sparked sudden expansion in the motor vehicle industries with demand for cars rapidly increasing at an alarming rate. This explosion in the industry led to the inclusion of more companies to join Toyota, Nissan and Isuzu. These companies included Mitsubishi, Hino, Prince, Mazda (Toyo Kogyo), Daihatsu and Honda which expanded the automotive fabrication capabilities to 100,000 units annually. The spare parts fabrication was integrated and concentrated together to form a coherent sub-contracting system effectively strengthening the national distribution network. Following the rising demand Nissan and Toyota introduced policies for full product productions and developed new car models that were suitable for mass production. The strategy was highly successful and it set the base for the emergence of the two car makers as giants in the automobile industries of Japan[3].

The period after 1965 witnessed a major re-organization in the automobile industry facilitated by the government through the ministry of international trade and led by players from the American car making industry. These led to mergers that gave the companies financial muscle for increased mass production and encouraged specialization. The re-organization led to the formation of three major groups with one of the groups consisting of the Japanese major players (Toyota and Nissan) together with their associates. The second group was composed of the companies that had links with the American firms while the third included Honda and Suzuki which were operating independently. From 1968, the exportation ventures for Toyota and Nissan car models rose up suddenly followed by that of Honda and companies linked to the American firms in 1975. The rapid growth and expansion of Japanese automotive export market was aided by taking advantage of economies of scale, technological advancements and cheap labor. Furthermore, the Japan models captured the international market due to their high quality, reliability, oil efficiency and low maintenance costs. In addition, the mass production coincided with the oil crisis that effectively raised demand for oil efficient car models from Japan.

In 1977 Toyota and Nissan exceeded the two million units mark and by 1980, Toyota had hit 3 million units per year with about 50% of the total production going to export markets. The entire automotive industry depended heavily on the export market that constituted 51% of the total sales in 1977 and 54% of 11.04 million units in 1980 that had effectively placed Japan as the World leading automotive manufacturer[4]. The exportation market was later threatened by restrictions imposed by the importing countries in their efforts to protect their emerging automotive industries and strike a balance of payment in export-import business transactions. After 1985, the US car makers introduced fuel efficient cars and this factor compounded by the instability of yen, continued to adversely affect the Japanese export market. The adoption of plaza accord signed by the G-5 states in 1985 led to a sudden appreciation of yen a scenario that elicited a great burden to Japanese automotive export markets. Nevertheless, the period witnessed a steady growth in domestic sales recording a 2.7% annual rise to hit a turnover of 5.71 million at the close of 1986. The automotive industry seemed to ride on the economic growth that ran from 1987 to 1991 posting the highest ever production volume of 13.5 million units in 1990. The collapse of the bubble economy in 1991 however drastically reduced both the domestic and export sales that effectively affected production. By 1994 the total production had reduced to merely 10.5 million units, a situation that elicited major restructuring in the industry[5].

During the financial downturn of 2008 and 2009 all the Japanese car makers recorded sudden decline in production volumes and on sales. The total sales volume in 2008 was the least in thirty eight years at 2.89 million units and the drop by 32.4% in sale volume recorded in 2009 was the highest such drop since 1974. During the 2008/2009 recession period the Japanese auto industries was generally affected by appreciation of yen and the sudden drop in the demand of the automotive products around the world. In the US market alone the demand fell up to 40% forcing Nissan, Toyota and Honda to drastically cut down on their levels of production. All the associated market lines in automotive industry including parts, shipping and restaurants were adversely affected by the crisis forcing some automobile suppliers to retire some of its workers. The problems with the US motor vehicle manufacturers also affected the 114 Japanese companies that had long term business mergers with GM. These companies, including 70 spare parts fabricators needed government support to rise up to profitable ventures and take their leading positions in the world automobile industries[6].

