Tuesday, April 19, 2005

Can Americans Drive Around The Japanese Road Block?

With the success of the Toyota Prius and the Honda Civic Hybrid, Japanese manufacturers have hit the ground speeding in the hybrid car market. And with a backlog of new car sales, they show no signs of slowing down. But American car manufacturers are ready to introduce their first hybrid models in 2005, and will be competing head-to-head with Japanese manufacturers for market share.
Although Japanese manufacturers first targeted a smaller, niche market of eco-friendly consumers in the late 1990’s, raising fuel prices and maturing hybrid technology have made the hybrid cars more popular with auto buying consumers than originally expected. Enhanced power, sleek and attractive style, along with the promise of fuel efficient, environment-friendly technology has brought hybrid models into the mainstream.
After winning Motor Trend Magazine's 2004 Car of the Year for the hybrid Prius, Toyota firmly established itself as the market leader while thrusting the hybrid into the industry spotlight. Honda has been cruising behind Toyota, and has made respectable sales with its hybrid version of the ever-popular Civic. But where are the other players? Since 1999, Toyota and Honda have been the only manufacturers in the American marketplace, setting the standard for hybrid technology. Detroit manufacturers have been notably absent. Only Ford has made recent entry with its Ford Escape, although it is using hybrid technology licensed from Toyota after failing to develop successful technology on its own.

2005 and 2006 may change the industry landscape, with many new car and SUV models planned for release by Detroit’s big three. Hoping to take advantage of the growing popularity of hybrids, Detroit is banking that loyal consumers will be attracted to the look and feel of traditional American brands. But is their entry into the hybrid marketplace too late? And can they convince consumers that American manufacturers can deliver quality and technologically superior automobiles, which has proven to be Japan’s strength in the automotive industry?

Only a handful of investment analysts covering the automotive industry have addressed the issue of hybrid cars – but their assessment matches the general news media – agreeing that the Japanese have an edge. News stories indicate customers’ willingness to pay full price for used hybrids and waiting lists of six months or more for new hybrids. In fact, about 200,000 hybrids will be sold in 2005, up from 90,000 in 2004. According to JP Morgan’s Equity Research team the demand will grow to 500,000 vehicles in 2006 and to 900,000 vehicles in 2008. Who will be meeting this demand? Toyota and Honda. Japan is about to take a 6-to-1 lead over Detroit in manufacturing hybrids. It is estimated Toyota will produce 243,000 hybrids in 2005 and Honda 50,000. Ford’s 2005 production, the closest forerunner of any American car
manufacturer - only a paltry 20,000. So it is no surprise that Japan is already taking the next step forward by introducing luxury hybrid cars .

Besides the purchase being a “global good” other perks are fueling the market. Some states allow unlimited access to carpool lanes or free parking meters for hybrid cars, tax benefits, and for Americans who prefer style over technology – hybrids now look just like your conventional everyday car. Yet, despite these benefits, hybrids won’t necessarily save you money. Hybrids retail at an additional $3000 to $4000 per car - a wash once savings from gas prices and tax credits are considered.

Switching costs are seemingly irrelevant as people seek to avoid the daily “pump pain.” Customers aren’t purchasing the gas guzzling SUVs that have kept Detroit’s big three profitable. Additionally, of those in the market to buy a new car in the next 12 months, 47% have already changed their minds and plan to buy a more fuel-efficient car. Baby boomers who have a little more wealth and education are leading the way in purchases. Of the projected 200,000 people who will buy a hybrid this year, it is highly likely they will be purchasing a Japanese made car. Henry Ford may have made history as the first entrant in the automotive industry but it is Japan that has the competitive edge and is revolutionizing the automotive market today.

The world’s oil reserves are undoubtedly diminishing, and as a result, car consumers are demanding alternatives to gas powered vehicles. While both fuel-cell and completely-electric technologies are decades away from reaching the market, hybrid cars are positioned to be the new short-term solution compared to their European diesel counterparts. A fundamental shift in the industry occurred in the 1970s, when the oil crisis alerted American consumers to the advantages of the fuel-efficient and high-quality automobiles characteristic of Japanese automakers. Toyota has been in the lead ever since, and the situation is no different when it comes to hybrid technology, resulting in skyrocketing U.S. sales.

American car manufacturers on the other hand are well behind the eight ball. Bob Lutz, GM's vice chairman for product development, recently acknowledged that GM was late to embrace hybrids, crediting the Japanese for their advances in technology. GM is now moving to release hybrid SUVs by 2007, and has plans to market its first fuel-cell car by 2010. Unfortunately for the consumers, GM is late to market on both accounts. It is a mentality such as GM’s that has kept American car manufacturers from introducing the next car of the future. Rather than focus on hybrid technology development, Detroit car makers would prefer to be the leaders in the large sport utility vehicles segment, whose sales are off by more than 20% this year. Even when federal taxpayers were pouring over $1 billion into something called the "Partnership for a New Generation of Vehicles" to help Ford, General Motors and DaimlerChrysler develop hybrids and other fuel-efficient cars, Honda and Toyota got to market first.

American car manufacturers have spent significant time trying to catch up to the standards that Japanese manufacturers have created, including high quality as well as innovation. Until Detroit’s car makers adopt these same as well as new core competencies, they will not come close to Japan’s dominance over value or market share.

You can contact the individual authors of this blog by e-mailing Vicki Ledajaks (vledajak@chicagogsb.edu), Deanna Markley (dmarkley@chicagogsb.edu) or Julia Zupko (jzupko@chicagogsb.edu). Please note, if you are off-campus and have trouble accessing information from the JP Morgan Analyst Report from Investext, you need to set up the GSB proxy server http://support.uchicago.edu/docs/web/proxy/.

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