Carmakers cut output as demand slumps

Carmakers cut output as demand slumps

Indonesia's car industry is by no means the only one to be
suffering from a severe downturn in demand as the country's
economic woes continue.

Sluggish demand in Japan for big-ticket items finally caused
its carmakers to begin large-scale production cuts.

The reductions are expected to hurt chances of an economic
recovery, as the automakers and the rest of the auto industry
contribute about 10 percent of the nation's gross domestic
product.

Consumer desire to buy new cars has been dampened by financial
and job insecurity, and auto-industry analysts said demand is not
expected to recover before summer at the earliest.

Nissan said it will reduce output this month by 10 percent
year on year. Honda changed its output plan for the month to
114,000 vehicles, from 118,000, eliminating two Sundays of
operations at its Suzuka factory that had been planned since
January.

Toyota and Mazda are also planning production cuts, according
to The Nihon Keizai Shimbun. The newspaper reported that Toyota
will cut its average daily output by 20 percent year on year to
about 12,500 vehicles in April, followed by reducing its 3,000
part-time factory workers by half.

The newspaper also reported that Mazda will cut production by
10 percent year on year in March.

Toyota and Mazda did not comment officially.

The analysts agreed that a main reason for the production cuts
is lingering weak domestic demand for new vehicles, rather than
slowing exports. Monthly sales of new vehicles as measured by
registrations have been smaller than year-earlier figures every
month since last April, when the consumption tax rose two
percentage points to 5 percent.

The February figure was 396,907 vehicles, down 22.4 percent
year on year, according to the Japan Automobile Dealers
Association. Though the rush to buy last February before the
higher consumption tax contributed to the drop, it also is
believed to reflect a substantial decline in basic demand.

Exports to Asia have also dropped because of its economic
crises. Still, said Kaoru Kurata, a securities analyst at Goldman
Sachs (Japan), "the drop does not affect automotive exports as a
whole, since the contribution is only 15 percent of the number of
exported vehicles. Exports to North America, which make the
largest contribution, are still going in good condition."

The continuing slump in the automobile industry could ripple
through Japan's economy. Sugiura pointed out that, "the cut in
Toyota's production could be even larger than that caused by the
temporary halt after the fire at Aisin Seiki in February 1997.
This will be a serious problem for business in Japan if it lasts
more than three months."

A revival of individual consumption holds the key to the
automobile industry's recovery.

Yuriko Tanaka, an economist at Goldman Sachs, is not
optimistic about that. "Even if individuals soon overcome the
shock they felt last December (from the collapse of major
financial institutions), they still will probably go on being
concerned about employment destabilization and their income
status," Tanaka said. "A visible consumption recovery for durable
goods is not likely to be seen within 1998 unless the government
lowers the maximum tax rate to change the mood of the people."

Whether there is demand for new models to be put on the market
in June and July will be crucial in determining whether
automakers can restore production before the nation's businesses
feel the impact. Automakers are placing their hopes on demand to
replace cars that were bought in the early 1990s, when Japan was
still enjoying the bubble economy, a Honda spokesman said.

"Still, we know that consumers have already changed their
purpose for having a car since the bubble economy," he said. "The
car has become a tool for daily life, such as recreation or
shopping, rather than a fashion item to show off to others, as it
was before. The launching of new models could fail unless the
models really meet the needs of current consumers."