The ratings services didn't exactly cover themselves in glory during the financial crisis, so it's difficult to understand why Standard & Poor's alert on U.S. government debt provoked so much discussion. But S&P seems to be in a downgrading mood. The Easter Bunny -- with his yearly needs to finance a vast inventory of Peeps and lollipops -- dodged the bullet. But the Japanese carmakers weren't so lucky.
On Monday, S&P cut Toyota (TM), Honda, and Nissan to negative from stable. Struggling Mitsubishi had already seen its borrowing outlook chopped. Jim Jelter summarized the S&P decision in MarketWatch:
This is a prelude to a possible credit-ratings cut, which would jack up these companies' cost of borrowing in the capital markets.Where's the transparency?
The car makers themselves already had warned it was going to take a while for them to get back on their feet, so the S&P report isn't even remotely shocking. Yet there's something about a ratings agency's downgrade that carries a little extra weight in the marketplace, deserved or not.
The S&P move could, like its announcement about the U.S.A.'s sovereign debt, be considered icing on a particularly hideous cake. However, there's a key difference: America's fiscal and monetary condition has been diced and sliced in so many ways by this point that people can at least take sides with either the neo-supply-siders or the neo-Keynesians and form reasonable opinions about debt ceilings and deficits.
The Japanese auto industry is proving to be far less transparent. Obviously, few industries are designed to absorb the series of blows dealt by a massive earthquake, a tsunami, and partial nuclear meltdown. But in Japan, an at-times cryptic corporate culture has run smack into the drawbacks of a piecemeal supplier network.
A supply chain in disarray
The Japanese manufacturing supply chain is a complete wreck. Toyota alone is unlikely to fully recover its production in North America until the end of the year, undoing years of steady gains in market share.
The system, based on principles of lean production and just-in-time inventory management, was much more vulnerable to a Black Swan disruption than anyone anticipated. It hasn't helped that the automakers have been less than forthcoming about the scope of their slowdowns.
Major damage to Brand Japan
In this sense, the S&P announcement is as much a comment on communications as it is on creditworthiness. Japan's national reputation in the car business was built on, as a Lexus tagline once put it, "the relentless pursuit of perfection." For the most part, the Japanese lived up to their ambitions: they built the most reliable vehicles money could buy.
But perfection can be the enemy of the good. Toyota's inability to effectively deal with its Great Recall in 2010 set the stage for its to be dethroned, after a very brief reign, as the number one global carmaker by General Motors (GM) this year.
The Japanese auto industry isn't in decline, by any stretch. But it does need to undergo a cultural change, offering more information about its business successes and failures than it has in the past, particularly as the latter pile up. This doesn't have to be humiliating. In fact, you could call it a natural step in Japan's maturation as an industrial power.
This isn't just about Japan
It would be easy to say that this is a Japanese problem and leave it at that. But all the automakers that S&P demoted operate in the U.S. and other countries. In North American particularly, the Japanese "Big Three" have established a paradigm for the future of car manufacturing.
With a network of plants in the South, they've created a transplanted counterpoint to Detroit -- and by their success, forced Detroit to change the way it does business, most notably with the UAW.
So a credit rating move to negative doesn't just mean that there's trouble in Japan. The ripples will be felt -- as they already are -- in Tennessee and Alabama. The autoworkers in these and many other states have questions: How long will it really take to rebuild the supply chain? Will plants shutdowns be unpredictable? Will Japanese cars become more expensive as the crisis persists?
It's up to the Japanese carmakers to answer these questions -- and to be a lot more proactive about addressing the ones that haven't been asked yet.