Japanese carmakers rue lost lead in China

The Financial Times, November 21, 2013

Troubled times at Toyota: sales fell precipitously last year in China
in the wake of a high-profile diplomatic dispute and strikes at car plants over pay

By Tom Mitchell in Guangzhou and Jennifer Thompson in Tokyo

Toyota and Honda picked a bad time to take their foot off the accelerator in China.

As the global car market went into a financial crisis-induced tailspin in 2008, Chinese demand kept expanding, accounting for one-third of the industry’s total growth over the ensuing five years.

Last year, annual sales of passenger cars and minivans remained 9 and 14 per cent below their pre-crisis peaks in the US and western Europe respectively, and recovered to 2007 levels in Japan, according to automotive consultancy AlixPartners. Meanwhile, sales in China’s market more than doubled to 18.6m, making it the world’s largest.

“The downturn didn’t really happen in China,” says Bill Russo, a former US auto executive and Beijing-based industry consultant. “China’s share of the global market rose significantly in 2009 and 2010.”

Toyota and Honda missed the party. Together with Nissan, the “big three” Japanese auto companies’ combined share of the China market crashed from more than one-quarter in 2008 to just 15 per cent in the first half.

Toyota and Honda at least have some interesting excuses. Japanese car companies make for easy targets in China, especially at times of political tension between Asia’s two largest economies.

Chinese nationalist passions boiled over in September last year, after the Japanese government purchased the disputed Senkaku Islands – known in China as the Diaoyu – from their private owner. Japanese car companies briefly halted production as angry crowds targeted their cars and dealerships.

Some Chinese drivers cleverly presented the mob with a moral dilemma – and saved their Japanese cars – by plastering the vehicles with stickers of Chinese flags and other patriotic symbols.

“We lost 50 per cent in sales immediately,” Carlos Ghosn, chief executive of Nissan, said as he delivered first-half results earlier this month. The carmaker is yet to regain the 7.7 per cent market share it enjoyed before the dispute.

Toyota’s vehicle sales also dropped rapidly, with many customers cancelling orders and shunning showrooms. It was forced to reduce production temporarily in some plants by as much as 60 per cent.

Japanese auto executives admit that the severity of the incident took them by surprise, given that previous geopolitical flare-ups had not seriously affected production. “Japanese carmakers always feel that [when it comes to] doing business in China we don’t stand on the same point as western carmakers,” says one industry insider. “We always have to overcome these past political problems.”

Ivo Naumann, AlixPartners’ Shanghai-based managing director, says: “The biggest problem [with these incidents] is on the dealer side. If sales decline or your windows get smashed every three or four years because of some stupid political issue, you ask whether you should continue.”

A series of industrial actions in 2010 that marked the beginning of the end of China’s cheap labour advantage also primarily affected Japanese car plants in southern China. The striking auto workers drew on lingering resentment over their country’s former wartime adversary.

Many analysts, however, do not accept that geopolitics has been the main reason for Toyota and Honda’s poor performance in China over recent years. They point instead to inadequate plant expansions, low levels of localisation and other strategic errors that were made before Sino-Japanese relations hit their latest nadir.

After last year’s turmoil, Toyota’s sales this September rose 45 per cent year on year, according to market research consultancy LMC Automotive, which collates data for every player in the market, while Honda and Nissan’s China business doubled.

But all three companies’ sales over the first three quarters of 2013 remained largely flat or slightly down versus the same period last year, even as the overall market grew a robust 15 per cent.

“The Japanese took a negative view of the market,” says Mr Naumann. “They simply ran out of capacity. There was demand but they just couldn’t supply it.” Toyota in particular, he adds, badly underestimated how fast the market would grow.

Toyota enjoyed a bumper 2008 in China, attaining a 10 per cent market share and becoming the country’s second-best-selling brand after Volkswagen.

