Japan's car industry is still expected to remain strong.

During the past few decades the auto industry has experienced an evolution in sourcing patterns. Since the deep sea trade of autos started in the 1960s, and until the 1990s, there were just a few important main trade routes including Asia to North America and Asia to Europe.

More recently, deep sea trade routes have spread right around the globe, triggered by changing sourcing patterns. Several factors are driving this evolution in sourcing in the auto industry, not least currency fluctuations and trade taxes.

Avoiding currency fluctuations
Lately, the strong Japanese Yen has made it increasingly difficult to profitably produce assembled mass-market cars in Japan. According to estimates from IHS, the net profit for Japanese-produced cars sold in Europe is roughly half the level of Volkswagen and Hyundai-Kia. The Japanese OEMs (Original Equipment Manufacturers) have responded by reorganising and overhauling their domestic operations, and increasingly using cheaper imported parts. Toyota and Nissan, for example, are increasingly importing parts from China and South Korea for use in their factories in Japan. 

Japan’s three largest OEMs, Toyota, Honda and Nissan, have also taken action by shifting output closer to where the cars are sold. Nissan has been the most aggressive in relocating production outside of Japan; in July 2012, it announced a cut of 15% in its domestic production. Likewise, Toyota plans to ramp up US production of its Highlander and to phase out Japan as an assembly site; Toyota is also exporting its US-built Sienna minivans to South Korea. In addition,Toyota plans to export some of its US-sold Yaris subcompact cars from France instead of from Japan. Once its new Mexican plant is finished, probably in 2016, all Yaris models sold in the US will be produced in Mexico. 

Despite these cuts, Japan’s car industry is still expected to remain strong as the country is an important auto research and development base, as well as  a buffer for variations in other markets. Exports from Japan are expected to stay at almost 4 million units per year for  the remainder of this decade.

Trade agreements
When setting up a new auto assembly plant in a country, trade agreements are an important deciding factor for OEMs. Factors like labour costs,  skills of the work force, taxes, free space as well as inbound and outbound logistics, are also considered. Mexico, for example, which has been successful in attracting OEMs, currently has free trade agreements with 44 countries.

OEMs such as Volkswagen, Nissan, Mazda and Honda are establishing themselves in Mexico. While Volkswagen’s Mexican plant is  scheduled to produce the new Q5 SUV from around 2015, Nissan’s new plant is expected to be up and running in 2014. Mazda also plans a new plant to produce its small 2 and 3-series models. Meanwhile, Honda aims to trim exports from Japan gradually from the current rate of 35-40% of its total output to 10-20%. It has started to construct a new plant in Mexico, which will produce the Fit (Jazz) for the entire North American market as well as other regions. Honda’s next NSX sports-car will be built in the US, making it the first non-US automaker to manufacture its entire range of vehicles in North America.