By on August 28, 2011

The chief reason for the recent decline of the fortunes of Japanese automakers was not, as posited by pop pundits, the recalls or the tsunami. It was something more insidious, something regularly overlooked by most outsiders and many insiders. It was a reduction in development spending – an eventually deadly bottom line therapy also popular by cash-starved American peers. Japanese automakers have realized the error of their ways and have returned to funding the finding of that insanely great next generation car.

In the wake of the “Lehman syokku” or “Lehman shock” as they usually refer to the 2008 financial crisis in Japan, Japanese automakers drastically reduced R&D spending in an attempt to shore-up their bottom line. This is a tried & true tactic in the industry: if a disaster hits, cut R&D and advertising. The cashflow-positive effect of both is as immediate as snorting cocaine. The negative effect will not be felt until years later. In many cases, the problem is shifted to the next generation of managers who now have to sell tired technology to unenthused customers. The best medicine for car sales is new cars. Old cars are slow acting, but sure poison. A car takes 3 to 5 years to develop, medicine and poison become felt after long delays.

The epicenter of the “Lehman syokku” was America, and three years after, the American market is still wobbly. Car companies most exposed to the syokku – American and Japanese – put spending into crisis mode. European companies were far less affected and mostly maintained their spending level. This explains why Volkswagen, Daimler, BMW et al are riding high, and why the friskiest Japanese car company is Nissan with its ties to European Renault. Three years after the syokku, we are beginning to feel the effect in earnest, and it will stay with us for a while until it is digested.

Japanese companies are reaching for the antidote: Increased R&D spending.

“Seven automakers plan to spend 2.09 trillion yen, up 10 percent from fiscal 2010,” reports The Nikkei [sub]. Converted to today’s dollars, that’s $38 billion, a good chunk of money. Japanese markers are “racing to develop the next-generation of environmentally friendly vehicles as well as low-priced models for emerging nations.”

Nissan for instance is seen increasing its R&D spend by 15 percent to 460 billion yen ($5.8 billion). Honda plans to spend more than 500 billion yen ($ 6.5 billion),” aggressively developing budget cars for emerging countries.”

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33 Comments on “Japanese Proverb: No Money, No Action. No Action, No Satisfaction...”


  • avatar
    geozinger

    As evident from the last generation (or two) of decontented models, the Japanese makers have been participating in cost cutting long before the Lehman shock or the tsunami.

    Japan is in it’s second ‘lost decade’ now, with the combination of the intractibly high yen and an aging demographic. Not a lot of room for expansion. The US market, is now being transformed with a reinvigorated GM, an aggressive Hyundai/Kia and VW promising to make substantial gains in market share here, among other issues. I’m not seeing a lot of room for improvement there.

    It will be interesting to see what this new emphasis on R&D will bring. We’ll know in 3 to 5 years…

    With the increased competition in this environment, it can only indicate one thing: the next several years may be a great time to shop for a car. Too bad I probably won’t be participating…

    • 0 avatar
      probert

      I’d also argue that the American market is altered due to massive unemployment, massive underemployment and lowering salaries. I hope the Japanese are investing in R&D for submerging nations as well as emerging nations.

    • 0 avatar
      jimmyy

      As evident from the last generation (or two) of decontented models, the Detroit makers have been participating in cost cutting long before the Lehman shock or the tsunami.

      Detroit is in it’s second ‘lost decade’ now, with the combination of the uneducated workforce and the UAW. Not a lot of room for expansion. The US market, is now being transformed with a reinvigorated Toyota Camry, an aggressive Honda and Hyundai/Kia promising to make substantial gains in market share here, among other issues. I’m not seeing a lot of room for improvement there.

      It will be interesting to see what this new emphasis on R&D will bring. We’ll know in 3 to 5 years…

      With the increased competition in this environment, it can only indicate one thing: the next several years may be a great time to shop for a car. Too bad for Detroit I will purchase Toyota and Honda…

      • 0 avatar
        Pch101

        Detroit is in it’s second ‘lost decade’ now

        We need to address a serious topic here: “It’s”

        This poor little contraction is suffering much abuse around here. The pain needs to stop.

        “It’s” is NOT a possessive. It is a contraction for “It is.”

