Japan Becomes the World's Largest Automobile Producer

Date 1980

In 1980, Japanese automobile production for the first time exceeded that of the United States. In order to compete, American companies were forced to revamp according to the Japanese model.

Locale United States; Japan

Key Figures

• Lee Iacocca (b. 1924), chairman of Chrysler Corporation
• Henry Ford II (1917-1987), chairman of Ford Motor Company
• Thomas Murphy (1915-2006), chief executive officer of General Motors
• Ronald Reagan (1911-2004), president of the United States, 1981-1989

Summary of Event

Japan had a small, unpromising automobile industry prior to World War II. In 1924, when American companies produced 3.1 million cars and the number of automobiles registered stood at 17.6 million, Japanese passenger car registrations came to fewer than 18,000. At the same time, there were 105,000 registered rickshaws, 3.7 million bicycles, and 374,000 ox- and horse-drawn wagons in Japan.

The Japanese market at that time was dominated by cars made from kits sent by American and British companies. Ford-Japan sold 18,000 cars in 1937, more than were produced by all Japanese companies combined. The coming of war did not stimulate the Japanese industry. The Japanese had only 3,000 trucks to use in the island campaigns, against 100,000 in use by American forces.

Wartime bombings all but destroyed the Japanese automobile factories, which recovered slowly after the coming of peace. In 1949, when all restrictions were lifted, Japan manufactured 1,070 passenger cars and 26,727 three-wheeled vehicles. A prominent cabinet member urged Japan to forget about producing cars and import them instead from the United States, noting that there was a large gap in terms of design, performance, and durability and that American cars were priced far lower.

Economists at the Bank of Japan argued that Japan would be better off without cars. In their opinion, the small country could not afford the land that would be taken by roads and parking places; it would be far better to concentrate on rebuilding and refining the railroad system. Others argued that the Japanese could be better served with inexpensive motorized bicycles and motorcycles. One of those who spoke this way in the early 1950’s was Soichiro Honda, whose company then manufactured motorized bicycles.

The Korean War provided a strong impetus for the Japanese economy, which became, in effect, an economic supply depot for United Nations troops. Trucks were needed, and the Japanese companies did what they could to provide some. As the Japanese economy was stimulated by wartime spending, demand for taxicabs and then rental vehicles improved. In 1950, the Japanese automobile industry produced 1,594 cars. By 1955, the number had reached 20,220. Although Japan still did not pose a threat to the United States, this was an impressive growth spurt.

Japanese companies realized that the domestic market could not support a large automobile industry and that without exports, the minor companies (Toyo Kogyo, Mitsubishi, Fuji, Isuzu, Daihatsu Kogyo, Prince, Hino, and Suzuki) would go out of business, and the majors, led by Toyota Motor Corporation and Nissan Motor Company, would not be able to achieve all the possible economies of scale. Japanese manufacturers therefore decided to export. Japan’s experience with manufactured goods made the Asian market seem appealing, but most Asians could not afford cars. The Japanese went after the richest market of them all, the United States.

After some preliminary forays in 1957, Toyota sent the Toyopet Crown and Nissan sent the Datsun Cedric to the United States. Neither was warmly received. Toyota sold 288 cars in the United States that year and only 821 the next. In 1961, the total was 576. Nissan did somewhat better: 1,131 sedans and 179 trucks were sold in 1959, and 1,294 sedans and 346 trucks the following year. Most were purchased on the West Coast, often by Japanese American customers. The Japanese industry was still small. In 1958, Japan produced slightly more than 50,000 passenger cars.

In the mid-1960’s, the powerful Ministry of International Trade and Industry (MITI) concluded that there were too many automobile companies and urged some of the smaller entities to merge into a third major company, to join Toyota and Nissan. The reasoning was that if the United States, with its large market, had only four major companies (General Motors, Ford, Chrysler, and the smaller American Motors), then Japan could not support twice as many.

Many thought that Toyo Kogyo or Mitsubishi could be the focal point for this new entity. Neither company supported the move, and in a rare show of strength, they derailed the MITI proposal. Undeterred, MITI attempted to have one of the other companies purchase Prince, which, although it was the third-largest company in sedans and small trucks, had a poor distribution system and an inferior repair record. After some sparring, Nissan acquired Prince, thus becoming the nation’s largest auto manufacturer. With some reluctance, Toyota agreed to acquire the financially troubled Hino, and Isuzu and Fuji entered into a program of coordination, introducing new relationships within the industry. In 1967, Toyota announced that it would purchase about 10 percent of the shares of Daihatsu Kogyo. The two companies would otherwise remain separate.

Kono Fumihiko, president of Mitsubishi Heavy Industries, which owned Mitsubishi Motors, was eager to divest himself of that company so that he could concentrate on other activities. He became the driving force for consolidation. His plan was to unite Mitsubishi with Isuzu and possibly Fuji to create a company approximately half the size of Nissan. This plan fell through, but Fumihiko spun off Mitsubishi Motors, which entered into a working agreement with Isuzu on some projects. Other than these arrangements, Japanese automobile manufacturers did not act on the MITI proposal to create a third force in the industry.

