Foreign Car Makers view Detroit Collapse Disastrous

It is all based on self-preservation, and if the Detroit car makers fail our economy fails, and no one is more sensitive to that than the foreign car makers who make and sell their products here:

President Lee Myung Bak told reporters in Washington on Nov. 16 that a bailout was vital because of links between the U.S. auto industry and the Korean economy. "I'm in favor of the efforts to rescue the U.S. auto industry," Korean newspapers reported Lee as saying. Hyundai, Korea's biggest carmaker, also wishes Detroit well. "We recognize there may be extraordinary situations [which] may require unprecedented actions to assure [the auto industry's] long-term viability and a healthy American economy," says Hyundai spokesman Oles Gadacz.

In an artcile by Business week:

Surprise: Japanese, Korean Carmakers Want a Detroit Bailout

For Toyota, Honda, and Hyundai, a collapse of GM, Ford, or Chrysler would create more problems than opportunities

Follow this article written by Ian Rowley and Moon Ihlwan

Considering the home states of some of the Republican Senators opposed to a $25 billion bailout of Detroit, a cynic might concede that they are doing Asian automakers' work for them. After all, Republicans who have criticized the planned aid package for (GM), Ford (F) and Chrysler include those from states where Japanese and Korean automakers have factories. For instance, Republican Senators Richard Shelby and Jeff Sessions represent Alabama, home to Honda (HMC), Toyota (TM), and Hyundai plants. John Cornyn represents Texas, which has a 200,000-capacity Toyota Tundra plant in San Antonio. And Bob Corker, who is "very skeptical" of the package, is a GOP Senator from Tennessee, which has two Nissan (NSANY) plants—in Smyrna and Dechard—and the company's U.S. headquarters in Nashville.

Yet the senators opposing a bailout bill also may be in disagreement with those same Japanese and Korean automakers. For Asia's leading automakers, the prospect of one or all of the Big Three failing is arguably of greater concern than rivals receiving government aid. Indeed, since executives worry the collapse of GM, Ford, or Chrysler would have a negative impact on car sales, hurt the financial health of suppliers, and trigger a possible backlash against import brands, the problems of Detroit are problems for foreign rivals, too.

While a bankruptcy filing would likely boost Asian sales and shares eventually, in the short term it could make matters worse for Toyota, Hyundai, and the others. One problem, notes Andrew Phillips, an analyst at KBC Securities in Tokyo, is that one or more U.S. carmakers entering into Chapter 11 would do little to cut excess capacity and probably worsen consumer confidence. "It's in the Japanese and Korean carmakers' interest for the U.S. economy to stabilize and, if bailing out the Big Three means that, they are not going to be opposed to it," he says.

In Their Interests to Help Detroit

With no bailout plan yet agreed upon, Japanese and Korean automakers are mostly avoiding commenting on what the U.S. authorities should be doing. For one thing, it might look as if they're crowing when rivals are in need of emergency surgery. Those who have spoken have offered qualified support for U.S. government aid for their struggling rivals. Among them, Nissan Chief Executive Officer Carlos Ghosn and Honda CEO Takeo Fukui have indicated that they back bailouts in principle. Fukui, for instance, said on Nov. 6 that he isn't opposed to the U.S. government helping automakers as long as fair competition is maintained. The Honda boss, who would also like to see the Japanese government intervene to weaken the soaring yen, added that it's only natural for a government to support one of its country's key industries.

In Korea, a bailout is also garnering support. President Lee Myung Bak told reporters in Washington on Nov. 16 that a bailout was vital because of links between the U.S. auto industry and the Korean economy. "I'm in favor of the efforts to rescue the U.S. auto industry," Korean newspapers reported Lee as saying. Hyundai, Korea's biggest carmaker, also wishes Detroit well. "We recognize there may be extraordinary situations [which] may require unprecedented actions to assure [the auto industry's] long-term viability and a healthy American economy," says Hyundai spokesman Oles Gadacz.

Consumer Perceptions Matter

Of course, self-interest is the motivating factor. Despite market share in the U.S. of a combined 44% in October, Japanese and Korean automakers are hurting. Toyota, for instance, projects it will only make around $200 million during the second half of its financial year which ends in March and has formed an Emergency Profit Improvement Committee, led by President Katsuaki Watanabe, to search for new ways to trim costs (BusinessWeek.com, 11/6/08) and reevaluate the size and timing of new projects.

A Detroit bankruptcy might only make matters worse, if consumers perceive Asians' success as having unfairly contributed to the Big Three's decline. "A bankruptcy would have a tremendous impact on the U.S. economy and on demand for new cars," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "In no way should Japanese automakers let their U.S. counterparts fail."

A U.S. car market without one or all of the Big Three might not be as attractive as it first appears. In Japan, Japanese automakers account for well over 90% of sales, but that means they have to compete almost completely with some of the toughest rivals in the industry—each other. Profits are low, but competing with less efficient Big Three rivals may make it easier to eke out bigger earnings. "Japanese carmakers would be wise to help ensure the U.S. market doesn't become like the Japanese market," Matsumoto adds.

Plenty to Lose

Just as important are the close ties between Japanese and Korean automakers and their U.S. rivals. On Nov. 18, Ford sold 20% (BusinessWeek.com, 11/18/08) of Mazda (7261.T), reducing its stake to 13%, but the fortunes of the two automakers remain closely aligned. For example, Mazda and Ford share production at several plants and work closely together on new vehicle development. In particular, Mazda plays a large role in the development of Ford's passenger cars.

Similarly, Korea's Daewoo is responsible for GM's small-car output and would have plenty to lose if GM were to go under. South Korea is the home to GM's small-car design and production and GM Daewoo Auto and Technology made about a quarter of the 4 million cars built in Korea in 2007. "GM's collapse would not only be a disaster for the U.S. economy, but also a major blow to the Korean auto industry," says Kim Jun Kyu, research manager at Korea Automobile Manufacturers Assn. And hundreds of Korean parts makers depend on GM for their sales. "I have invested $16 million to make parts for GM Daewoo's new Gen3 engine, but now nobody knows when GM can introduce new vehicles in the face of the global economic meltdown," says Choi Bum Young, who also heads the association of 228 primary part suppliers of GM Daewoo.

While the linkup is less vital to their financial health, Toyota and GM share production at the New United Motor Manufacturing plant in Fremont, Calif. Meanwhile, Nissan and Chrysler have inked production agreements that will see Nissan make small cars for Chrysler. In return, Chrysler will supply pickups and vehicles to Nissan in North America.

Even Asian carmakers that don't have alliances, particularly Japanese players such as Honda, still share U.S. suppliers with the Detroit Three. Indeed, analysts say that the biggest short-term worry if GM fails is it will also damage suppliers. That would then have an impact on all their customers, says KBC Securities' Phillips. The ideal situation for Japanese automakers is to continue to take market share gradually from Detroit in a way that allows suppliers time to adjust and avoids a consumer backlash against import brands. From a Japanese carmaker's point of view, "It is better that the Big Three slowly wither away, but that scenario is looking increasingly difficult," says Phillips.

Rowley is a correspondent in BusinessWeek's Tokyo bureau. Moon is BusinessWeek's Seoul bureau chief.