        The sentence above reads as “Detroit is in it is second ‘lost decade’ now.” That’s wrong, of course. It should read “Detroit is in its second ‘lost decade’ now,” with no apostrophe.

        Think of all of the time that you’ll save by not using an apostrophe that you didn’t need in the first place. Conservation is a wonderful thing.

      • 0 avatar
        probert

        Another UAW bash – but since you don’t buy domestic why bother? But you did so at least lets be consistent:

        When you buy a product from any industrial nation other than the US – you are supporting strong unions, good public education, pensions, and universal healthcare.

        Hmm – the Lada is still being made – maybe a little grey market action.

    • 0 avatar
      eldard

      You lost me at reinvigorated GM. I would have believed you had you mentioned Ford.

  • avatar
    mike978

    Glad to see they have realised the errors of their ways (how western and capitalistic of them to succumb to cutting R&D spending). They are following GM who have said in their latest investor briefing that they will spend a consistent amount on R&D rather than cut and splurge from time to time. Time will tell if any of the companies have learnt their lesson.

    • 0 avatar
      Pch101

      They are following GM who have said in their latest investor briefing that they will spend a consistent amount on R&D rather than cut and splurge from time to time.

      That’s a nice policy proclamation that looks good on a Powerpoint. But good luck maintaining it when that additional R&D spending results in an income statement with lower net income or net losses as a result of the policy.

      In any case, if there are vehicle-related problems as of today, they are likely produced by cheaper parts and/or decontenting, not by a lack of research spending. Paying more for the engineering won’t improve how the cars look or the feel of the controls.

      • 0 avatar

        Thanks for bringing this to our attention, Bertel. Is there by any chance a chart tracking development spending by year over the last five to ten?

        Pch101 makes a good point: talk is cheap. GM has said it would keep spending steady through business cycles. But this is much like an alcoholic pledging to not go on another bender. It might happen, but in the end actions matter far more than words.

      • 0 avatar
        geozinger

        But GM has a pretty clean balance sheet and not many tax obligations going forward. They can afford to spend consistently. Maybe make up some ground lost to the Inaki principles.

        However, I agree that we’ll see if it occurs. All we need is a change of CEO, CFO or some other C(insert letter here)O, who has a great idea to change how business is done, and poof! Another promise forgotten.

        Not like it doesn’t happen anywhere else.

      • 0 avatar
        eldard

        I’ve said it before and I’ll say it again: US makes are more profitable than Japs even though they sell less cars, employ like thrice the people at higher wages and pay their execs the highest in the industry. One very important department is getting squeezed.

      • 0 avatar
        Pch101

        But GM has a pretty clean balance sheet…

        That doesn’t change the need to manage the income statement. (Shareholders pay attention to this sort of thing.) Under current rules, R&D spending in the US goes onto the income statement (although I believe that in the near future, some of that spending is going to be capitalized as accounting rules in the US change over to follow international standards.)

        and not many tax obligations going forward.

        If GM is producing profits, then those carryforward losses will be burned off within several years. Those were a temporary reprieve, not a permanent tax shelter.

        Is there by any chance a chart tracking development spending by year over the last five to ten?

        I would think such an evaluation should account for the number of models that each company produces.

        GM now should get more R&D bang for its buck than it did before, because it is producing fewer badges. Today, GM should be able to maintain higher spending per model (which would be appropriate for GM) without spending more in total dollars.

        I can see that the Germans did increase their spending. But I have to wonder how much of that went into paying to develop new models, versus investing more per badge into the revisions of the current ones.

      • 0 avatar
        geozinger

        @PCH: “If GM is producing profits, then those carryforward losses will be burned off within several years. Those were a temporary reprieve, not a permanent tax shelter.”

        My bad. I guess I should have stated something to this effect, but I thought as much as the BKs had been scrutinized on this site (and others), it would have been pretty common knowledge.

      • 0 avatar
        Pch101

        I thought as much as the BKs had been scrutinized on this site (and others), it would have been pretty common knowledge.

        Fair enough. But given some of the woefully inaccurate statements that I have read about the bailouts and other such topics in the comments section of forums and blogs such as this one, I tend to be more skeptical and find it easier just to assume the worst. Not everyone who posts on the internet is a fan of accuracy…

  • avatar
    Lampredi

    European companies were far less affected and mostly maintained their spending level.