Meanwhile, the Japanese Diet passed legislation forbidding other companies to enter the field. At the time, Honda, which by then had emerged as a major motorcycle manufacturer, wanted to enter the business. Soichiro Honda got around the legislation by telling the authorities that he had no intention of producing sedans or trucks, but instead wanted permission to produce a low-priced sports car, the S500. Permission was granted, thus enabling Honda to enter the industry through the back door.

Smaller companies had come to accept MITI’s reasoning regarding the impossibility of the domestic market supporting so many companies and the subsequent need to export. In 1967, Nissan and Toyota had 60 percent of the domestic market, a share that was increasing. They too looked overseas.

The U.S. market at first appeared to be unpromising. In the 1960’s and early 1970’s, American companies introduced a series of compact cars to combat the Japanese imports. These included the Ford Maverick and Pinto, the American Motors Gremlin, the Chevrolet Corvair and Vega, and the Chrysler Valiant and Dart. For a while, some of these cars sold well, but the Japanese onslaught continued. In 1969, Toyota and Nissan sold 260,000 cars in the United States; two years later the figure peaked at 704,000 before declining to 625,000 in 1973. In all these years, however, German cars, led by the Volkswagen Beetle, outsold Japanese cars in the United States.

Believing that his company could not compete on its own in the United States, in 1969 Mitsubishi President Yoshizane Makita announced his intention to join with the Chrysler Corporation in joint ventures. As part of this plan, Chrysler would purchase 15 percent of Mitsubishi’s shares, then later expand its holdings to 35 percent. Mitsubishi was to have access to the American market through Chrysler dealerships. It came as a surprise when Chrysler informed Makita that it lacked the funds to make the purchase. In time financing was arranged, but the Japanese had caught a glimpse of the weaknesses of the American companies.

Ford entered into discussions with Toyo Kogyo, which also wanted entry into the American market. In 1970, Ford announced that it would purchase 20 percent of Toyo Kogyo’s shares, a figure soon raised to 25 percent. This was followed by an announcement from Isuzu that it would enter into a partnership with General Motors (GM). Other arrangements followed, the most important being a complex joint venture among GM, Isuzu, C. Itoh, and Kawasaki Heavy Industries for the manufacture of gas turbines and automatic transmissions. During a period in the mid-1970’s, it appeared that American firms would dominate the non-Toyota and non-Nissan parts of the Japanese automobile industry. This was not to be, for even then the other Japanese companies were entering the American market on their own.

The first Mazda models, produced by Toyo Kogyo, were sent to the United States in 1970. Among them were the RX-2 coupe and sedan, both powered by the revolutionary Wankel rotary engine. Mazda was a success, selling 20,000 cars the first year and 63,000 the second. Subaru followed, selling 24,000 cars in its first year. Mitsubishi’s cars were sold as Colts and Arrows by Chrysler dealers, so its nameplate came to be recognized only later.

Honda arrived in 1970, with its N600. It sold 4,000 cars that first year and 12,000 the next. The N600 was a small, boxy model that did not appeal to Americans. Recouping, Honda introduced the AN600, with a fuel-efficient CVCC (compound vortex-controlled combustion) engine. In 1972, Honda introduced the Civic, selling more than 20,000 of that model.

The turning point for the Japanese industry came in 1973, with the oil embargo imposed by Arab members of the Organization of Petroleum Exporting Countries (OPEC) and the American decision to cut the dollar completely from its former gold base. The price of gasoline soared, and the value of the dollar against the yen plummeted. The rising oil price lifted the price of gasoline, making the American “gas guzzlers” less desirable. The strong yen, however, caused the prices of Japanese cars, as expressed in dollars, to rise.

So was born the struggle for the American car buyer’s pocketbook. Americans wanted more fuel-efficient cars, but they also wanted to pay lower prices for these economy models. At first, the battle was won by those who refused to pay higher prices. Toyota and Nissan sales fell, although those for Honda and Mitsubishi rose. By mid-decade, however, sales were on the rise once again. American sales of Japanese cars in 1975 were 695,000 units. The number rose every year for the rest of the decade.

In 1980, Japanese companies produced 7 million automobiles (up from 6.2 million in 1979), against 6.4 million (down from 8.4 million in 1979) in the United States. Exports to the United States in 1980 came to slightly fewer than 2 million units. That year, for the first time, Japanese car production surpassed that of the United States.

Significance

The news that Japan had become the world’s leading automobile manufacturer did not come as a surprise in Detroit, where the American companies were in disarray. In 1980, all four major manufacturers lost money: General Motors lost $762 million, Ford lost $1.5 billion, Chrysler lost $1.7 billion, and diminutive American Motors lost $156 million.

All these companies had programs in place geared to alter this situation. In the autumn of 1979, GM’s chairman, Thomas Murphy, announced a five-year, $40 billion program to completely revamp the company’s offerings. Soon thereafter, Ford and American Motors came out with similar statements. Chrysler, headed by Lee Iacocca, hovered at the edge of bankruptcy. The company was saved only when the federal government made $1.5 billion in loan guarantees and the United Auto Workers made important concessions in labor contracts. Iacocca told the press that his company would downsize, cut back on its lines of cars, and, like the others, present new models. He also complained about unfair Japanese competition, a theme he would return to often throughout the decade.

