The ability to lower costs and set reasonable vehicle prices will be key to winning in the car industry as more consumers opt for cheaper and smaller cars to fight high fuel prices, a top auto analyst said.
As demand for better mileage grows and governments tighten emissions standards around the world, the pressure has grown on global auto makers to pump out cash to develop fuel-efficient and cleaner powertrains.
At the same time, pricing remains tough as weaker brands such as General Motors Corp and Ford Motor Co push profit-eroding deals to sell their cars.
"If you look at what's happening now, gasoline prices are the factor most likely to tip the balance," said Takaki Nakanishi, managing director and head of Japanese equity research at J. P Morgan Securities Japan. Nakanishi, ranked Japan's top auto analyst by Institutional Investor magazine and the Nikkei Financial Daily for three years running, said the advantage on those grounds will remain squarely with Toyota Motor Corp and Honda Motor Co.
Japan's top and third-largest auto makers have been expanding in the United States, the world's biggest car market, with the industry's most fuel-efficient fleet, and look set to stay ahead as they lead in next-generation vehicle technology, he said.
The US Big Three, meanwhile, will struggle to regain their past glory as they still rely heavily on gas-guzzling SUVs and pickup trucks, most with older engines that trail in fuel performance, Nakanishi told Reuters in his first media interview since joining J. P Morgan from UBS Securities last month.
"It's difficult to make money with small cars. You need volumes to cut costs, and a wide regional reach," he said, adding that Asian brands in general enjoyed a competitive advantage.
"For the medium term - I'd say around three to five years - I don't see a big turning point to change this trend."
TOP PICK: TOYOTAWith gasoline pump prices around $3 to a gallon, sales of large SUVs are sliding in favour of leaner crossover models and sedans, shrinking the pie for Detroit's dominant segment.
GM, Ford and DaimlerChrysler AG's Chrysler arm have sought to stem the fall by offering thousands of dollars in discounts and other incentives since 2001, dragging the rest of the industry into a fierce price war.
But Nakanishi noted that top Japanese brands have in fact managed to raise their product prices since 2004 - a testament to their strong brand image and sound business strategy.
Toyota, Nissan Motor Co and Honda - Japan's top three auto makers - all have operating profit margins above 8 percent, while Western rivals such as GM, Ford and Volkswagen AG face losses in their core domestic operations.
While GM and Ford had room to vastly improve their cost structure, Nakanishi said a tradition of protecting redundant white-collar jobs, disproportionately high executive salaries and a militant union meant change was hard to come by.
"The US Big Three will continue to lose market share (in the United States). On the other hand, Japanese brands' share will probably exceed 35 percent next year," he said. In 2005, they grabbed just over 32 percent.
But he cautioned that Nissan's outlook was less certain than that of Toyota and Honda given its fleet's bigger weighting of SUVs and trucks.
"Nissan's share of the US small car market is a mere 5 percent. That means they haven't been doing their job," he said.
Nissan will soon launch the new Versa and remodelled Sentra in the segment, but Nakanishi said it was still questionable whether the auto maker could maintain its high profitability.
"There's some concern that management is too focused on short-term sales and other numerical targets," he said. Nakanishi singled out Toyota as his top pick among global auto stocks citing its latent and actual earnings power and a low price-to-earnings (PER) ratio of around 13 based on his earnings per share (EPS) forecast of 481.7 yen for the business year ending March 2008.