FACTORS THAT CONTRIBUTED TO THE EXPANSION OF THE JAPANESE AUTO INDUSTRY
3.1  HISTORICAL EVENTS

3.1.1    TOKYO EARTHQUAKE OF 1923

The devastating Kanto Earthquake of 1923 fueled the need to have sufficient vehicles to serve the population that had been adversely affected by the quake in the capital. This called for importation of eight hundred truck chassis from Ford car makers which were converted into passenger buses. The city commuter services were a great success and the buses continued to serve the city long after the restoration of the transport infrastructure in Tokyo. The move exposed the potential market that Japan offered and therefore Ford immediately introduced an assembling plant in Japan in 1925. By 1927 the company had successfully adopted two other models these are, the GM Japan and Chevrolets. The establishment of these automobile company efforts in Japan gave the country a vision and a dream to venture into mass automobile production[7]. The first opportunity for the country demonstrated by Ford Company impacted an experience in both automotive mass production technologies and effective quality control systems including sub-contraction of parts and establishment of nation-wide distribution networks.

3.1.2    WORLD WAR II

During the war period most of the sectors including the automotive industry prepared earnestly for their contribution to the difficult moment. The Japanese ministry of war placed the auto industry at the centre stage in its five year industrial strategic plan of 1937. The plan stipulated that the industry realize a 270% target growth in vehicle production by the year 1941. This positioned the auto industry in a strategic position in war preparedness efforts that forced the industry to keenly concentrate in the mass production of trucks instead of small cars. As an effort towards war preparedness the auto industry was granted the role to spearhead development agenda in all the sectors due to its interdependence nature with other sectors especially in its role to supply parts. This decision lifted the expectations of the industry requiring it to double its effort to meet the requirements placed by the government in expansion of the general industrial infrastructure. The ban on oil importation from US in 1941 called for intensive researches in alternative vehicle engines, this culture of research gave Japan an advantage later during the global oil crisis for its car production efforts had fuel efficiency factored. Most of the production and technology advancement in Japanese auto industry at this time was all directed and driven by the war pressure and all its units were directed to the military and government agencies[8].

The pressure of war built a significant foundation for the vehicle manufacturing in Japanese auto industry. The mass production of the vehicle grew steadily after 1935 with parts fabrication becoming a significant segment of the industry. The manufacturer-user mutual trust that is associated with Japanese vehicles today was influenced by the military requirements in the war era and was successfully maintained to attract the world attention to date.

3.1.3    1970’S OIL CRISIS

The global oil crisis started in 1973 and though it affected the whole world its gravity was particularly high in Japan. At the time, Japan’s 80% oil requirements were sourced from Middle East and therefore the declaration by OPEC to suddenly cut down production was horrifying news to the Japanese economy. The OPEC declaration stepped up fuel prices by a whooping 217% that effectively increased the nation’s oil importation costs from 2.8 trillion yen to 6.6 trillion yen within the first two years of the crisis. The crisis induced a serious inflation of 24.5% causing the GNP index to experience negative growth of a kind that had not been recorded in the post WWII era. This economic situation adversely affected the automotive industry with the entire domestic sales falling by over 20% and the production level going down by 12.1% in 1974. The export market however recorded an increase of 26.7% with the importation of trucks by Middle East going up by 44.3%[9].

As a response to the crisis, Japan introduced stringent measures to reduce costs and conserve energy and other renewable and non-renewable resources. Energy conservation turned out as an important government policy and the need to design and manufacture cars, buses and trucks that conform to strict fuel efficiency regulations became the first agenda in most of the car makers throughout Japan. The Japanese auto industry therefore adopted technologies that allowed for greater fuel efficiency leading to the industry’s recovery in 1975.  The high demand of the fuel efficient cars and mini buses grew steadily after 1975 especially in US market. The search for fuel efficient vehicles also resulted to development of automobiles with lesser emissions that led to cars with automatic transmissions. The development fitted to the user needs at the time and increased the demand of the environmental compliant vehicles. The oil crisis therefore exposed the need for relevant technology and also forced research measures by the manufacturers that became a significant asset for the successful growth within the auto industry. The success of the Japanese auto industry today is owed largely to the development stimulated by the oil crisis.

