The Japanese Cost Advantage in Automobile Production

Over the past ten years, U.S. automobile producers have lost substantial ground to the Japanese in the small-car market. A major reason for the success of Japanese manufacturers is that they enjoy a fundamental cost advantage in automobile production. While estimates of this cost advantage vary widely, an accurate determination of the advantage is extremely important to U.S. auto makers if they are to compete successfully in the small-car market. If the Japanese cost advantage were as small as $500 per car, then U.S. producers could close the gap by slightly improving productivity, instituting minor wage restraints, and taking advantage of moderate dollar depreciation. However, if the Japanese cost advantage were as large as $2,000 per car (as some analysts estimate it to be), then U.S. producers must fundamentally alter their production technology and labor-cost structure. Even a large dollar depreciation against the yen would not close such a gap by itself.