A worker assembles a vehicle on the production line of an automobile manufacturing plant in Ota, Gunma, Japan. (Photographer: Tomohiro Ohsumi/Bloomberg)

Japan's Automakers Should Switch to a Faster Lane

(Bloomberg Gadfly) -- As Donald Trump works to kick Japan's automakers out of their largest market, they may want to set their sights on an even bigger prize -- China.

Authorities in the U.S. are considering making imported cars meet stricter environmental requirements, the Wall Street Journal reported, citing administration and industry officials it didn't identify. This sort of a non-tariff barrier would dent manufacturers including Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co., which together command about one-third of the market.

Japan's Automakers Should Switch to a Faster Lane

Last year, the trio overtook Detroit's big three -- General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV -- by number of cars sold for the first time in a decade. Toyota now books higher revenue from the vehicles it exports to the U.S. than it does domestically. America's top-selling marques are usually Japanese, too. Little wonder Trump isn't in the mood to be forgiving.

With such an entrenched lead, why change course? The answer is because market dynamics are changing, and not just around trade.

Auto sales in the U.S. increased just 6 percent in March from a year earlier, and Japanese manufacturers struggled to keep pace, with Toyota, Nissan and Honda clocking average growth of 2 percent. Light trucks, rather than sedans, where the Japanese excel, are also becoming more popular, while the cost to companies of shifting a car, including buyers' incentives and other marketing expenses, is rising.

Cheap auto loans, meanwhile, are coming under regulatory scrutiny and used-car prices are plunging, pushing down the residual value of leased cars and weighing on automakers' financial services arms.

Japan's Automakers Should Switch to a Faster Lane

Perhaps a more serious shot at China, the world's largest car market, is worth considering.

Margins there are more lucrative, and Honda has already shown a strategy like this can work: It's managed to boost profitability by focusing on motorbikes in emerging markets, for example. Rather than deep discounts, Chinese consumers seem to be charmed more by an extensive range, particularly when it includes high-end SUVs.

Beijing's carrot-and-stick policies aimed at forcing automakers to go green have also been somewhat effective in prodding Toyota toward electric vehicles and away from hydrogen fuel-cell cars. That seems to have temporarily buoyed investors' confidence in the company's ability to proactively turn things around.

Of course, the risk for Toyota, Nissan and Honda is that they're a little too late -- China's car market posted its slowest growth since 2008 last year. Volkswagen AG defended its title as the country's best-selling automaker in 2017, living up to its name that translates as "people's car" in German, while General Motors isn't far behind.

There's also China's longstanding animosity toward Japan. Tensions between the two nations flared in 2012 over the ownership of disputed islands northeast of Taiwan. Nationalist crowds ransacked a Toyota dealership and set a Panasonic Corp. factory ablaze. 

Still, faced with more restrictive environmental policies from the U.S., or worse, a full-blown trade war, Japan's carmakers may want to switch to a faster lane.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Gadfly columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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