Auto parts: imports are rising – but so are exports

by SR on August 14, 2012

Annual imports of auto parts to Japan by weight (thousand tons)
Note: the figure for 2012 is for January to June only

Imports of auto parts not something to worry about

An article in the 2012-08-14 morning edition of the Nikkei business daily notes that imports of auto parts reached 324,000 tons for January-June 2012, which suggests that autoparts imports to Japan by weight in 2012 will be the highest since 1998, when the Ministry of Finance and Japan Customs started tracking tonnage imported. The facts reported in the article are entirely true. However, rather than taking a nuanced view, the writer deliberately leaves out the information that would make for a less dramatic – and thus less ‘commercial’ – article. The conclusion is simple: there’s no need to spend precious investment thinking time worrying about imports of auto parts. Ignore red herrings from anonymous journalists trying to sell papers and focus on something more worthy of your resources. Not convinced yet? Consider the following points.

Imports have risen every year except 2009

As the chart at the top of this page shows, the tonnage of auto parts imported to Japan rose every year from 1999 to 2012 with the exception of 2009 and posted a new record every year between 1999 and 2008. The compound annual rate of growth in tonnage from 1998 to 2008 was +12%. If the global financial crisis had not intervened and growth had continued at this rate, tons imported in 2011 would have been 878,700 tons rather than the 564,5871 tons reported. In that sense we are under rather than over the long-term growth trend for imports. In other words, there’s nothing new about rising imports of auto parts – we have had record imports in 11 out of the past 15 years.

Annual exports of auto parts from Japan by weight (thousand tons)
Note: the figure for 2012 is for January to June only

Don’t forget that export tonnage has also been rising

If we take the imports number in isolation and without looking at the history of the data series, a record high in 2012 sounds, well, disturbing, or at least noteworthy. However, despite the stronger yen exports have also been rising, as shown in the chart above. There are two point to make about this. First, auto parts exports are many times larger than auto parts imports on a tonnage basis. Second, auto parts exports have posted record highs in 9 out of the past 15 years. We’re probably going to have a record year for exports in 2012 as well. That suggests pretty strong performance by the domestic auto parts production network.

Nevertheless, the long trend is that of imports growing more quickly than exports. Again, not news and as the chart below shows, the ratio of exports to imports is eroding only slowly. The chart below shows that ratio annualised over the most recent 15 years (2012 is a provisional figure as it reflects only the first half of the year). From 1998 to 2011, the ratio of exports to imports fell at a compound annual growth rate of 2.9%. To put it another way, there is no sudden change here. This is the evolution of a long-term trend that has been in place for a decade and a half.

Annual ratio of exported weight of auto parts to imported weight of auto parts (Japan)
Note: the figure for 2012 is for January to June only

It’s about value as well as tonnage

The import and export data list the value in yen and the weight in tons. A discussion of forex and how it distorts the data may have been relevant here, but basically the situation for yen-based imports and exports is very similar to that of imports and exports in tons. Exports are far larger than imports, slightly more than 6x in 2011. Imports are growing more quickly than exports, but the difference is not large. For that reason, the long-term decline in the ratio of exports to imports has been gradual; the CAGR for that ratio was -2% from 1998 to 2011. It is shown in the chart below.

Annual ratio of exported value of auto parts to imported value of auto parts (Japan)

Imports not an automatic negative

The period when imports of auto parts were rising most quickly was an era of prosperity both for Japanese auto parts suppliers and Japanese auto OEMs. Despite the gloomy tone of the Nikkei article, it is far from clear to me that rising imports are necessarily a negative for Japanese auto parts suppliers (or OEMs). The key is to keep moving up the value chain within Japan even as you import lower value-added items from overseas locations. As the rate of technology development in the auto sector – which quite honestly is a bit sleepy compared to the technology space – seems to be accelerating and broadening at the same time, I expect there to be plenty of opportunities to add value.

Having said that, there is no point in standing like King Canute against the tide and insisting that the proportion of output in Japan does not need to fall: it does. The main offender is Toyota, although it does seem to have accepted the need to shift more production overseas. Nevertheless, a stable core of Japan production will be required in the future. Below a certain level of output the cluster effects that have made Toyota’s home region of Aichi such a powerhouse of the global auto industry will start to fade. This problem of balancing external and internal is not unique to Toyota or to the Japanese. All major OEMs need to maintain critical mass in their home countries while growing in emerging markets. As there are no global auto OEMs from emerging markets, almost by definition costs in home countries are higher and this goes for Hyundai Motor, GM and Volkswagen as well as Toyota. Neither the US nor Germany are exactly cheap and Korea continues to struggle with labour issues and the extra costs that discord generates. Expensive headquarter locations are a problem for everybody.

Looking at the parts suppliers, I will reiterate what I have said before. You don’t want to be investing in some little metal-bashing Japanese company that has has no sustainable competitive edge and doesn’t have the funds or the know-how to expand overseas. Choose auto parts suppliers that:

  1. Already have extensive overseas production networks
  2. Derive a substantial fraction of profits from emerging markets
  3. Have leading positions in their main product lines
  4. Operate in high value-added segments

Companies like Denso, an automotive semiconductor, electronics and cooling specialist, or Aisin Seiki (the world’s largest independent supplier of automatic transmissions) are good examples.

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