Challenging aftermarket environment persists in wake of Japan’s amazing recovery
In the days and weeks that followed that devastating day in March, many wondered if the Japanese automotive industry would ever flourish again. There were concerns over the business climate. Would it ever be the same and what would the impact be on the psyche of the Japanese consumer?
At first, the Japanese OEM business struggled to keep up with demand and the result was the rebound of the American car companies, who were being aided at the same time by the U.S. government. But the struggles didn’t last long, as Japan accelerated its healing and recovery process. Now, just more than a year and a half later, Japanese manufacturing is once again world class and the world’s third largest economy has stabilized. While the economy is far from thriving, as it too is being directly affected by the European economic crisis, the country is again a viable place to do business.
But for aftermarket companies to do business in Japan, it takes a deep understanding of this intricate culture and consumer behavior.
First, you have to understand the market potential, which dwarfs the U.S. market. Japan accounts for approximately 10 percent of the world’s total vehicle population, with nearly 80 million motor vehicles registered (approximately 73 percent of the total being cars; the remainder light trucks and buses).
According to the Japan Auto Parts Association (JAPA), the size of the aftermarket is approximately $73 billion — less than a third of the U.S. market. This is just one of the many differences between the two markets. Perhaps the biggest difference is the average lifespan of a vehicle is far shorter than that in the United States or Europe. On average, the life of a car in Japan is just over 6 years, according to JAPA. The lower age of cars and the fewer miles driven reduce total aftermarket opportunity.
“It’s a really tough market to do business in,” says industry veteran Tom Muldowney, managing director of International Market Access. “You can spend a lot of time and money in Japan and there are much easier places to go if you’re an American company hoping to build your international business. It is difficult for non-Japanese companies or non-multinationals without Japanese ‘feet on the street’ to profitably gain traction in Japan”
Aftermarket competes with other costs
U.S. companies looking to expand into the Japanese aftermarket should take note of Muldowney’s warning. There are many considerations that make the aftermarket a difficult market to grow, including the affordability of new and used cars in the home country of Toyota, Nissan, Honda and Mazda. Brand new Kei-class cars, the smallest car type (many with 800cc engines), sell for less than a million yen (around $12,000).
Owning and operating a car also involves numerous expenses, which may delay repairs and maintenance. These include compulsory inspections (also known as Shaken) every two to three years, various taxes, mandatory and optional insurance, high parking costs in cities and expensive toll expressways. Not to mention gas has been historically about 25 to 40 percent higher than in the United States.
Shaken is a compulsory safety inspection, which cars in Japan have to undergo every two years (except new cars, for which the first inspection is not due until three years after purchase). Before a test can be administered on a vehicle, the owner must contact a Shaken center to set up an appointment and complete the necessary paperwork. The inspection process can be quite costly, including paperwork processing fees, vehicle registration fees, 24 months of mandatory liability insurance and a one-time recycling fee. When the fees are all totaled, a Shaken inspection can range between $1,200 and $2,600, depending on the make and mechanical condition of the vehicle.
“The cost to repair many of those older cars 10 years ago was so high that many Japanese traded in their cars after 3-5 years and those cars or their components were shipped to markets like Russia and New Zealand,” Muldowney says. “As a result of these inspections, there is virtually no engine rebuilding in Japan; cars just aren’t used long enough.”
Since the mandatory insurance does not provide full coverage, Japanese motorists are recommended to purchase additional, optional insurance. If this isn’t enough, Japanese drivers then pay an annual automobile tax that can range between $120 and $800, depending on the vehicle’s engine size.
Then how can the Japanese aftermarket be so disproportionately large compared to the U.S? Muldowney says: “it is so big because of the high-end electronics (auto, navigation, video systems) and wheels and tires sold in this market. It is not uncommon for a car owner to go to Autobacs and spend $10,000 to upgrade their new car.”
Distribution channel dominated by dealerships
The distribution channel in Japan is similar to the U.S. formula. Fundamentally, there are four channels that most companies could pursue for selling aftermarket products in Japan: independent aftermarket, mass merchandisers, OES (dealers) or gas stations. Depending on the type of product, an American automotive supplier can hope to sell its products through one or more of these four channels.
There are approximately 28,000 licensed dealer repair shops and nearly 90,000 independent repair shops, according to JAPA. One constant among the repair shops is Tsubasa, Japan’s computerized auto parts and accessories distribution database, which is used by approximately 95 percent of repair garages to identify the appropriate parts.
Of aftermarket parts sold in Japan, U.S. companies maintain a market share of approximately 12 percent, according to JAPA. However, Japanese retailers and distributors are open to offering more U.S. products. To succeed, parts makers must provide high-quality parts, packaging for the Japanese market, and most importantly, compatibility with Japanese specifications and sizes so no modification is required.
The “Big Two”
The dominant aftermarket retailers in Japan are Autobacs Seven and Yellow Hat. Both have similar product offerings and each touts itself as one-stop shops where you can purchase products and obtain vehicle service. Both offer amazing selection and interactive merchandising.
Autobacs Seven was first established in 1948 as a wholesaler and retailer of automotive parts. In 1974, the first Autobacs store opened in Osaka, and since then, the company’s retail network has grown to become Japan's largest nationwide chain with more than 500 stores and 4,500 employees.
Being the giant in Japan hasn’t been good enough for the retailer, and the company has expanded internationally with stores in France, China, Taiwan, Singapore and Thailand. The company attempted to expand its presence into the United States, but shuttered its store in California after only five years.
While its U.S. experiment didn’t work, just about everything else Autobacs has tried has been successful. The chain has evolved into what it deems a “total car-life service business,” which includes wholesale and retail of automotive related goods, repair and maintenance/safety inspection service, vehicle sales and body repair/painting.
Autobacs has tried just about everything to attract customers, including building movie theaters near several of its stores. The company has also been instrumental in changing laws to open the aftermarket to increased competition.
Yellow Hat was founded in Japan in 1961 and today has more than 500 stores globally. While the two retailers are very similar, Yellow Hat specializes more in tires, chemicals, electronics and other accessories. Yellow Hat also promotes itself as the standard for installation and generally offers free extended warranties on its parts and service – sometimes up to five years.
Japan as a unique market
It is important to understand that Japan must be treated as a unique market with distinct needs. According to Muldowney, success in the United States does not automatically guarantee success in Japan.
“The two markets are completely different,” Muldowney said. “The U.S. market is more open from any other aftermarket due to the anti-monopoly laws of the last century that made sure the specifications for aftermarket components were available to virtually any supplier. In Japan, the automakers kept the replacement parts business to themselves and their closest suppliers. There was little outside competition especially for non-Japanese suppliers without major operations in Japan”.
When it comes to understanding the Japanese consumer, Muldowney emphasizes that the lowest price does not necessarily result in a sale.
“The Japanese have extremely high quality standards,” Muldowney said. “In Japan, quality is a given, no matter what the price is. Quite simply, consumers will reject the product if it is not a quality product. Logistics and speed of delivery are considered part of product quality in Japan. You have to be able to get one of your products anywhere in Japan within 24 hours”
On the positive side for foreign manufacturers coming into Japan, the country’s affluent and loyal customers make it potentially a lucrative market for companies that have globally recognized brand names. Japanese consumers are known for paying premium prices for premium brands. In addition, a good legal infrastructure and respect for the law make it attractive for companies to invest in their brand without the fear of intellectual property theft.
“The Japanese also love choice and assortment,” Muldowney added. “In Japan you can find a distributor for almost anything. If you walk into an Autobacs, you will see just about every brand of major car care product, lubricant or auto accessory sold in the world.”
It is important for U.S. companies to avoid common mistakes when deciding how to go to market: not understanding the strengths and weaknesses of their potential distributors or the importance of having Japanese sales personnel in the field; underestimating the importance of marketing; lack of effort in training; and ignoring the unique needs of the customer or the end-user.
One way to go to market is by using a company like Muldowney’s firm. International Market Access (IMA) is a sales and marketing company based in Hong Kong that helps small U.S. companies (usually less than $100 million) with leading brands. IMA takes these brands global in the automotive aftermarket and acts as an international sales force and provide “feet on the street.”
Other ways U.S. companies can go to market would be establishing an office in Japan that has Japanese sales and engineering personnel who can discuss all issues related to specifications, marketing and customer support. Of course, this requires an initial investment of time, effort and money.
Before making an investment, it is important to spend time understanding the different issues related to brand positioning, local competition, warranty and how parts are specified and distributed, Muldowney says. The U.S. Commercial Service and many states have trade and development offices in Japan that can help.
When the economy was booming at the turn of the 21st Century, several foreign aftermarket suppliers opted to form strategic alliances with Japanese manufacturers to get a foothold in the country. These forms of direct investment included marketing joint ventures and technological exchange with Japanese parts suppliers.
Examples of these alliances included Bosch acquiring a majority share in Zexel, a Japanese maker of diesel fuel injection pumps, and Delphi purchasing a share of Akebono. Goodyear jumped into the mix by purchasing 10 percent of Sumitomo Rubber, which gave the company instant market share.
The direct investment has certainly slowed down. Japan's economy experienced its worst recession since World War II in early 2009, propelling the nation's jobless rate to a record high of 5.7 percent.
Japan is a large complex market that requires time and money resources and a complete strategy to successfully enter. Fortunately, the strong Yen means U.S. made goods have an advantage.