Short vehicle life spans, trade imbalance make Japan a challenging aftermarket for suppliers

Jan. 20, 2017
In 2015, Japan imported $535 million worth of auto parts from the U.S. while its exports totaled nearly $45 billion. Most of that parts trade was original equipment parts used on production vehicles.

Japan is known as the Land of the Rising Sun. But you would be forgiven if you believed that the light of that sun was being generated by a massive array of LED lights.

Japan’s reputation for being a massive industrial powerhouse is well deserved. In particular, Japan’s automotive industry is world renowned as a cradle of innovation for design, manufacturing and development of stunning motor vehicles.

The automotive industry in Japan was originally a government planned project. In the era just after World War I, the Imperial Army started farming out small manufacturing projects for military vehicles to small companies. In 1933, Nihon Sangyo Corporation, a real estate holding company established their automotive division, the company now known as Nissan.

Later in that same year, a weaving machine maker, Toyota Jido Shokki, which later became Toyota, founded its automotive department. But the automotive industry as a whole was tiny until 1950. In that year, post-war restrictions barring automobile manufacturing were lifted. Up until then, the industry had produced mostly industrial trucks, buses and military vehicles.

An important fact to remember is there was little to no domestic demand for personal automobiles in Japan until the 1950s. Other than for the wealthy, car ownership wasn’t really an option. Japan had low per capita incomes, and was still largely an agricultural society.

However, with a booming post-war economy, and more urbanization, came the need for personal transportation. Today, Japan is ranked 16th in the world in per capita vehicles on the road, with 591 vehicles per 1,000 people (2014). But overall, Japan has more than 60,668,000 vehicles in operation as of 2015, which makes it the third largest automotive market in the world, behind the United States (258 million VIO) and China (120 million VIO). Today, approximately 5.3 million people are employed in Japan’s automotive industry, representing nearly 8 percent of the entire Japanese workforce.

Japan’s automotive market is dominated by Japanese vehicles. Based on full year 2015 sales, Toyota was the dominant brand in the market, with a 28.7 percent market share. Sales for Toyota fell 4 percent from 2014, but the market was down an overall 9 percent from 5,562,000 units sold in 2014 to 5,045,000 in 2015. Toyota improved market share by 1.5 percentage points from 2014. Honda (14.4 percent), Suzuki (12.6 percent), Daihatsu (12.1 percent) and Nissan (11.7 percent) made up the top 5 brands in 2015, all with slightly lower market share totals than from 2014. The only foreign nameplate to break the top 10 brands was Mercedes (Germany), with a 1.3 percent share of the market.

The domestic car makers in Japan are so dominant, foreigners hardly seem welcome. European cars and trucks, mostly represented by luxury brands, represented only 5.3 percent of sales in 2015. By contrast, U.S. made vehicles were only a paltry 0.3 percent of the market. Korean brands hardly registered at all, selling 83 units during 2015. So there is definitely a home field advantage at play.

In terms of individual model sales, Toyota held six out of the 10 spots, with the Toyota Aqua (a Prius-C in the U.S.) and the Toyota Prius leading in the first two spots. The VW Golf, was the only foreign model to crack the top 30, and that was at number 30.

If the market seems closed to foreign competition, it’s because it is. Japan has an overwhelming trade advantage when it comes to auto parts, particularly against the U.S. According to Japanese government trade statistics, in fiscal year 2015, Japan imported just $535 million worth of auto parts from the United States. In contrast, during that same period, it enjoyed 84:1 advantage in exports, totaling nearly $45 billion. Most of that parts trade essentially encompasses original equipment parts used on production vehicles.

Taking a narrower view, the Japanese aftermarket is valued at approximately US$78 billion, or roughly one quarter the size of the U.S. aftermarket. There are several factors for the difference. One obvious factor is the number of vehicles in operation. Japan has slightly less than one fourth as many vehicles in operation as in the United States. But VIO is just one factor. There are other factors too, including annual miles driven, quality of the roads and highway system and the skill level of repair technicians.

But one factor that has a disproportionately large impact on aftermarket sales is the age of a vehicle. In the U.S., the average vehicle is now 11.6 years old, with more than 25 percent of the vehicles on the road being 16 years or older in age. In contrast, cars in Japan average just 8.2 years old. This will impact the lifecycle of replacement parts, as many vehicles will only get one repair opportunity. Dissimilarly, vehicles operating in the U.S. might get two or three repair opportunities for the same parts. So why is there such a big disparity in vehicle age? It’s not because the vehicles are of poorer quality or workmanship. Rather, the issue is mostly financial.

