Is Toyota Circling The Drain? Will It Take Japan With It?

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Paul Wildman with David Waterworth. (Certification chatGTP was not used in the writing of this article.)

Recent conservations with my mate, retired economics professor Dr Paul Wildman, have led to this article.

The entire Japanese auto industry, and especially Toyota, appears to be in denial about the global ascendency of electric drivetrains. To EV or not to EV? Shades of Hamlet. This is creating Japan’s wicked economic problem. The plight of the Japanese industry was highlighted in a recent Carbon Tracker report.

Japan, even uniquely as a nation, seems to be holding off on going EV. How come? Is it ICE Auto Addiction Syndrome? Toyota has even been caught resisting carbon neutralism in order to reduce global warming. So, are their no “sparks” left to reignite the Japanese economy, or is it a case of running on empty? The Prius and Leaf were good starts, yet their potential has not been further developed. In this article, we look at some possible factors behind this “holding off.”

Japan’s wicked economic problem: A wicked problem is a complex one where fixing one aspect thereof will cause deterioration elsewhere. In addition, the matter is now extremely urgent as the following six factors coalesce. (Disturbingly, there is no way to test a solution.)

Factor 1: Japan’s economy is facing its greatest challenge since the end of WW2. Is Japan facing what the UK did at the end of WW2, having to restart almost from scratch or lose out nationally? Japan had to start over with its automotive industry whereas the UK did not. UK carmakers used pre-war engineering and manufacturing. Over the next 35 years, Japan overtook and then “crushed” the UK auto industry, including in the motorcycle field. Is Japan like the UK after WW2, stuck in a manufacturing paradigm? Possibly China does not have this heritage and is starting from scratch with EVs and vehicle manufacturing generally.

Factor 2: Japan’s economy is running on empty with its humongous and unsustainable debt level. With general government debt equivalent to 262.5% of its gross domestic product in 2021, Japan has the highest debt-to-GDP ratio in the G7, according to data from the International Monetary Fund. (Editorial note: Paul strongly believes that debt matters and does not subscribe to Modern Monetary Theory. )

Factor 3: Automotive is critical to Japan’s manufacturing sector, and without manufacturing, Japan’s economy grinds to a halt. Manufacturing is the leading employment generator in Japan, with a staggering 90% of the total employment. In this sector, the motor vehicles and parts sector accounted for a half of that. By 2020, manufacturing accounted for one fifth of Japan’s GDP.

The Climate Group warns that without a move to BEVs, Japan could lose 50% of its auto exports, more than 14% of its GDP, and almost $700 billion (80-trillion yen) in profit by 2040.

The automotive sector in Japan is the third-largest automotive producing industry in the world, with 78 factories in 22 prefectures. It employs over 5.5 million people and is a major pillar of the country’s economy . Currently, about half of domestically-produced Japanese vehicles are exported. This equates to 14% of GDP or 1.7 million jobs, or around 8% of the workforce, all amounting to a 14% drop in GDP through 2040 unless Japan goes BEV.

Factor 4: ICE auto addiction syndrome. All this indicates that Japan is showing signs of an uncritical, almost blasé, “automotive dependency.” I would go further and suggest it’s even an “auto addiction.”

How important is Toyota to Japan? Toyota looms so large that Japan can seem like a one-company town. Toyota is Japan’s largest company by sales ($230 billion last fiscal year) and in recent years has been its most profitable company and biggest taxpayer. Toyota has also been Japan’s largest ad buyer, making the major media here afraid to criticize it.

Some pundits even give Toyota a lifespan of eight years before it goes bankrupt.

So, is it a case of what’s good for the big T is good for Japan? We hope not! Yet Toyota is indicative of Japanese car manufacturers in general. And they are all coming very late and grudgingly to the EV party. Is it too late?

Factor 5: IoT. Given the rapid move to IoT (Internet of Things) cars are becoming computers on wheels. EVs are ideal platforms to do IoT compared with the irregularities of ICE vehicles. Given the above, Japan is at risk of missing this transition. Then what?

Factor 6: Japan’s population has been shrinking and aging since 2010, when the population peaked at 128.5 million. The United Nations currently projects that Japan’s population will fall below 100 million around 2050, but the faster-than-expected decline in fertility may mean that Japan reaches that threshold ahead of schedule. So, Japan’s internal market has been shrinking, and old-age-dependent expenditures increasing, for the past 12years!

Japan’s agricultural sector is in decline. Maan Limberg’s new book highlights Japan’s ghost villages. “Dutch photographer Maan Limburg discovered that Japan is a series of rural landscapes punctuated by empty houses.”

On balance, or should we say whirlpool, there is a huge need for change in the Japanese Automotive Industry, but probably not much private and certainly no public gas (so to speak) to spark (so to speak) any EV innovation.

Disclaimer: This article does not claim to be prescriptive or precise. We are not experts in this arena. (Though, I, Paul, am an economist with maybe at least an inkling). Some of the data are a decade old. Nor is this a futures piece. Rather, it is a snapshot where we look a few years out at trends that have been in place for the past decade.



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