Surprise: Japanese, Korean Carmakers Want a Detroit Bailout

(page 2 of 2)

In Korea, a bailout is also garnering support. President Lee Myung Bak told reporters in Washington on Nov. 16 that a bailout was vital because of links between the U.S. auto industry and the Korean economy. "I'm in favor of the efforts to rescue the U.S. auto industry," Korean newspapers reported Lee as saying. Hyundai, Korea's biggest carmaker, also wishes Detroit well. "We recognize there may be extraordinary situations [which] may require unprecedented actions to assure [the auto industry's] long-term viability and a healthy American economy," says Hyundai spokesman Oles Gadacz.

Consumer Perceptions Matter

Of course, self-interest is the motivating factor. Despite market share in the U.S. of a combined 44% in October, Japanese and Korean automakers are hurting. Toyota, for instance, projects it will only make around $200 million during the second half of its financial year which ends in March and has formed an Emergency Profit Improvement Committee, led by President Katsuaki Watanabe, to search for new ways to trim costs (BusinessWeek.com, 11/6/08) and reevaluate the size and timing of new projects.

A Detroit bankruptcy might only make matters worse, if consumers perceive Asians' success as having unfairly contributed to the Big Three's decline. "A bankruptcy would have a tremendous impact on the U.S. economy and on demand for new cars," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "In no way should Japanese automakers let their U.S. counterparts fail."

A U.S. car market without one or all of the Big Three might not be as attractive as it first appears. In Japan, Japanese automakers account for well over 90% of sales, but that means they have to compete almost completely with some of the toughest rivals in the industry—each other. Profits are low, but competing with less efficient Big Three rivals may make it easier to eke out bigger earnings. "Japanese carmakers would be wise to help ensure the U.S. market doesn't become like the Japanese market," Matsumoto adds.

Plenty to Lose

Just as important are the close ties between Japanese and Korean automakers and their U.S. rivals. On Nov. 18, Ford sold 20% (BusinessWeek.com, 11/18/08) of Mazda (7261.T), reducing its stake to 13%, but the fortunes of the two automakers remain closely aligned. For example, Mazda and Ford share production at several plants and work closely together on new vehicle development. In particular, Mazda plays a large role in the development of Ford's passenger cars.

Similarly, Korea's Daewoo is responsible for GM's small-car output and would have plenty to lose if GM were to go under. South Korea is the home to GM's small-car design and production and GM Daewoo Auto and Technology made about a quarter of the 4 million cars built in Korea in 2007. "GM's collapse would not only be a disaster for the U.S. economy, but also a major blow to the Korean auto industry," says Kim Jun Kyu, research manager at Korea Automobile Manufacturers Assn. And hundreds of Korean parts makers depend on GM for their sales. "I have invested $16 million to make parts for GM Daewoo's new Gen3 engine, but now nobody knows when GM can introduce new vehicles in the face of the global economic meltdown," says Choi Bum Young, who also heads the association of 228 primary part suppliers of GM Daewoo.

While the linkup is less vital to their financial health, Toyota and GM share production at the New United Motor Manufacturing plant in Fremont, Calif. Meanwhile, Nissan and Chrysler have inked production agreements that will see Nissan make small cars for Chrysler. In return, Chrysler will supply pickups and vehicles to Nissan in North America.

Even Asian carmakers that don't have alliances, particularly Japanese players such as Honda, still share U.S. suppliers with the Detroit Three. Indeed, analysts say that the biggest short-term worry if GM fails is it will also damage suppliers. That would then have an impact on all their customers, says KBC Securities' Phillips. The ideal situation for Japanese automakers is to continue to take market share gradually from Detroit in a way that allows suppliers time to adjust and avoids a consumer backlash against import brands. From a Japanese carmaker's point of view, "It is better that the Big Three slowly wither away, but that scenario is looking increasingly difficult," says Phillips.

Business Exchange related topics:
Honda
Toyota Motor Corp.
Hyundai Motors
Bailout

Rowley is a correspondent in BusinessWeek's Tokyo bureau. Moon is BusinessWeek's Seoul bureau chief.