DETROIT - The economic crisis in Asia is forcing Japanese and South Korean carmakers to increase exports. Because of the political risk of exporting too many vehicles to the USA, western Europe will be the key market.
For the first time, Japanese carmakers used up their entire European import quota last year.
Three interrelated factors have forced the Asian carmakers to increase exports:
Currencies. The Japanese yen has weakened against the dollar to the 130-135 range, from 115-116 a year ago, while the Korean won has virtually collapsed to about 1,650 from 750-800 a year earlier. That has generated enormous windfall profits for Korean and Japanese carmakers selling in the USA because every dollar of sales generates more yen and won. The depreciation of the yen and won also allows manufacturers to cut prices to gain market share.
Weak home markets. After several years of flat sales, the Japanese market fell 2.4 percent in 1997. The Korean market fell 9 percent, and is expected to be down by at least 25 percent - and possibly by as much as 40-45 percent - this year, according to Hyundai Chairman Chung Mong-Gyu.
Loss of Asian markets. Asia took 16.7 percent of all Japanese vehicle exports in 1996, but that fell to 13.8 percent in the first 11 months of 1997, according to the Japan Automobile Manufacturers Association. Korean exports to the region slid 10 percent - and are expected to be down by 21 percent this year.
Exports to Europe and South America, however, are expected to go on rising. Korea will export about 60 percent of production this year, say auto analysts.
Japanese exports to Europe rose 32.2 percent in the first 11 months of 1997, and exports to South America were up 65.3 percent.
North America was less affected, with exports up by 11.2 percent. Exports to the USA could even fall this year, say analysts, who expect Asian carmakers to use their windfall currency gains to increase profits, rather than to buy sales.
Japanese companies recorded their biggest sales rises last year in countries where they have been weak in the past. Italy, for example, has traditionally been a small market for Japanese cars. But in 1997, while the Italian market rose 39 percent, Japanese sales jumped 63 percent and Korean sales soared 189 percent, according to Italian government figures.
For Japan, 'it's basically the peripheral markets that are taking up the slack' caused by the slowdown in Asian markets, said Enda Clarke, Tokyo-based auto analyst for Dresdner Kleinwort Benson (Asia) Ltd.
Japan's exports to both Poland and Turkey more than doubled in the first 11 months of 1997.
'It's clear that South America is on the verge of going into the same kind of problems as Asia had,' said Peter Boardman, an auto analyst with UBS Securities.
'With markets in eastern Europe and Russia still too small, and South America having 'too many ifs, ands or buts,' that leaves only one export market to concentrate on, Boardman said. 'I think the Japanese are going to be more focused on (western) Europe. It's the only growth market in the world.'
Specter of price cuts
In some markets Japanese carmakers might have to reduce prices in the face of Korean cuts, said Clarke at Dresdner Kleinwort Benson.
'In places like Turkey, I can see them butting heads,' said Edward Brogan, Tokyo-based auto analyst for Salomon Brothers, Asia.
This is less likely in western Europe, where Japanese cars tend not to compete head-on with Korean models. But in eastern Europe and other peripheral markets, Korean price cuts could impact on the Japanese.
In Australia, for example, Hyundai used lower prices to leapfrog over the Japanese competition two years ago to become the top-selling import brand.
But Hyundai Chairman Chung Mong-Gyu denies that the company plans a huge export effort to Europe. He said Hyundai has not changed its pre-crisis target of raising total exports by 15-17 percent from about 600,000 units in 1997 to 700,000 this year. The company does not intend to slash prices.
Chung said Hyundai would show a profit for 1997, though smaller than the 87 billion won ($54 million) it made in 1996.
Limits to price war
Most analysts do not expect Asian carmakers to launch a price war, event though their depreciating currencies would allow them to cut prices drastically.
'Currency is a moving target, and you don't build long-term business that way,' said Pierre Gagnon, executive vice president of Mitsubishi Motor Sales of America Inc.
'We're not banking on the weak yen to help us in North America. We have far bigger challenges ahead of us. The incentive game just buys short-term gains for long-term pain.'
Another constraint: the fear of re-igniting trade friction.
'If Toyota wanted to throw another 150,000 Camrys to America, they could do it. If Honda wanted another 100,000 Civics, they could do it,' said Chris Cedergren, an analyst with US consultancy Nextrend. 'But they realize that if they did, the US manufacturers would start lobbying Congress for sanctions very aggressively.'
With North America and Europe, via the International Monetary Fund, contributing billions of dollars to a Korean bailout, it is unlikely that either would tell Seoul not to ship too many cars, said Ashvin Chotai, London-based Asia Specialist for the DRI/McGraw-Hill Global Automotive Group.
But will either Japan or Korea take advantage of that?
George Peterson, president of consulting firm AutoPacific, says the Japanese in particular will not risk flooding the USA with exports.
'I doubt they would really open up the faucet,' he said. 'They don't want to raise the specter of voluntary restraints. It's something they need to be very judicious about.'
The continued growth of Japan's exports also depends on certain key models, analysts say.
'It will have to be the Honda CR-V and Toyota RAV4 continuing strong,' said Clarke. 'The key question is whether that trend will continue, and I don't think they will be as strong this year.'
Honda's exports to the USA will be down 'almost certainly,' said Brogan, while Toyota has made 'a political decision' to restrain its US shipments.
Hyundai, which is in the process of leaving the fleet-car market in the USA, also expects to keep shipments about level. The company predicts its sales there will be down slightly this year, to 110,000 units from 113,000, even though the falling won has given it lots of room to cut prices.
'We are struggling with an image problem (in the USA), and we have a long way to go,' said Hyundai spokesman Chris Hosford. 'To sell your cars at fire-sale prices is not the way to improve your image. There are no plans to do anything to the incentives other than where they stand.'