    With one big exception – Fiat, which today is struggling with an ageing lineup and dwindling market share as a result of Sergio Marchionne’s spending freeze.

  • avatar
    jimmyy

    To those that think Detroit is on a comeback, I have diagnosed your condition as delisional disorder.

    Delusional disorder is an illness characterized by the presence of nonbizarre delusions in the absence of other mood or psychotic symptoms, according to the Diagnostic Manual of Mental Disorders, Fourth Edition, Text Revision (DSM-IV-TR).[1] It defines delusions as false beliefs based on incorrect inference about external reality that persist despite the evidence to the contrary and these beliefs are not ordinarily accepted by other members of the person’s culture or subculture.

    • 0 avatar
      PintoFan

      Why are you still being allowed to post? I mean, when was the last time that you made a constructive comment on this board that was not a direct personal attack on your “enemies?” And certainly, why are you allowed to post under multiple accounts (jj99, jjimmy, and others)? It is quite obvious that you have been doing so for some time, and I think that must qualify as a violation of the Terms of Service. I’m sure that I’ll be written off as an angsty “Detroiter” for making this post, but I’m sure that there must be other sensible people thinking the same thing.

    • 0 avatar
      Loser

      Delusional disorder, that pretty much covers your act jimmyy jj99.
      Still laughing about you thinking the new Camry will steal BMW buyers and acting as if the use of high strength steel in the Camry is something new. Delusional indeed!
      You are not much of a car guy but you are good for a few chuckles. Your arrogance makes it all the more funny.

  • avatar
    Dimwit

    The irony is that a lot of the new development isn’t coming from the manufacturers but from the parts suppliers. I don’t see how those additional funds help those guys.

  • avatar
    wsn

    – “European companies were far less affected and mostly maintained their spending level. This explains why Volkswagen, Daimler, BMW et al are riding high”

    Just can’t agree with that. The rise of VW, MB and BMW is mainly due to the disappearing middle class. Most of VW’s gains are not in the US anyway, super low end products sold in China lead the way for VW. As for MB and BMW, the riches in both China and elsewhere (US included) are not impacted much by the recession at all.

    • 0 avatar

      I am afraid you are making the dangerous mistake of analyzing solely from an American perspective. In a world where the majority of cars are sold in emerging markets, and where nearly all of the growth is in emerging markets, a global view must be taken. Volkswagen’s dumb luck was that they had a small market share in the U.S. Where you don’t have much, you don’t have much to lose. MB and BMW were more exposed and skidded a bit after 2008, but recovered quickly on the back of high Chinese demand and the then low Euro. VW never dialed back investments. MB and BMW did a bit, but recovered quickly.

      “Super low end products sold in China lead the way for VW?” VW sells its whole range in China, its biggest single market. “Super low end?” Ever heard of Audi?

      • 0 avatar
        HiFlite999

        I agree with wsn here, and inclusion of the emerging market doesn’t much change the conclusion. China is also experiencing a boom in the rich class. But even so, it’s all about status, not R&D. Most Chinese can’t find a spark plug, much less tell you what DSG is all about. What it is about is *status*. An A6 and a Kia will average the same speed in Beijing. The only way the majority of the Chinese middle class can afford a new car (and there aren’t that many used ones) is access to easy credit. That bubble will end, just as it has here in the USA.

  • avatar
    PintoFan

    I would welcome more R&D from the Japanese makes, but I sincerely believe that their time in the sun is over. By the time that any new models are available, I think that they may have lost an unrecoverable amount of ground to the Americans, the Koreans, and as much as I hate to admit it, Volkswagen. That’s not to say that they will disappear entirely (except for Mazda, Mitsubishi, and Suzuki- they’ll be gone within 15 years), but the kind of marketplace dominance we have come to expect from them is being ruthlessly undercut every day.

    • 0 avatar
      Robert.Walter

      I agree. If Toyota and Nissan get into a price-war, Mitsu, Mazda, and Suzuki (in declining order of risk) could very well go the way of the Detroit independents in the 1950′s Ford – Chevy price war.

    • 0 avatar
      Pch101

      I sincerely believe that their time in the sun is over.

      “Belief” is a good term for that. That sounds like wishful thinking, not cogent analysis.

      I think that they may have lost an unrecoverable amount of ground to the Americans, the Koreans, and as much as I hate to admit it, Volkswagen.

