China Smashes Japanese Cars, and Buys Them

The Wall Street Journal, September 17, 2012

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There likely won't be any quick resolution in the dispute between China and Japan for control of an obscure group of islands. But there's already one clear loser: the Japanese car industry.

Thousands of Chinese protesters marching on the Japanese Embassy in Beijing over the weekend, burning flags and smashing cars, signals the strength of anti-Japanese feeling among young Chinese. The proximate cause is a dispute over control of the Senkaku Islands, controlled by Japan and claimed by China, which call them the Diaoyu Islands. Lingering anger at Japan's 1930s invasion of China, and rivalry between Asian powers, runs deeper.

In the immediate future, it's bad news for Japanese car manufacturers, who already count China as a major market and a driver of future growth. Toyota, Nissan and Honda saw 11%, 17% and 20% of their 2011 unit sales from China, according to Bill Russo, China auto analyst at Synergistics.

The China Association of Automobile Manufacturers has said the downturn in sales of Japanese cars is already evident in the August data. Nissan has acknowledged that the row is hurting sales, and Honda dealers have canceled some promotional activities. There could also be longer-term consequences. The sight of Japanese cars smashed by angry mobs won't encourage dealers to place bumper orders for next season's models.

Japan's auto firms still have many factors in their favor, though. Many of their Chinese sales are made in joint ventures with mainland firms—a confusing factor for angry mobs and government officials considering trade sanctions. A reputation for reliability at an affordable price is another plus. A similar wave of protests in 2005 had little effect on the upward trajectory of sales. Japan's auto makers will hope that the latest wave of nationalist sentiment doesn't have a more lasting impact.