3.1.4    BUBBLE ECONOMY OF THE MID 1980S

Though the rise of the bubble economy in Japan was not sustainable it exposed the great potential that the Japanese automotive industry could achieve. This fact consequently placed a high production target established at the peak of the bubble economy (1990) that the industry has always worked hard to maintain. The era of the bubble economy prompted a significant increase in the pricing of the assets that were guided by a number of factors. First, the Plaza Accord signed by the G-5 countries in 1985 caused the yen to appreciate steadily (from 250 per dollar in 1985 to 113 per dollar in 1993) prompting the interest rates to drop drastically. The doubling effect of the value of the yen improved the power to spend in the domestic market. By 1987, the interest rates in the banking sector had hit a low of 2.5% from an average of about 5% recorded only two years earlier. The consistent little returns on savings compounded by small costs attached to borrowed money elicited a further increase in investment and spending. Secondly, the shift in monetary policies prompted many companies to reduce their borrowing culture from the banks effectively increasing the financial activities in the country. The increase in the value of mainstream assets in the economy prompted a steady rise in the value of concealed properties contained in the balance sheets of various firms. This consequently amplified the prices for the shares of these properties to values that were not factual. This was followed by many corporations shifting their financing methods from accumulation of debts to equities through issuance of bonds. The banking industry also changed their focus from issuance of loans to speculations in real estates’ market and activities in the stock exchange market.

The 30 years of steady growth in the economy had given the Japanese car makers a great advantage over the international rivals. The impulsive rise of the bubble economy was further supported by wide international spending and the continued appreciation of the yen that made lending and borrowing to be done without keen consideration of the risks involved. As a result huge investments were directed into assets by both local and international firms, marking the busiest trading period at the Nikkei Stock Exchange when the activities rose from 13,113 yen at the beginning of 1985 to 26,000 yen just two years later. These activities pushed the Japan’s stock exchange market to become the biggest in the globe constituting 41.7% of the global market capitalization! The bubble economy period witnessed a 240% that left land value in Japan being more than four times its value in US. The market situation raised confidence in consumers raising further the spending culture and stimulating the high demand levels associated with the period. The GNP doubled to hit the $24,000 mark in 1990 which is one of the highest GNP among the developed countries[10].

Though the phenomenal economic growth did not correspond to the reality of the market it greatly stimulated the automotive growth and global confidence with a remarkable production level of 13.5 million units in 1990. The bursting of the economy later in 1990 left an automotive industry that had taken its position in the world economy. The technological and production muscle developed within that period could not be wished away and the period remains a remarkable historical pace setter for the industry to date.

3.2       CULTURAL FACTORS

Japanese auto industry was established on rich cultural norms of a country that emerged from extreme poverty. The approach by the car makers is engraved in three major cultural values that have driven the industry to become a world leader. First, there is the belief that a group is always larger and of great significance than any individual constituting the group or outside the group. The development of the auto industry has been done as a collective project that was not meant for a few individuals. It is worth noting that the period after the WWII was too difficult for continuation in automobile research and fabrication, the funds for such projects were insufficient and therefore the industry could only be driven by patriotic motivation engraved in the Japanese culture. Secondly, the Japanese culture puts a lot of value towards devoting ones life in its entirety to perfect particular art, skill or technology that may add collective value to others.  This cultural value was particularly important in the development of the auto industry that called for total commitment by researchers and designers in the initial stages. Thirdly, the Japanese culture is known for frugality even when the economy is prospering. This is coupled with immense resourcefulness whenever adversity strikes. These cultural values have helped the industry to survive through the difficult economic challenges as the Japanese automobile manufacturers have always tackled the difficult economic challenges collectively[11].