But as the global financial crisis took hold, it froze development of a major plant in Changchun, a northeastern industrial centre, and delayed approval for capacity increases at other facilities. The Changchun plant, originally slated to have begun manufacturing in 2010, finally opened last year with an annual capacity of 100,000 vehicles. “We never thought of [China] as an El Dorado,” one Toyota executive admits.

GM is now firmly entrenched in the number two slot.

Some analysts are optimistic that Toyota and Honda have learnt from their mistakes and can bounce back, although it will be a difficult task in what is now the most competitive national market in the history of the auto industry. More than 100 manufacturers are active in China including every major multinational car company.

“They will regain market share,” says Mr Naumann. “They are still formidable companies. They still have excellent cars.”

Tatsuo Yoshida, auto analyst at Barclays, also believes Japanese manufacturers are at last addressing their deficiencies in China after concerns about intellectual property protection had for years dissuaded them from developing more vehicles there. But he expects that the US will remain their key market.

Additional reporting by Henry Foy in London

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Lost Year for Toyota Dealer in China Underscores Japan Challenge

Bloomberg Business Week, September 11, 2013

The Toyota Motor Corp. logo is displayed on a vehicle in Beijing, China.

It took Wang Chongwei almost a year to rebuild his Toyota Motor Corp. (7203) dealership in Qingdao, China, after a mob protesting against Japan’s purchase of a group of disputed islands burnt down the showroom.

On opening day one humid Sunday morning last month, more than 100 local residents, some with toddlers in tow, showed up to play funfair games and watch svelte dancers performing South Korean pop star Psy’s new hit single “Gentleman.” That’s a stark contrast to the demonstrators last year, who also torched Wang’s other dealership by Honda Motor Co. (7267)

“I’m a patriot just like any other Chinese, but politics should be politics and business should be business,” Wang said in an interview at the showroom’s reopening. “Last year’s incident is unique and I don’t want to talk about it any more. I am fully confident in future sales.”

Wang said he’s targeting to sell the same number of cars at the reopened dealership -- about 100 cars a month -- illustrating how Japanese automakers are working to return to last year’s sales levels even as the likes of Ford Motor Co. and Hyundai Motor Co. pull ahead.

Intermittent bouts of tensions between Asia’s two largest economies also underscore the risks of a prolonged consumer backlash against Japanese auto brands, which have lost a fifth of their market share in the past year. Winning back the lost ground will involve increasing incentives that will pressure margins, according to consultancy Synergistics Ltd.

“Even if the Japanese recover, they will do so at great expense,” said Bill Russo, Beijing-based president of Synergistics. “That’s really going to affect their investment in this market going forward. They have to think where else in the world they can have profitable growth if they can’t get it in China.”

Disputed Islands

Nationwide protests erupted across China last September after Japan moved to purchase a group of disputed islands -- known as Senkaku in Japan and Diaoyu in China -- from their private owner one year ago yesterday.

Thousands of Japanese cars were vandalized and businesses attacked by mobs in the demonstrations. The ensuing consumer backlash sent Toyota and Honda to their first annual sales declines on record in the world’s largest vehicle market.

The dispute hasn’t blown over. Japan lodged a diplomatic protest to China after eight Chinese Coast Guard ships entered Japan-controlled waters on Sept. 10 near the island chain being claimed by both nations.

Sales Slump

According to Nissan Motor Co. (7201), the biggest Japanese carmaker in China by volume, its sales are down more than 6 percent in the country during the first eight months of this year, even as industrywide passenger-vehicle sales increased.

Toyota’s deliveries have declined 5.3 percent in the same period, while Honda slid 2.9 percent.

“In China, there are several issues, ranging from the political situation between the two countries, the slowdown of the Chinese economy and the products we sell in the market,” Toyota Executive Vice President Nobuyori Kodaira said Aug. 21. “Our aim is to carefully respond to what our Chinese customers want and to raise our efforts in meeting those needs.”

Toyota passed on Shanghai and Beijing and chose Dubai for one of its three new global Intersect by Lexus boutique stores, a key effort by the automaker to promote its upscale brand outside its biggest market of the U.S.

