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The European Commission has expressed a will to continue negotiations with Japan with regard to a free trade agreement (FTA). However, the deal is facing strong opposition from European car producers due to fears of a price war, driven by an influx of Japanese imports. If a free trade agreement is reached, European producers could seek strategic alliances with their Japanese counterparts.
Despite the expressed political support from the European Commission, the European Automobile Manufacturer’s Association (ACEA) is opposed to a free trade agreement. The EU has consistently faced a trade deficit with Japan in terms of motor vehicles, with the value of imports reaching €9.1 billion in 2013 compared to exports worth €7.8 billion.
ACEA fears that an FTA would hinder business in its home market, particularly for volume producers in Italy and France. FTA would provide better positions for Japanese producers to leverage overcapacity and flood the European market with cheaper imports. This could spark a price war in the EU, which would be disastrous for car makers in France and Italy, which are already struggling with overcapacity and low profit margins.
An FTA would also not greatly benefit European car producers in Japan. In 2013, Japan imported 346,000 vehicles, a large share of these being luxury and sports cars – an area in which European volume car makers are uncompetitive. The popularity of kei cars (cars with an engine capacity below 660cc) in Japan is another problem. This category is particularly popular in Japan due to low taxation, although there is no production of kei cars outside Japan.
Source: Euromonitor International from Japan Automobile Importers Association
ACEA has stated two requirements for Japan for the free trade negotiations to continue – the elimination of preferential tax treatment for small cars (which ACEA perceives as discriminatory) and the adoption of international safety standards.
The latter measure is likely to be implemented and common safety standards between Japan and the EU are set to come into effect in 2016. Meanwhile, the elimination of preferential taxes for small engine cars is more difficult to achieve. The Japanese authorities appear to be less willing to change the taxation policy, which is oriented towards reducing energy consumption.
Even though tax breaks would be eliminated, European car producers would gain only minimal benefits. Firstly, Japanese consumers are unlikely to change their preferences and start buying cars with larger engines as energy prices in Japan are high. Moreover, European car makers would struggle with complicated logistics when transporting cars to Japan. As a result, a more strategic approach is required from European producers to solve their problems if the FTA is signed.
One possible solution to help European car producers could be strategic alliances, following the example of Renault-Nissan. Such a scenario appears possible when looking at technological cooperation between Mitsubishi and PSA Peugeot-Citroën and Ford and Mazda in the past.
Mitsubishi and Mazda were struggling in the European market due to falling sales and stricter CO2 emission standards. A strategic alliance with a European volume producer would cut the cost of new technology development, hence benefiting European and Japanese producers. Moreover, European car makers could get a share of the profits from the kei car category by acquiring stakes in Japanese companies.
Fiat has already announced that it will collaborate with Mitsubishi on the production of a pickup model. This could represent a step towards closer cooperation between Fiat, Chrysler and Mitsubishi in the future.