Motor vehicles are highly taxed in Japan. In fact, for every year a vehicle is owned, the cost of registering said vehicle increases. Government tax policies on vehicles have several aims. Originally, such taxes were meant to offset major congestion and pollution problems by getting people to use mass transit. Today, the goals are more toward driving vehicle fuel efficiency and spurring growth in an economy that’s been stagnant for nearly 15 years. These registration taxes also motivate consumers to buy small displacement vehicles, known as kei cars and hybrid vehicles.

The complexities of the Japanese car parc are numerous, given an extremely homogeneous set of local models that are not widely sold in other parts of the world, short vehicle life cycles, and a tendency to scrap or export vehicles just as they enter into what would be considered the vehicles prime repair cycle in other countries. This has discouraged many exporters from trying to develop aftermarket sales in Japan. But “application parts” isn’t the only game in town.

Several aftermarket segments are actually doing very well selling to Japan. The most successful areas for exporters to Japan have been in appearance and accessories, as well as diagnostic tools and equipment. Both segments benefit from their non-reliance on vehicle-specific parts. However, a key driver of these sales seems more related to “need” rather than “want.”  Many Japanese will buy foreign parts strictly from necessity rather than any desire to do so.

A key to selling to any importer or distributor in Japan will be your own knowledge and intimacy with the products you’re trying to sell. “No doubt, the biggest obstacle of selling product to Japan is to overcome their hesitancy to purchase anything foreign,” says Steven Dreyfus, Managing Director of Dreyfus Global Trade, LLC. “They will spend an inordinate amount of time asking you question after question, testing the product, asking more questions, before you even have a chance.” Dreyfus, head of an export management company, is referring to a line of specialty diagnostic tools he represents.

The reason buyers are intent on determining the efficacy of your products isn’t necessarily mistrust of American made items. It results more from a general perception in the market that American goods are really only geared for the U.S. market.

“I think Japanese look at American products specifically designed for the American market and not considering the Japanese and Asian car parc,” Dreyfus says. Highlighting the differences between the two markets, Japanese buyers know most vehicles in operation in Japan will “never see the light of day in the North American market,” further driving their misgivings.

Appearance products and accessories are also a category that has seen growth over the past decade. Popular retailers throughout Japan, such as Autobacs, are distributors of American brands such as Meguiar’s, Armor All and STP. Tom Muldowney, Managing Director of International Market Access Ltd, a Hong Kong based firm representing U.S. manufacturers, confirmed that Japan is a big buyer of his appearance and adhesive lines. But all is not lost for hard parts suppliers either.

According to a 2016 Top Markets report issued by the U.S. Commerce Department about the automotive industry, Japan was ranked as our fourth largest export prospect for OEM parts. The same report, citing many of the challenges we’ve covered, ranked Japan as 17th in a list of aftermarket prospect countries. But the report did go on to say, “Most U.S. SME auto suppliers do not export. Those that do export do so primarily to Canada and/or Mexico. This demonstrates untapped potential to introduce U.S. suppliers to foreign markets, particularly for the aftermarket. These SMEs do not have the marketing departments, international operations and vast resources to readily expand their operations to new markets throughout the world in the same capacity as the vehicle manufacturers and many of the Tier 1 suppliers.”

So those companies that have unique or technologically superior products should explore exporting as potential avenue for growth. Japan’s OE market does seem to offer the better option as opposed to aftermarket though.

Having new and unique products is certainly the best way to capture the attention and imagination of what is a very fickle Japanese audience. But if your products are the right products, they will find a place in the market. Even with Japan’s economy still continuing to struggle, there is potential for growth. When asked about how he sees the near term for Japan, Dreyfus said, “Certainly the economy in Japan is not helping. However, as we introduce several unique products, we are confident that our sales in Japan will grow.” 

The status quo in Japan has remained soft, but stable over the past 15 years. All indications point to continued modest growth, and perhaps a recovery in auto sales in 2017. Given the market dynamics of having short vehicle life spans and a vehicle parc very different from anywhere else in the world, Japan will continue to be a challenge for all but the most daring and dynamic U.S. suppliers.
 

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