Asked whether the anti-Japanese sentiment played a part in that decision, Mark Templin, the brand’s vice president, said last month in an interview that the company wanted to be careful about the pace of expansion in China.

Slow Recovery

Honda said the political issue won’t affect its long-term plans in China and the automaker expects sales this year to surpass last year, according to Beijing-based spokeswoman Natsuno Asanuma. Nissan’s sales in China haven’t fully recovered, though it’s on track to achieve its plan this year, said Yoshiko Tsumagari, a spokeswoman for the Yokohama, Japan-based company.

Ford Motor Co., unencumbered by geopolitical baggage, has emerged as the biggest winner, benefiting from consumers seeking non-Japanese options and an expanded lineup of new models.

Deliveries at the Dearborn, Michigan-based automaker have jumped 50 percent in the first eight months of this year, driven by sales of its Focus compact and Kuga and EcoSport SUVs. The second-largest U.S. automaker last month introduced a revamped Mondeo mid-sized sedan aimed at Toyota’s Camry, Nissan’s Teana and Honda’s Accord.

Ford Benefits

“Ford’s success is due to their new product launches which suit the market well, but also because of the fall of the Japanese,” said Zhu Bin, an analyst with LMC Automotive in Shanghai. “They have many models that directly compete with the stronghold of the Japanese, such as the Mondeo sedan, Focus compact and Kuga SUV.”

General Motors Co. (GM:US) and Volkswagen AG (VOW) are also stepping up investments in China as both automakers forecast their sales will climb to 3 million vehicles in the country this year.

GM will invest $11 billion in China by 2016 and add four plants by 2015 that will boost capacity to about 5 million units. VW said in March that it will add seven car plants in the country, bringing the total to 19, and increase production capacity there to 4 million vehicles a year by 2018 from about 2.5 million currently.

Despite the headwinds, China remains too big a market to ignore and Japanese automakers should play to their strengths in fuel economy to win back customers, said Satoru Takada, an auto analyst at Toward the Infinite World Inc. in Tokyo.

Fuel Economy

That would mean wooing consumers like real-estate agent Lei Zhucheng, 43, who says tensions between the two countries aren’t a factor in his purchase decision.

“I look at the car’s quality rather than politics,” said Lei, who was checking out the Honda Jade wagon at the Chengdu auto show last month. “Honda cars are fuel-efficient. Their prices are reasonable and it’s good value.”

Back in Qingdao, Diao Zihui, marketing manager of the rebuilt Toyota dealership, said she wants to put the past behind her. The staff worked out of makeshift premises for months while the showroom was being rebuilt.

“It’s like a nightmare I hate to recall,” said Diao. “I shed a lot of tears. I hope this won’t repeat and China and Japan can be friendly.”

To contact the reporter on this story: Ma Jie in Tokyo at jma124@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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Nissan’s Teana Tests Chinese Willingness to Buy Japanese

Bloomberg News, March 1, 2013

After protests erupted across China last year over Japan’s nationalization of disputed islands, sales of Japanese-branded cars there plummeted. Nissan (7201) Motor Co.’s prescription for winning back Chinese drivers: a quieter ride and better gas mileage.

Nissan introduced its new Teana sedan on Feb. 26 in the southern Chinese city of Guangzhou, the site of riots that saw Japanese businesses looted last year. The company is counting on the car to revive sales in its biggest market, and as the first major new model by a Japanese automaker since the protests erupted last September, the Teana will serve as a barometer for sentiment toward 

Japanese brands.

The revamped Teana “is critical in helping Nissan regain the momentum lost 

after the islands crisis,” said Bill Russo, president of auto consultancy 

Synergistics Ltd.

The redesigned Teana claims better fuel economy than rivals such as the 

Volkswagen Magotan, Toyota Camry, Honda Accord and Chevrolet Malibu. It 

features redesigned rear suspension, rear- view monitor cameras, and seats 

inspired by spaceship technology that the company says promise less fatigue on long drives.

