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Demand for minicars is hurting profit at Japan’s automakers?

Back on January 5th, we reported that December 2006 auto sales in Japan had declined for the 18th straight month to a 29 year low. Overall sales of new vehicles had declined by 7.2% compared to December 2005. For all of 2006, new vehicle sales dropped 5.4%, representing the third consecutive year of decline. However, there was some good news in one sector:

In 2006, sales of mini-cars (autos with engines sized under 660cc) rose by 5.2%, to 2,024,000 units. The December year-on-year sales were up a whopping 14.5%.

With that information as a backdrop, the Financial Times published a piece yesterday entitled Japan’s demand for small cars hits profits. Their argument is put clearly in the first paragraphs:

Japan’s carmakers, on a global expansion spree, are seeing margins increasingly squeezed in their home market as consumers turn to cheaper, more fuel-efficient minicars…The popularity of smaller cars is eroding profits in an already fiercely competitive market in which eight carmakers operate.

Ok, so we’re going to push aside the export market for a moment and focus on domestic sales. Good. From that statement, we know two things: 1) Per unit, small cars are not as profitable as larger cars, and 2) Consumers want either cheaper or smaller cars, or some combination of the two.

But, here’s where the risk management gets shaky: Is demand for minicars really hurting the bottom line? Or is it preventing the bottom line from crashing through the floor?

The assertion that profits are ‘eroding’ due to demand for minicars assumes one thing: that those people who bought minicars would have bought sedans if the minicars had not been on the market. We just don’t know if that’s true. Perhaps some of them would have shelled out the extra money for a full-size car. But many might not have been able to, and probably would have ended up with a motorcycle if the minicar option had not been available, due to the fact that the sedan was simply prohibitive on cost.

One might also assume that in an aging society, where 20% of the population is now over 60, that fewer people would be buying new cars.

However, according to statistics released by the Japan Automobile Manufacturer’s Association, registrations of new cars (included sales of mini vehicles that are not registered) have increased by 500,000 units over the five years to 2005. This includes imports, which have seen a slight decline in registrations over that same time period.

So, despite the decline in new car sales, the drop in registrations of imported cars and the aging society, we see an increase in new car registrations over the past five years. In other words: more people are actually on the road. Far from being a bane to the automakers, the minicar appears to be saving them; figuring out how to turn them into a higher volume, higher margin durable consumer good will be the challenge for Japan’s automakers.

By the way, in 2005, Maybach outsold Daewoo in Japan, 26-12. Ferrari outsold Bentley, 391-355.

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