3.3       POLITICAL AND ENVIRONMENTAL FACTORS

Since 1970s intense political debates have been raised towards adopting stringent measures that will reduce dangerous emissions in the auto industries across the world. Muskie Act enacted in US and which required auto industries to reduce emissions by 10% generated a lot of political heat that forced the Environmental Protection Agency to postpone its adoption in US automotive industry in 1973. Japan however, having lesser political influence on global environmental issues chose to concentrate on adopting technological innovations that would comply with the environmental policies. Honda Japan was the pioneering company to meet the emissions requirement with its CVCC engine. Nissan and Toyota introduced an innovative 3-way catalyst that met the environmental requirements without restructuring their engines. This was a great breakthrough that placed Japanese Auto industry in the limelight and this technology was later adopted by many other industries across the world. Though such innovations were sparked by political pronouncements, it challenged the Japanese Auto industry to bravely take a leading role ahead of other major countries like US a move that increased the consumers’ confidence in their products[12].

3.4       INDUSTRIAL BASE

Though Japan had an established industrial base by 1950, the issue to introduce an automobile industry in the country elicited controversy following remarks against the idea by Mr. Ichimada Hisato who was a very influential leader at the Bank of Japan. Ichimada argued that the country did not need an auto industry given that the positions in the motor vehicles had already been taken by some powerful states in Europe and America. Therefore according to Ichimada, Japan was supposed to concentrate on areas that it could command a world monopoly. This comment elicited a lot of debate among so many people who believed that Japan could still introduce and command a leading role in vehicle manufacturing. The comment therefore turned out to be an enormous driving force by interested players towards proving the hidden potential that Japan had in the Auto industry. The ministry of International trade and industries was in favor of the establishment of an auto industrial base in Japan that would protect the emerging car makers. The position of the ministry quickly shaped the government’s policy towards automobile industrial base and in October 1952 the ministry introduced strategies with an aim of establishing and adopting relevant technologies by appropriate partnership with foreign car manufacturers with a focus to improve on productivity levels of small cars suitable for export markets.

The adoption of the rational industrial promotion law in 1952 set the pace in implementing the policies that would see the growth of the Japanese Auto industry to unprecedented heights. According to this law automobile industry was among the industries that needed urgent rationalization meaning that the industry could enjoy government tax subsidies and easily access loans from the government agencies. Driven by Mr. Ichimada pessimism, the industry took advantage of the new provisions and status to improve on the quality of the passenger cars for export market. At around the same period Japan Industrial Standard arm was introduced making it easier to rationalize the industrial base for automotive spare parts. This lead to great reductions in costs of automotive fabrication processes giving a big boost to the new industry. The successful start of the industry reflected its enormous potential causing the government to consider abolishing the postwar restrictions issued in 1949 on manufacturing of small passenger vehicles. Regulations in the exportation of automotives were also abolished and new legislative measures to promote Japanese auto industry’s products were enacted. In 1951 a determined ministry of international trade and industries published an advert booklet in English meant to capture the international market by giving all necessary details on the already established Japanese Auto industry. This worked out positively in making many international consumers to consider Japan as an automobile source a fact that raised a new challenge to the manufacturers to further improve on the products quality, increase productivity and draw areas of uniqueness in products.

The Korea War triggered in June 1950 came at a time when the auto industrial base was settling in Japan. The war provided a challenging opportunity for the rationalized industry to supply ammunitions, military trucks, spare parts and fuel tanks for military aircrafts. The war demands enlarged the products’ output for the Japanese auto industry and plunged it to unprecedented paths of growth that aided in revitalizing the entire Japanese economy. The tremendous growth in the economy increased the demand levels for Japanese automotive products leading to the first Japanese auto show exhibition in 1954 that turned out to be a great success. These effectively set a trend along which the industry grew to greater heights. The setting up of auto industrial base among other Japanese industries therefore, even though it was surrounded by controversies, can be seen as the foundation on which the success of the Japanese Auto industry was nurtured.

