While the most prominent news stories on the New Domestics during 2010 were the recall problems and resulting fallout for Toyota, a much more significant trend has been occurring behind the scenes. The industry data for 2010 (as of this writing) is beginning to show that, for the first time since 1998, both Honda's and Toyota's U.S. market shares are projected to decline. While the decline is expected to be modest, the implications of this change are potentially profound. For the first time in over 20 years, the assumption that Japanese market share will continue to increase in the U.S. market is now uncertain.
So what is the cause of this change?
1. The Quality Gap Has Narrowed Dramatically
This is the positive collateral damage of the Toyota recall debacle. For years, the Japanese manufacturers have enjoyed a significantly better quality reputation than either their North American or European counterparts. It is what drove their growth in North America and made it so easy for them to compete. In the last few years, however, that quality gap has narrowed dramatically, just in time for the Toyota recall. As Americans entered the showrooms of the Detroit Three (GM, Ford, Chrysler), they liked what they saw and recognized that the quality gap, if it still exists, is relatively minor. (For what it is worth, you will never convince a Honda or Toyota true believer that this is the case.)
2. Hyundai – The Rising Star
Hyundai has been a major beneficiary of the struggles of some more-established players, after toiling away here for years. U.S. consumers looking for alternatives finally noticed the huge strides the Korean company has made in product quality, styling, and fuel economy. Its North American production has gotten a boost through the flexible use of Hyundai's Alabama plant and its sister company Kia's Georgia assembly facility. By early 2011, the company will have localized production of its three best-selling models in the U.S., the Santa Fe crossover, Sonata sedan, and redesigned Elantra sedan (formerly imported). The strengthening Korean won against the dollar may have hurt Hyundai's profits, but the Japanese yen has been even stronger, yet another way the Korean automaker has benefited relative to Japanese competitors. With terrific designs and even better pricing, we anticipate Hyundai will continue to pick up share.
3. The Millennials Rise
The assumption that the Detroit Three couldn't walk and chew gum at the same time and that the Japanese could do no wrong drove much of the Japanese market share success over the last 20 years. What many in the industry have failed to recognize is that this bias does not exist with the Millennial generation (which is bigger than the Baby Boomers, by the way). Given that the Millennials grew up in the age of electronics and imports from all over the world and have no experience with the truly horrible vehicles that the (then) Big Three produced in the 1980s and 1990s, this generation is demonstrating that the Detroit Three can count on them as buyers in increasingly large numbers.
Last but certainly not least, this is also the end of the Japanese being able to ignore the importance of design. From consistently boring product (e.g., no one ever bought a Camry for its looks) to truly bad design (anyone want to defend the Honda Crosstour?), the Japanese have a lot of catching up to do here, both with Hyundai and their Detroit Three competition. In our opinion, this will be the most difficult hurdle to overcome.
Toyota Loses in the Court of Public Opinion
While we would not plan on a major decline of Japanese share in North America, it seems clear that the era of the Japanese market share juggernaut is over. The Toyota crisis at the beginning of 2010 revealed a chink in the armor. The media was right to cover the story of concerns about Toyota vehicles at the end of 2009 and beginning of 2010. It is too bad that less attention has been paid to subsequent reports on the preliminary results of NHTSA's investigation, which showed that there was no evidence of flaws in electronic controls and that the brakes were not applied in 35 out of 58 crashes blamed on unintended acceleration, suggesting driver error was to blame. It's a somewhat hollow victory for the automaker, but Toyota shares responsibility for the tremendously damaging way the drama played out.
The way Toyota handled this crisis turned out to be more important than the actual facts behind the story. If Toyota had gotten ahead of the story from the beginning as opposed to trying to hide the anecdotal evidence of a problem or demonstrating a media tone deafness that was truly astonishing for a company of its size, this would have been a blip in its corporate history. While it may be unfair given that the facts now support Toyota's initial claims of innocence of wrongdoing, Toyota is primarily responsible for this becoming such a huge and harmful event. The primary lesson to be learned from this is that in the current world we live in, perception is more important than reality. American consumers now perceive a wider range of vehicle options that are less differentiated and they are going to start "voting with their feet" in ways that will likely benefit automakers outside the Japanese Big Three.