Japanese Car Manufacturers' China Woes
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Auto sales growth has slowed in China and actually dropped in September. The Chinese economy has been experiencing a decreasing rate of growth that dropped to 7.6 percent for the April-June period. This isn’t good news for global auto manufacturers. In addition, passenger vehicle sales contracted for the first time in the last eight months as the China-Japan territorial fight shook consumer confidence, who are refraining from buying cars offered by Japanese manufacturers Toyota (NYSE: TM), Honda (NYSE: HMC) and Nissan Motors. The mounting tension over the disputed island in the East China Sea is costing these automakers, who are suffering severe drops in their China auto sales.
Looks like the Japanese automakers will not get relief that easily. Last year these companies suffered from production disruption due to natural calamities, and this year just as they started enjoying good sales numbers they got entangled in this political chaos.
What do the numbers say?
Both Toyota and Nissan reported that their sales numbers were their lowest since 2008, while Honda experienced its lowest numbers since May 2011. As per the China Association of Automobile Manufacturers, Japanese car sales experienced a steep decrease of 41 percent by selling 160,000 units, which shrank their market share to 12.2 percent compared to 20.5 percent a year ago. During September, Toyota’s China sales plunged as much as 48.9 percent versus last year, Nissan suffered a 35.3 percent sales drop, while Honda tumbled 40.5 percent compared to a last year’s figures. In addition, smaller players Mitsubishi and Mazda also witnessed poor car sales, that fell 63 percent and 36 percent respectively. The October figures are also expected to remain weak for these automakers.
However, China is also suffering from these actions. Many Japanese cars are manufactured in their economy’s local factories using components made by Chinese dealers. Now, Japanese automakers are temporarily curbing their China operations to lower production, China is feeling the pinch. The three big Japanese automakers Toyota, Nissan, and Honda have plans to curtail production in their Chinese facilities by half of their present levels. Toyota and Honda are working on reducing their work hours to cut production rate, while Nissan would shelve its night shift. Returning to the normal level of production will take time given the dampened demand.
Japanese carmakers back in trouble
These Japanese carmakers have a big exposure in the Chinese market which accounts for a large percentage of their revenue. About 12 percent of Toyota’s sales come from China, Nissan sold around 27 percent of its vehicles in 2011 in China while Honda sold 20 percent. Their top-line could suffer if China’s demand doesn’t improve. Also, the dispute between the two countries would adversely affect the automakers’ bottom-line. People are moving away from buying Japanese cars, and if the situation doesn’t improve, it would dampen the car manufacturers’ earnings.
Interestingly, Japanese carmakers are the dominant players in Chinese auto market compared to other foreign manufacturers. However, now that people are withdrawing from buying cars offered by Japanese auto manufacturers, whom will they buy from? The options include General Motors, Hyundai and Volkswagen. These companies are likely to gain market share from the Japanese carmakers.
Somebody's pain somebody's gain
The non-Japanese companies stand a good chance of benefitting from the rift between the two countries. Volkswagen’s Audi enjoyed a sales increase of 20 percent in September by selling 35,512 units. On the other hand, Hyundai expects to cross its 2012 target of 1.25 million units. General Motors reported record September sales with a growth rate of 1.7 percent over the previous year; however, growth was the slowest in eight months. Though GM is the largest foreign automaker in China, it isn’t making the most of the situation. In fact the company announced a decrease in its Buick and Cadillac deliveries for the month. The other Dearborn based automaker, Ford (NYSE: F), seems to have capitalized from the situation. The company posted record September sales growth of 35 percent by selling 59,570 vehicles. It is investing heavily to increase its presence in China and has plans to double its production capacity in the world’s largest auto market.
The shunning of Japanese brands is doing a lot of damage to the Japanese auto manufacturers who are finding it difficult to meet their projected targets in this economy. In fact they have been forced by the feeble demand scenario to take appropriate measures to cut their current production. A prolonged slowdown wouldn’t be good for their health as it would account for another round of suffering after the production disruption during last year’s Tsunami and flood. It would only widen their losses and could invite more damage to the automakers than the damage suffered during the Tsunami.
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