In March, 1981, Japanese Foreign Minister Masayoshi Ito arrived in Washington for trade negotiations centering on automobiles. Some in the administration, including Commerce Secretary Malcolm Baldrige and Transportation Secretary Andrew Lewis, argued for tariffs on Japanese cars, whereas Secretary of State Alexander M. Haig and Treasury Secretary Donald Regan opposed them. In the end, President Ronald Reagan came out for “voluntary restraints” self-imposed by the Japanese. In April, MITI chairman Rokusuke Tanaka proposed that exports of Japanese cars to the United States be limited to 1.68 million units per year for a two-year period. This was equal to the average number of Japanese cars exported to the United States in 1979-1980 and was a reduction of 7.7 percent from the previous year’s exports. A clause in the agreement permitted increases should the domestic U.S. industry revive; another clause provided for an extension of the agreement if necessary. This move, together with the Chrysler bailout, indicated just how serious Washington thought Detroit’s ailments were and the lengths to which it was prepared to go in offering assistance.

These activities had several intended and more unintended consequences. The limitation on Japanese imports enabled American companies to raise their prices in the hope of restoring profitability. At GM, there was an average increase of $617 for the new 1982 models. GM promoted its new X-Cars while raising their prices almost 20 percent. At Chrysler, the new K-car chassis was used as the platform for autos ranging from compacts to high-priced sedans. Ford’s new Tempo/Topaz was a hit, as were the revamped Thunderbird and LTD. These cars, like the GM models, had higher prices.

Relations between American and Japanese companies became closer. Toyota and GM entered into a $300 million agreement to manufacture 200,000 Corollas a year in a GM facility in California. As part of the agreement, GM would study Toyota’s manufacturing techniques. GM invested another $200 million in Isuzu and imported that country’s small sedan. Chrysler became more dependent on Mitsubishi for small cars. Ford entered into further arrangements with Toyo Kogyo.

For their part, the Japanese companies—fearing further restrictions, perceiving the growth of a “Buy America” sentiment, and realizing that American labor costs were falling to near Japanese levels after currency adjustments—set up factories in the United States. Nissan went to Tennessee, and most of the other Japanese companies set up their own American factories. By 1992, the best-selling American-produced car in Japan was a Honda manufactured in Ohio.

The export agreement limited the number of cars that Japan could sell in the United States, so Japanese companies responded by entering the higher-priced (and higher-profit) area and playing down their economy cars. The Infiniti, Acura, Toyota Camry, Lexus, Mazda 929, and others now challenged BMW and Mercedes, while the Honda Accord became the best-selling model for a number of years.

By then, the American companies seemed to have learned their lessons: They revamped according to the Japanese model. This meant strong quality control, “lean” manufacturing, and close worker-management cooperation. The result could be seen in the Saturn, one of the American success stories of the period. The Saturn was sold on a one-price basis and received high scores on quality. The Saturn Corporation stressed customer service and attempted to win brand loyalty. As a result, there were waiting lists for some Saturn models. Saturn received high scores from rating agencies. Ironically, some surveys showed that a large number of customers who liked the car thought it was Japanese.

Bibliography

Cole, Robert, ed. The Japanese Automotive Industry: Model and Challenge for the Future? Ann Arbor: Center for Japanese Studies, The University of Michigan, 1981. A collection of papers on the subject submitted at a conference in 1980. Contains several provocative essays on the nature of the Japanese industry.

Halberstam, David. The Reckoning. New York: Morrow, 1986. A study of the Japanese strategy for capturing a large share of the American market, along with its consequences.

James, Wanda. Driving from Japan: Japanese Cars in America. Jefferson, N.C.: McFarland, 2005. Chronicles the success of Japanese car manufacturers in the United States since the 1950’s.

Maynard, Micheline. The End of Detroit: How the Big Three Lost Their Grip on the American Car Market. New York: Random House, 2003. Demonstrates how foreign companies were more innovative and strategic than their American counterparts in winning over American consumers.

Rae, John. Nissan/Datsun: A History of Nissan Motor Corporation in the U.S.A., 1960-1980. New York: McGraw-Hill, 1982. A study of how Nissan entered the American market, with a brief background on the history of the company in Japan.

Sanders, Sol. Honda: The Man and His Machines. Boston: Little, Brown, 1975. An early study of the idiosyncratic Japanese automobile manufacturer.

Sobel, Robert. Car Wars: The Untold Story. New York: E. P. Dutton, 1984. A study of the Japanese invasion of the American market, with chapters on the evolution and growth of the Japanese industry.

Womack, James, Daniel Jones, and Daniel Roos. The Machine That Changed the World. New York: Rawson Associates, 1990. An invaluable work, based on a study by the Massachusetts Institute of Technology, that illustrates Japanese “lean” production methods.