Japan Auto Makers Count the Cost of China Spat

The Wall Street Journal, September 26, 2012

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No wonder Japanese auto makers are slowing production in China. Who would buy a Japanese car in China right now, given drivers of such vehicles risk attack by their compatriots enraged by the country's territorial dispute with its neighbor?

Though the spat has lingered for weeks, the severity of the economic impact is only just becoming apparent. Worries about production cutbacks for Japanese auto makers are intensifying. Nissan7201.TO -2.64% for example, now says it will halt some passenger-car production until Oct. 7, while Toyota 7203.TO -2.67% says it is adjusting production of its pricey Lexus models.

The concerns sent shares in Japan's Big Three down Wednesday. Honda 7267.TO -4.88% fell the most, by 4.9%.

There will be a short-term hit to earnings. China accounts for between a fifth and a tenth of global sales by volume for the three car makers. In a dire case, production might be halted for, say, a month. Under that scenario, global unit sales for the Japanese companies would likely be down by around 1% to 1.5% this year. The impact on revenue could be even bigger because foreign car makers typically charge more for their premium brands in China than elsewhere. In some case, they charge twice as much.

Margins could also take a hit from rising input costs. Lower production means less buying power for parts, and that pushes up the total cost structure, says Bill Russo, China auto analyst at Synergistics.

The anti-Japan sentiment has been on the wane in China in recent days. But the spat goes on. Beijing is unlikely to take a softer tone ahead of a once-a-decade leadership change expected in coming weeks. Japan may even ratchet up the rhetoric: The the main opposition party Wednesday chose an outspoken nationalist as its standard bearer heading into elections, likely in coming months.

Previous bilateral flareups have meant only a blip in sales of Japanese cars in China. But the full effect on Japan's auto makers hasn't been counted yet. China is a key growth driver for the entire auto sector. Honda, Nissan and Toyota will hope a peace is brokered soon.

Write to William Mallard at billy.mallard@dowjones.com

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