Japan Carmakers: Speed up consolidation to compete with China’s EVs

nissan-ev

Media reports that rival Japanese automakers Nissan Motor Co and Honda Motor Co are potentially entering into a partnership feel so unlikely it’s as if Messi and Ronaldo are set to play on the same football team, or that Taylor Swift is about to drop an album with Kanye West.

The automakers have jostled for years for second place behind Toyota Motor Corp. The two rejected out of hand merger talks that had been proposed by government officials five years ago, the Financial Times
reported in 2020. According to the newspaper, authorities were prompted to propose it by the state of the Japanese auto industry and worries about a potential Nissan collapse.

This week’s story is much less ambitious, involving just a potential partnership on electric-vehicle procurement and development. But the need to concentrate forces may now be even more acute, with both companies’ sales in China in freefall as customers in the world’s largest auto market switch to EVs.

I don’t hew to the commonly held idea that Japan has been “slow” to shift — as sales growth slows, we’re seeing more and more evidence that the mad dash to an electric-only future was likely a strategic error, and that fully electric cars will be just one part of where the auto industry goes from here.

But it’s undeniable that the industry is in a state of rapid flux. China sees an opportunity to dominate, and just as it did with sectors from steel to solar panels, it’s unlikely to always play fair. Huge investment in technology is needed, from batteries to automated driving systems. And Taiwan-based Hon Hai Precision Industry Co, better known as iPhone maker Foxconn,
wants to turn making vehicles into a commodity just like smartphones.

In this environment it doesn’t make sense for all of Japan’s automakers to continue battling for scraps among themselves. There are seven listed carmakers in the country, but Toyota has become increasingly cozy with three of them. It bought 5 percent of Mazda Motor Corp in 2017 and a similar share of Suzuki Motor Corp in 2019. It’s been allied with Subaru Corp. since 2005, raising its stake to 20 percent in 2019. It also owns half of truckmaker Hino Motors Ltd and another 5 percent in Isuzu Motors Ltd, as well as buying out long-standing partner Daihatsu in 2016. Toyota has been the world’s biggest-selling automaker for four years in a row, and the hybrids it pioneered are now enjoying another moment.

That leaves Nissan with its tie-up with Mitsubishi Motors Corp, which together with Renault SA form a shaky alliance that was mostly held together by the disgraced Carlos Ghosn. Honda, famously, stands alone, though it has an EV partnership with Sony Group Corp.

It’s not just Japan, however: The chief executive officer of Stellantis NV recently said that the industry transition might leave room for only five major automakers worldwide, with the Peugeot owner also denyingspeculation it might tie up with Renault. In that scenario, how many of the survivors would hail from Japan? It seems that over the long term the Japanese industry will gravitate into two groups — the Toyota-affiliated firms and everyone else. But the country can’t afford to move at the pace of yesterday, to spend the half century it took from when Toyota first invested in Daihatsu to when it finally bought it outright.

Japan’s automakers should use the current transition to reconsolidate. We’ve seen past instances of how the country’s firms lost control of industries because they were too focused on competing for larger slices of a shrinking domestic pie. Mobile phones, solar panels and lithium-ion batteries are all sectors Japan once pioneered and dominated. It can’t afford for that to happen to cars.

Indeed, it’s far from the only industry where it might be good for Japanese companies to consolidate. There are four major beermakers, all creating similar drinks, which are struggling to compete on the world stage with today’s brewing giants. From drug stores to supermarkets to home centers, the retail industry is unnecessarily scattered. And let’s not even get started on the country’s more than 350 banks.

While Japan’s now-defunct Ministry of International Trade and Industry once actively coordinated deals such the 1966 reorganisation that merged Prince Motors with Nissan, in a free market it’s difficult to imitate China’s creation of “national champions.”

But it sometimes ends up doing so anyway — only from a position of weakness when it coordinates mergers of struggling industries, such as that which formed the disastrous panel maker Japan Display Inc. The country’s recent coordination of semiconductor investment suggests it’s getting smarter, however.

It’s true that both companies are so different that the benefits of combining their technologies for internal-combustion engine vehicles are limited. Less competition isn’t good for the customer, and as Toyota has discovered with Daihatsu’s safety test issues, there are risks in getting too close.

But the biggest danger might be in waiting too long to team up. Honda and Nissan are both known for their high-octane vehicles like the NSX or the GT-R. When it comes to working together, they should step on the gas.

Gearoid Reidy is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg