The yen's rapid rise, the country's high corporate tax and ever-intensifying competition are forcing makers of small cars to transfer production overseas.
This trend is expected to negatively affect the country's labor market because 8 percent of the nation's workforce have jobs related to the auto industry.
Mitsubishi Motor Corp. has decided to transfer its domestic production of mini- cars to Thailand and other nations over the next few years because the high yen and fierce price war have made it unprofitable to produce the cars in Japan.
"We can't stand the high yen anymore," a Mitsubishi Motor executive said. "Furthermore, this country's corporate tax is too high."
Mitsubishi Motor plans to manufacture a new line of compacts with engine displacements of between 1,000cc and 1,200cc in Thailand, hoping to keep the price of the new cars below 1 million yen. The profit margin for small cars is smaller than that for medium- and large-sized passenger vehicles, so it would be very difficult to secure profits if the cars were produced in Japan in light of the yen's increasing strength.
For the current fiscal year that will end on March 31, Mitsubishi Motor initially assumed an average exchange rate for the year of 90 yen to the dollar, 9 yen more than the current rate.
Mitsubishi's decision to shift production of small cars to Thailand was essential for the carmaker, as every 1 yen increase in the yen's value in relation to the dollar means a 1.5 billion yen annual loss in profits.
Within a few years, Mitsubishi aims to produce 400,000 to 500,000 units of the new compacts annually in Thailand and other nations for sale worldwide. But the company said it would maintain production bases in Aichi and Okayama prefectures, where it produces electric cars, and would preserve current employment levels there.
Industry sources say other automakers will keep their domestic production at current levels to maintain the same number of jobs. But an executive of a major automaker said, "It's extremely difficult for us to undertake new, large-scale investment here in Japan."
Toru Hasegawa, president of Nissan Motor Co.'s Thailand operation, said producing March compact cars in Thailand slashed production costs by 20 to 30 percent compared with those in Japan.
In Thailand, the corporate tax rate is 30 percent, considerably lower than Japan's effective rate of 40 percent. Furthermore, Thailand exempts automakers that mass-produce fuel-efficient cars from the corporate tax for up to eight years.
Located near the growing Southeast Asian market, Thailand also offers cheap labor and a growing number of local auto parts manufacturers.
"Considering production costs, making cars overseas and bringing them into Japan is the way to go," Suzuki Motor Corp. Chairman Osamu Suzuki said. Suzuki Motor is constructing a factory to produce compact cars in Thailand.
Toyota Motor Corp. is also considering shifting domestic production of its Corolla passenger cars to factories overseas after 2013.
Compact cars are defined by law as four-wheel passenger vehicles measuring 4.7 meters or less in length, 1.7 meters or less in width and two meters or less in height, with an engine displacement of 2,000cc or less.
Both Mitsubishi Motor and Nissan Motor will maintain their current domestic workforce by producing high-value electric vehicles at factories that manufactured small cars. But the production volume of electric cars will not be as large as that of small cars.
Moving production bases overseas is expected to eliminate domestic jobs because the carmakers will procure their parts overseas , slashing domestic demand.
A Toyota Motor executive said that for automakers to continue manufacturing in Japan, they must solve a number of difficult problems such as foreign exchange rates and and the tax system. These problems should be tackled in cooperation with the government, the executive said.
"We really want the government to do something [such as lowering corporate tax] so we can compete with South Korean and German automakers on equal terms," the executive said.
Without help from the government, the recent trend of carmakers shifting production overseas could gather steam, raising unemployment and bringing more stagnation to the nation's economy.