CONCLUSION
Historical events, political and socio-economic factors have worked coherently to shape the Japanese auto industry from a humble beginning to the World giant that we know today. The culture of innovative research and efforts to satisfy consumer demands has been evident in the auto industry throughout its history. Japan has successfully evolved production of eco-friendly cars without compromising on other consumer demands. However, development of automotive products is an ongoing process and collaboration with international players will continue. The costs to adopt new car models to meet the modern requirements is going up and Japanese auto industry is introducing long term measures to face the new challenges by forging mutual alliances with other international manufacturers. Such alliances is the way to go in the development of future automobile industry for it lowers the cost of production and ensures that technological innovations are affordable to meet the increasing market requirements.
BIBLIOGRAPHY

Clark Kim, Bruce Chew and Takahiro Fujimoto, “Product Development in the World Auto Industry.” Brookings Papers on Economic Activity, Special Issue on Microeconomics 3, 729-781, 1987.

Cole, Robert, and Yakushiji Taizo. “American ; Japanese Auto Industries in Transition”, Center of Japanese Studies, UoM, Ann Arbor, Michigan, 1984.

Hamilton David . “Japanese Recession Prompts Corporations to take Radical Steps.” The Wall Street Journal (February 24, 1993).

Jones Philip and John North, “Japanese Motor Industries Transplant” The West European Dimension,” Economic Geography 67:2 105-123, (April 1991).

Shimokawa, Koich. “Japanese Auto Mobile Industry”, A Business History, pp.5-17. Atlantic Highlands, NJ: Athlone Press, 1994.

Tabb, William. The Post war Japanese System, Cultural Economy ; Economic Transformation. pp.112 -139 NY: Oxford University Press, 1995.

Taylor Alex , “Do you know where your car was made?” Fortune (July 17, 1991), 52-56.

Womack, James, Daniel Jones and Daniel Roos, “the Machine that Changed the World”, New York: Rawson Associates, 1990.

[1] Shimokawa, Koich. “Japanese Auto Mobile Industry”, A Business History, pp.5-17. Atlantic Highlands, NJ: Athlone Press, 1994.

[2] Shimokawa, Koich. “Japanese Auto Mobile Industry”, A Business History, pp.5-17. Atlantic Highlands, NJ: Athlone Press, 1994.

[3] Tabb, William. The Post war Japanese System, Cultural Economy ; Economic Transformation. Pp.112 -139 NY: Oxford University Press, 1995.

[4] Shimokawa, Koich. “Japanese Auto Mobile Industry”, A Business History, pp.5-17. Atlantic Highlands, NJ: Athlone Press, 1994.

[5] Shimokawa, Koich. “Japanese Auto Mobile Industry”, A Business History, pp.5-17. Atlantic Highlands, NJ: Athlone Press, 1994
[6] Shimokawa, Koich. “Japanese Auto Mobile Industry”, A Business History, pp.5-17. Atlantic Highlands, NJ: Athlone Press, 1994.

[7] Womack, James, Daniel Jones and Daniel Roos, “the Machine that Changed the World”, New York: Rawson Associates, 1990.
[8] Taylor Alex , “Do you know where your car was made?” Fortune (July 17, 1991), 52-56.

[9] Jones Philip and John North, “Japanese Motor Industries Transplant” The West European Dimension,” Economic Geography 67:2 (April 1991), 105-123.
[10] Hamilton David . “Japanese Recession Prompts Corporations to take Radical Steps.” The Wall Street Journal (February 24, 1993).

[11] Clark Kim, Bruce Chew and Takahiro Fujimoto, “Product Development in the World Auto Industry.” Brookings Papers on Economic Activity, Special Issue on Microeconomics 3, 729-781, 1987.

[12] Cole, Robert, and Yakushiji Taizo. “American ; Japanese Auto Industries in Transition”, Center of Japanese Studies, UoM, Ann Arbor, Michigan, 1984.