Designed by a team led by Nissan’s joint venture with Dongfeng Motor Group Co., the new Teana is 18 millimeters (0.7 inch) longer, 35 mm wider and 15 mm taller than the previous version and has more interior space than the 

Camry and Magotan.

More Chrome

To attract the Teana’s target demographic of a 34-year-old married man with a young child, Nissan gave the car a bolder front grille and used more chrome than is available on the Altima, a similar U.S. model that shares many parts. Since Chinese drivers value a quiet ride, Nissan beefed up the soundproofing and raised the car’s height for rougher roads.

Nissan also stiffened the feel of its door knobs and engineered its door panels to give off a solid sound when tapped, as the company says that’s how many Chinese buyers assess safety and quality.

“This is the first time we have seen a flagship model designed for this market with a very clear focus on the Chinese customer,” Andy Palmer, Nissan’s 

executive vice president in charge of global product planning, told reporters in Guangzhou.

Nissan expects buyers to pay a premium for the new Teana. Starting at about 190,000 yuan ($30,500), it’s roughly 4,000 yuan to 28,000 yuan more 

expensive than the base models of the Accord, Camry and Malibu, according to data from auto-pricing website Yiche.com.

Better Mileage

That extra cash will buy gas mileage of 7.3 liters per 100 km with a 2.5-liter engine, versus 9.5 liters previously for the base model. That compares with 8.4 liters for the Accord and Camry, and 8.0 liters for the Malibu, according to company specifications compiled by Bloomberg.

Nissan, the biggest Japanese carmaker in China, is expecting a jump in first-year sales with the new Teana. Sanford C. Bernstein says it’s the most 

profitable of the dozen-plus models the automaker sells in the country. The Teana accounted for 12 percent of last year’s sales for the Dongfeng-Nissan joint-venture.

The last time the Teana was redesigned, in 2008, sales surged 54 percent after dropping 17 percent the previous year. The trend was repeated in 2012, when deliveries of the Teana plunged 42 percent to 90,072 units, 
exacerbated by nationalist tensions and competition from the Camry and Magotan, both redesigned in 2011. The Teana’s slump was the worst among the 10 top-selling midsize sedans in China, according to researcher LMC Automotive.

‘Tough Time’

Any first-year boost may be tempered by lingering anti- Japanese sentiment. Nissan says its overall China sales for the first two months are about 20 percent lower than the year- earlier period. The country last year accounted for about a quarter of all of Nissan’s vehicle sales.

“A single model isn’t enough to solve the problem entirely,” said Koji Endo, managing director at Advanced Research Japan. The Teana “should be a big help, but probably even with this new model, Nissan will continue to face a tough time there.”

Researchers at Bernstein say midsized sedans like the Teana are becoming a tougher sell in China as more consumers choose SUVs, and as German 

premium brands such as Audi introduce entry-level models.

“Even before the islands crisis the Japanese were suffering sliding pricing and profitability,” Max Warburton, an auto analyst at Bernstein in Singapore, said in a Feb. 26 report. Despite Nissan’s expectation of a substantial boost this year in China from the new Teana, “we’re more cautious.”

‘Getting There’

Nissan earlier this month reported that third-quarter profit fell a more-than-

estimated 35 percent to 54.1 billion yen after sales tumbled in China and new models trailed competitors in the U.S. Its shares have risen 16 percent this year, versus a 19 percent gain for Toyota Motor Corp.

Nissan had the biggest sales decline in China last year among the three leading Japanese carmakers, with deliveries off 5.3 percent in 2012, versus drops of 4.9 percent at Toyota and 3.1 percent for Honda. (7267)

A rebound in Chinese demand would help the automaker regain ground after sales of the new Altima, its bestseller in the U.S., trailed the Camry and Honda’s Accord.

In China, “the situation is getting better, it’s getting normalized,” Ghosn said on Feb. 26 at an event near the company’s headquarters in Yokohoma, Japan. “We’re getting there.”

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net; Ma Jie in Tokyo at jma124@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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