Running On Empty

By EDWARD W. DESMOND TOKYO

Two years ago, Yasuharu Kondo was overwhelmed with customers at his Toyota showroom in Tokyo. Sales were booming, and most shoppers looking for top-of- the-line models, the best their yen could buy. Those days are gone; today Kondo surveys a showroom full of sparkling new cars -- and not a customer in sight. "In my 30 years as a salesman," he says, "I have never seen it as bad as this."

The lament echoes across the $339 billion Japanese auto industry, which finds itself running low on gas. The industry accounts for 10% of Japan's overall economy; thus its falling fortunes are a major factor in a deepening recession. Domestic car and truck sales are down 13% from the 1990 peak of 7.7 ( million vehicles, and profits for the five biggest carmakers -- Toyota, Nissan, Honda, Mitsubishi and Mazda -- are off about 64% from the same year. Some of the smaller companies, like Isuzu, have been in the red for two years and may soon be joined by the likes of Nissan and Mazda.

In normal times, the automakers would trim expenses, adjust to new market trends and wait for business to improve, but these are not normal times. While the U.S. is making a modest comeback in car sales, Europe and Japan show no signs of a turnaround. And none of the world's major car markets are likely to return to the headlong expansion of the 1980s. That is a particularly painful prospect for the Japanese companies, which have justified continuing investment in new plants and models on the premise of selling ever more cars.

The result is a shake-out among Japan's 11 domestic companies, with the smaller firms suffering the heaviest impact. Their emergency measures include reductions in product lines, severe cost cutting, mergers with other automakers and drastic rethinking of business practices. In mid-December, sixth-ranked Isuzu announced that it was getting out of the passenger-car business to concentrate on its truck business. Second-ranked Nissan is slowly absorbing ninth-ranked Fuji Heavy Industries, the parent of ailing Subaru.

On top of the global slump, Japan's automakers face increasingly tough, lean rivals. In the U.S., where total auto sales increased an estimated 1.5% in 1992 over the previous year, the once burgeoning Japanese share of the market has retreated slightly, to 30%. The strong yen and an attempt to inflate prices overseas to offset weak profits at home have made Japanese vehicles more expensive in the U.S. A mid-priced American-built car now typically costs $1,500 less than its Japanese counterpart. Another factor is that Japanese companies are weak in the light-truck category, where such vehicles as Dodge pickups and the Ford Explorer are driving off with the lion's share of a market niche that grew more than 18% last year, to 4.5 million vehicles.

Japan's setback provides a moment of respite for America's Big Three, which have problems of their own. GM, the most bloated U.S. automaker, plans to lay off 74,000 of its 360,000 workers in a bid to cut costs. Ford will post an estimated $6 billion loss for 1992, largely because of a huge write-off for future retirement obligations. Chrysler remains saddled with $13 billion in high-interest debt.

For Japanese automakers, the worst problems are at home, where the excesses of the country's so-called bubble economy in the late 1980s set the stage for today's trouble. Fast economic growth and the boom in real estate and stock- market prices gave Japanese buyers the urge -- and the money -- to flock to showrooms. Result: a surge of nearly 50% in passenger-car sales between 1987 and 1991.

Faced with a tide of increasingly discriminating consumers, the manufacturers dove headlong into the race for market share. They invested heavily in plants and engineering to create a wider range not only of models but also of variations within model lines. "They listened to car dealers who said, 'We need 16 types of steering wheels to impress customers,' " says Benjamin Moyer, an auto analyst at Merrill Lynch Japan. "No one stopped to think about the long-range impact on costs." One effect was a golden era of design, as the companies competed strenuously to create graceful new bodies, innovative engine technology and an amazing array of options, including solar- powered air conditioning and satellite-based computer guidance systems. In all areas, cost seemed to be no object.

Now the bills are coming due. Overall, the leading five companies invested nearly $50 billion during the past five years, much of it in highly automated plants like Nissan's $800 million "dream factory" in Kanda, which emphasizes flexible production, or the ability to assemble different cars on the same line. For the moment, these factories represent a largely unneeded capacity to make sophisticated cars that are no longer selling well. By most estimates, paying off the big bills while waiting for a comeback in sales will take several years.

In the meantime, the companies are taking drastic steps to cut costs. All have announced sharp reductions in capital spending as well as in overtime allocations and the hiring of temporary workers. Nissan has gone a step further: it plans to shrink its 55,600-member work force by 4,000 through attrition.

The biggest savings will come from trimming back the overgrowth of models, variations and options. Mazda, for example, has dropped plans to launch a new luxury line, the Amati, in the U.S. All the automakers except Honda have announced that they will extend the model life cycle from the customary four years to save on investment in engineering design and manufacturing equipment. The changes are intended to help the manufacturers attack the root of runaway expenses: a proliferation of auto parts. Mazda intends to reduce its parts orders 30% by 1998; among other things, the company hopes to reel 58 different seat-belt types back to 10.

Today's buzz word is "commonization," or sharing parts among old and new models, even among different carmakers. Honda is out in front in that race with its new Domani, a small family car that is 60% built with parts also used in other Honda models; previously the shared-component segment amounted to 10% to 15%. The carmakers are also considering a method already used by truck manufacturers: standardization of certain components, which allows parts companies to cut their prices. Zexel, a major high-tech partsmaker based in Tokyo, expects to get seven manufacturers to agree to a common fuel injector for their diesel vehicles. The risk of commonization is that if taken too far, it could disappoint consumers, who hardly need more disincentives to buying.

While the auto companies do penance for past overindulgence, few analysts believe the bigger firms have much to worry about in the long run. When the dust clears, they will still own some of the most modern and flexible production plants in the world, not to mention much of the best automotive technology. "The Japanese carmakers have serious problems but also impressive strengths," says Harley Shaiken, a professor of technology at the University of California at San Diego. "They are still going to be major innovators. One of their strongest attributes has been the ability to rebound."

They should also have new markets to explore in Asia, where they are better positioned for expansion than their Western competitors. Japanese carmakers are already dueling in Thailand, one of the fastest-growing Asian markets, and are eagerly awaiting a rise in living standards in other countries that should launch a major auto-buying spree. Thailand's market may be only a fraction of the size of the U.S.'s, but it offers a taste of things to come in some Southeast and West Asian countries -- and someday China and India. Yasuhara Kondo's showroom may not enjoy another boom, but Toyota and its large rivals are looking to wider horizons.

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CAPTION: Japanese Carmakers Are Feeling Pain . . . Especially at Home