      In the US, VW is a niche player. The domestics have been sliding for decades and have only begun to stabilize.

      Meanwhile, Honda and Toyota still dominate most of their respective passenger car segments in the US market. Their main threat in the US comes from the Koreans, but the latter are still fairly small players here.

      That being said, Toyota and Honda have to strive to maintain their quality branding. Their failure to shine above everyone else in the more recent rankings of Consumer Reports and JD Power suggests that the competition is actually closing the gap this time, unlike before. If Honda or Toyota become unable to use quality to differentiate themselves, their market share and margins are going to take a hit.

      • 0 avatar
        PintoFan

        It’s not “wishful thinking,” it’s a logical extrapolation of current trends. I’m not saying that Detroit is going to rise again and re-assert dominance over the industry like it did in the 60′s. What I am saying is that we have a classic situation here, much like what was encountered way back when- two giants versus a large crop of “upstarts.” Except this time, the “upstarts” have either been in the car biz for a lot longer, have learned what sells and what doesn’t, or already have a vast infrastructure and pool of resources at their disposal. Their was a time when Toyota and Honda could have played their way out of this by increasing the quality of their products, but now they’ve hit a plateau. Japanese cars hit their peak in quality sometime in the late 90′s, and have either continued on or backslid slightly. Meanwhile, the competition has increasingly improved with no sign of stopping, and the gap is already at a nullity for most of the brands. Without the quality gap to lean on, Toyota and Honda are forced to slowly burn through brand equity as the competition discovers the new crop of competitors. There are no simple solutions for Toyota, Honda, or even Nissan, especially because of the high yen.

        Volkswagen WAS a bit player, but if the new model sales statistics are any indication, they are pretty serious about this whole “largest automaker in the world” thing. There was a time in living memory when Volkswagens represented over 40% of the imports sold in the United States. Even if the products remain subpar, they have the kind of resources and brand cachet that will enable them to sell vast numbers of vehicles in the United States again.

      • 0 avatar
        Pch101

        Japanese cars hit their peak in quality sometime in the late 90′s, and have either continued on or backslid slightly.

        This meme is popular around here, I know. Which is great, except that it’s false.

        The data tells us that today’s Toyotas and Hondas are more reliable than before, in absolute terms. There are fewer defects today per 100 cars than there were in the past, so the cars are actually better than they were.

        Honda and Toyota are still generally ahead of the competition. The issue is that others are also improving, so that (a) Toyota and Honda are no longer clearly leading the pack in some vehicle classes and (b) the total number of flaws are fewer in number than before. So it’s not only harder to be “above average” than it once was, but being “below average” isn’t as bad as it used to be.

        Volkswagen WAS a bit player

        No, it still is. YTD 2011 US market share for all of VAG is 2.5%, not much larger than the BMW group of brands and 1/5th the size of Toyota. It’s probably going to stay a niche player.

        The main threat remains the Koreans. The CEO of the American division of Hyundai worked at NUMMI and is a disciple of lean production, so he understands the Toyota production method and how to compete against it.

  • avatar

    I thought that VW is aggressively decontenting its US offering. So far Ford and GM are adding more tech into their cars than VW. Japanese always made boring appliances not very popular in other developed countries. In US customers did not notice because Detroit’s offering were even worse. Now when Detroit is catching up it will be progressively difficult for Japanese to compete esp when Koreans offer the same or better value than Japanese and time is working on their behalf. But it is when Chinese get serious Japan may get into real trouble.

  • avatar
    eldard

    Too bad the Birch 3 can’t do the same. Most of the money went to them union weed whackers and overpaid execs.

  • avatar
    Robert Schwartz

    I don’t think lack of funds accounts for the ugly, fat, uninspiring cars that Toyota and Honda are selling.

  • avatar
    DearS

    Toyota and Honda have inspired me to take many a reliable trip. Its not all about the excitement in the drive, It’s also about getting to where I’m going with my car in one piece.

    I parked my 89 Corrola last year next to brand new luxury SUVs at a mountain youth camp in the Dominican. I don’t think I had any less an exciting time than anyone else. Drove up and down to beaches, rivers, resorts etc etc..the car had 230k plus. I can’t picture many cars to do that with, maybe in the future things will be different.


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