Daihatsu to Seek Niche in U.S. Car Market : Despite Warning Signs, Japanese Firm Sees No Time Like the Present

It would be hard to imagine a less opportune time for yet another Japanese auto maker to try to break into the United States with a new small car.

After all, there’s a trade war brewing between the United States and Japan, the yen is soaring, import quotas on Japanese autos remain in force, and cheap mini-cars from the Third World are flooding unchecked into America, threatening Japan’s hold on the small-car market here.

“It’s horrible timing,” notes Thomas O’Grady, president of Integrated Automotive Resources, a Wayne, Pa.-based automotive research firm. “You probably couldn’t pick a worse time to come in.”

But Daihatsu Motor Co. is coming anyway.

Daihatsu (pronounced Di-hot-soo), the only Japanese auto company not yet in the U.S. car market, plans to introduce its Charade mini-car in the United States this fall, with a Jeep-type utility vehicle, known in Japan as the Rocky, due to follow in late 1988.

Still, as the last Japanese entry into the United States, Daihatsu will be operating at a distinct disadvantage.

For one thing, Daihatsu lacks the established U.S. marketing and distribution resources of its larger Japanese competitors. Although Toyota owns 14.8% of Daihatsu, it will sell its cars here without Toyota’s help.

But more important, Daihatsu will initially be able to sell only about 11,000 cars a year here under the Japanese quota system, making it difficult for Daihatsu to cover its costs and turn a profit. And even that small volume has been made available to Daihatsu by the Japanese government only by shrinking the quota allotments of every one else--thus angering Daihatsu’s Japanese competitors.

With such tight controls over its shipments, Daihatsu will only sell the Charade in California and eight other states in the West and Southwest when the car is introduced in October or November. At first, the company plans to have only 130 to 150 U.S. dealerships, according to C. R. Brown, chief operating officer of Daihatsu America Inc., the company’s U.S. marketing arm, which will open its U.S. headquarters in Los Alamitos later this month.

Brown insists that Daihatsu has been so long in coming to the United States because it was waiting until it had revamped its Japanese models and had a “product line more suited to the United States in place.”

Still, it’s clear that it was mainly quotas that kept Daihatsu, one of the oldest auto makers in Japan, out of the American market. Under the quota system, which was established in 1981, the Japanese government decides which Japanese car companies are alloted shares of the allowable volume of exports to the United States; the government has favored the major auto makers that were already in the American market at the time the quotas were introduced.

Thus, smaller Japanese companies--including Mitsubishi, Suzuki, and now Daihatsu--that have entered the market since have been severely restricted as they have sought to expand in the United States. With that in mind, Daihatsu is starting to look to Canada for a way around the quotas. A bilateral U.S.-Canadian treaty allows cars built in Canada to enter the United States in unlimited numbers--and duty free.

Daihatsu and Bombardier Inc., a diversified Canadian manufacturer that does not yet make its own passenger cars, are reportedly working on a deal to form a joint venture to produce the Daihatsu Rugger, a version of the Rocky utility vehicle, in one of Bombardier’s Canadian plants beginning in 1988. The joint venture might also build a new Canadian plant to produce the Charade, which is smaller than traditional subcompacts, beginning in 1990 or 1991.

No Easy Solution

Still, Daihatsu won’t be able to solve its problems in the United States simply by increasing its volume.

The rapid rise in the value of the Japanese yen against the dollar over the last 18 months will make it far more difficult for Daihatsu to make money in the low-margin, small-car market in the United States, adding another layer of uncertainty to its American debut. Industry analysts note that gross profit margins--including earnings attributable to dealers and distributors--on Japanese subcompacts have plunged, from $2,900 to $1,200 per unit, as a result of the run-up in the yen.

Faced with such pressures, Daihatsu has abandoned its efforts to try to set a price for the Charade in advance of its introduction.

“If you can tell me what the dollar-yen exchange rate will be in October, I’ll tell you what our price will be,” says Brown. “We haven’t tried to price the car yet, because we would just have to change our estimates every day that the yen moves.”

In fact, Brown stresses that he’s glad the exchange rate volatility has become evident before Daihatsu enters the market.

Biggest Problem

“As far as the yen is concerned, we’re just happy it’s happening now, before we have marketing plans in place,” says Brown. “It’s a lot better for it to happen now, so we can develop our strategies to accommodate to it, rather than to have to enter into knee-jerk reactions after we launch.”

Still, perhaps the worst problem Daihatsu must confront is the prospect of competing not only against a growing array of Japanese subcompacts but against cheap Third World mini-cars that will be transforming the U.S. small-car market as they flood the nation over the next year.

With so many intimidating obstacles before it, many industry analysts now wonder whether it makes sense for Daihatsu to come to America at all.

“The Japanese industry is already having trouble selling out what they are allowed under the quotas,” because of their sharp price hikes, notes Donald De Scenza, automotive analyst with Nomura Securities, a Japanese investment firm. “This is not a good climate for Daihatsu. It’s too late.”

Brown, of course, disagrees. “Too late? I can’t understand that attitude,” he responds. “That’s like saying it’s too late for anything new in the future. The U.S. market will have peaks and valleys, and one of the valleys is going to be this year, I think. But the United States is certainly a growing market, the largest car market in the world, and Daihatsu has products that are very suitable to this marketplace.”