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Wednesday, Oct. 24, 2007

Motor show glitz belies car market glut

Some companies seen as M&A targets as automaker map is redrawn


Staff writer

The Tokyo Motor Show, which opens to the public Saturday, is one of the world's biggest auto exhibitions and a place to show off global carmakers' research and development efforts and state-of-the-art technologies.

Since the last exhibition two years ago, cars have become more environmentally friendly and fuel-efficient, thanks to increasing worldwide awareness of global warming and rocketing oil prices.

But these are not the only changes the industry has seen. The territorial map of automakers has also been redrawn and analysts say further "marriages and divorces" are likely in the years to come.

"Companies need capital resources to develop environmental and safety-related technologies and to produce (new models) for emerging nations," said Shigeru Matsumura, a senior analyst at SMBC Friend Securities Co. "The burden of investment costs is likely to trigger a realignment of alliances."

Matsumura said Honda Motor Co., which has a strong market presence in China, is an attractive target for mergers and acquisitions, including hostile takeover bids.

"Honda has strong motorcycle sales in emerging markets," Matsumura said. "Users of motorcycles in emerging markets will eventually shift to automobiles, giving Honda an advantage in those markets and making it a very attractive target for such M&As."

Matsumura argues there are too many automakers, especially in Japan, which means there are opportunities for mergers or new capital alliances initiated by the big-name players.

In the past few years, alliances surrounding Japanese automakers have drastically changed due partly to the troubles besetting General Motors Corp.

Terminating a 35-year-old capital tieup with Isuzu Motors Ltd., GM sold all of its stake in the truck maker in April 2006 as part of a restructuring plan.

The U.S. giant also sold its stake in Fuji Heavy Industries Ltd. in October 2005 and reduced its stake in Suzuki Motor Corp. to 3 percent from 20 percent in March 2006.

Meanwhile, DaimlerChrysler AG sold its Chrysler unit in August to U.S. investment fund Cerberus Capital Management LP after failing to turn it around. The investment fund acquired 80 percent of Chrysler's outstanding shares and Daimler holds the remaining 20 percent stake.

The German company also stopped funding Mitsubishi Motors Corp. in 2004 and ended its capital alliance with the ailing company in 2005. At one time it had about a 37 percent stake in MMC.

For its part, MMC is currently in the process of rebuilding itself under the guidance of the Mitsubishi group — Mitsubishi Heavy Industries Ltd., Mitsubishi Corp. and Bank of Tokyo-Mitsubishi UFJ — which holds a combined 34.3 percent of its outstanding shares.

Speculation is rife that the ailing carmaker may seek help from other car manufactures for a capital tieup to replace DaimlerChrysler.

"A carmaker of this size will have a difficult time surviving global competition without an alliance with other car companies," said Yasuaki Iwamoto, an analyst at Okasan Securities Co.

But because MMC, Japan's sixth-largest automaker, is still suffering losses, it first needs to rebuild under the Mitsubishi group before it can be an attractive target for a buyout, Iwamoto said.

In the business year that ended in March, MMC posted a profit for the first time in four years but still reported accumulated losses of about ¥740 billion.

"At this point in time, no one would be interested in buying Mitsubishi Motors" unless the financial condition improves, Iwamoto said. "European carmakers may (then) find the company attractive as a key foothold to the Asian market."

While Japan's medium-size automakers are exposed to potential buyout threats, the country's No. 1 carmaker, Toyota Motor Corp., is busy expanding its alliances within Japan.

When GM severed its capital alliance with Fuji Heavy and Isuzu, Toyota stepped in to purchase part of the shares. Toyota now holds 9 percent of Fuji Heavy and 6 percent of Isuzu.

Matsumura of Okasan Securities said Toyota's aim was to increase production globally in the short term.

"Toyota wanted to increase production in North America by utilizing Fuji Heavy's plant in North America," he said. "As for Isuzu, Toyota wanted its diesel engine" for the European market.

Matsumura said judging from the small capital participation, those capital tieups are not meant for a long-term commitment.

In fact, the moves Toyota, well-known for its Prius and Lexus brands, has taken over the past years show it is keener on creating stronger ties among its "keiretsu" affiliated companies to protect them from unwanted takeover attempts.

Koji Endo, a senior analyst at Credit Suisse in Tokyo, said Toyota is increasing cross-shareholding with its affiliated companies, apparently as a takeover defense measure.

In May, the government lifted a ban on triangular mergers, allowing foreign firms to acquire Japanese companies more easily.

Prior to the ban's lifting, Toyoda Boshoku Corp., a maker of car interior ceilings and floor mats, acquired Araco Corp. and Takanichi Co., also affiliated with Toyota, in 2004 to expand its business. The merged company is now called Toyota Boshoku Corp.

"Toyota ordered the three companies to merge because the interior sector was one of the weakest parts suppliers," Endo said. "To protect some affiliated makers, Toyota actually ordered the merger to protect the suppliers from foreign companies."



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