Last week some auto news talked about the coming negotiations between European Union and Japan looking for a Free Trade Agreement. Both economies could sign a deal in which their exports could access to each market without paying taxes. Europe needs to increase the number of destinations for its goods while Japan could benefit from having free access to one of world’s largest markets. This would be the ideal scenario: both parts could strongly benefit from the deal. However it is not always like that every time a trade agreement is signed, a part of the economy is not necessary a beneficiary of it. This time it seems European car industry could have problems in case Japanese car industry gets free access to Europe. According to ACEA the industry could lose around 73.000 jobs as a consequence of more cars coming from Japan. They say that by eliminating 10% tax to imported Japanese made cars, Japan could become the ideal place to build cars and therefore the current situation of over capacity production in Europe could get even worse. Certainly a scenario like that is not good for any European auto maker, but looking at it closer, some opportunities could arrive to specific car companies. The challenge is to make this big threat an opportunity and Fiat with its small cars and its possible alliance with Mazda, could be a big winner of the agreement.
Currently Japan does not charge any taxes to regular cars coming from Europe, while Japanese made cars must pay 10% of taxes to enter European market. However when it is about small cars (Kei-cars) the legislations is completely different. Every imported kei-car must pay 35% of taxes to access Japanese market and that is the big deal of the agreement. Kei-cars are a category of small vehicles that must comply some requirements in order to benefit from fiscal incentives. The idea was born just after WWII when most Japanese people did not have enough money to buy a car but a motorcycle. It is why since 1949 the government created this segmentation in which any car under 2.8 m length and 150 cc engine could benefit from fiscal incentives. More than 60 years later Kei-cars are Japan’s most popular segment with almost all Japanese auto makers making part of it. Now Japanese legislation indicates that only those cars under 3.4 m length, 1.48 m width, and maximum 2 meters tall, with a maximum engine of 660 cc and 64 HP, can apply to become a kei-car. They are charged with 3% VAT against 5% for other cars. Besides the owner of a kei-car pays less total weight taxes (30% less than regular cars). Insurance cost is about 187 euro every 2 years, while regular cars must pay 222 euro. As this kind of cars are powered by small engines, their owners have to pay less displacement taxes. In other words driving a kei-car in Japan means money-saving*.
That is mainly the reason for their success. Kei-cars are so popular in Japan that last year they made 36% of total sales, with more than 1.5 million units. This year sales are up 36% till October with more than 1.7 million units sold, 36.7% of total sales. Daihatsu and Suzuki have been traditionally the leaders, but Honda, Nissan, Toyota, Mitsubishi, Mazda and Subaru are part of the segment. As it is an important part of Japan’s car market, Japanese do really protect it from imports. Therefore all imported kei-car must pay 35% import tax, which is really high and explains the lack of offer coming from abroad. No foreign auto maker sells a specific car for this segment as it is not profitable for them to develop a car under those conditions. A possible free trade agreement with European Union could solve this problem. One of the things European auto makers ask is to eliminate this tax for imported kei-cars, and that is where the opportunity appears. Though it is not really probable Japanese authorities will open their kei-car market to European imports, a possible scenario like that could really compensate the increase of sales of Japanese cars in Europe, and Fiat would be for sure a clear winner.
At the same time all this was happening, Mazda’s CEO, Takashi Yamanouchi, said at LA Auto Show that both companies, Fiat and Mazda, are analyzing what other models they can build together, besides the Alfa Spyder and next Mazda MX-5. Mazda is not Japan’s leader but is an important auto maker over there and now is looking for partners to develop its future cars. Its position in Europe is not quite good, but it knows it must do more in order to get more. A possible alliance with Fiat could mean to produce jointly developed cars at Fiat’s Italian factories. But Fiat could gain too. Having a deal with a Japanese car maker means to have a better position in that market in case FTA negotiations succeed. Besides, Fiat is Europe’s leader in A-Segment, with its popular Panda and 500. Though both models are longer than 3.4 meters, just the fact of having free access to a market of more than 1.7 million units/year would make Fiat to consider or accelerate its plans of a future mini A-Segment car. For some years press has speculated about a possible arrival of a mini citycar such as the Smart made in Serbia, and called to be the successor of the extinct Fiat Topolino. Launching a car like that under current European scenario would be a disaster, but taking into account the possibility of exporting it to Japan paying zero taxes, would be certainly a good move. If the alliance with Mazda is also considered, then a big and stable market could be just right in the corner. Besides, Fiat’s position in Japanese car market is not bad at all. The 500 is not as popular as in Europe but has sold more than 18.000 units since it was introduced in 2008. If this small Fiat reaches these numbers, and not being included as a Kei-car, then Fiat has a great potential in kei-cars if the tax is abolished.