It looks like there is no respite for Toyota Motor Corporation (ADR) (NYSE:TM) in China. Ever since territorial disputes sparked in second half of 2012 the Japanese auto makers have been fighting a relentless battle against falling sales. China was, in any case, a preferred destination for automakers around the world and with Japanese companies taking a backseat, global giants like General Motors Company (NYSE:GM)and Volkswagen AG (ADR) (PINK:VLKAY) are fast gaining ground with Ford Motor Company (NYSE:F) not too far behind. And just when it was thought that trends were reversing in January, February brought in news of sharp declines for all the three big Japanese automakers – Toyota, Honda, and Nissan. The largest decline, almost 46%, was posted by Toyota Motor Corporation (ADR) (NYSE:TM). Now the situation is likely to deteriorate further as China has announced that it will send a team of surveyors to the disputed islands. This spells more declines for the Japanese automakers over the coming months.
The territorial disputes
To give investors a bit of a background this is the dispute that has been going on between China and Japan for decades over a chain of five uninhabited islands in the East China Sea. The islands which are known as Diaoyu in Chinese and Senkaku in Japanese are merely 6 square kilometers in area. Both Japan and China claim sovereignty over them. The dispute received a fresh lease of life when in September 2012 the Japanese government bought three islands from their private owners to prevent their commercialization. Last week China has made its boldest move so far in this skirmish by announcing that it will send a team of surveyors to these islands thereby implying that it is now ready to set foot on the disputed lands. In the diplomatic circuits it is being said that this will cause more sparks to fly.
Effect on auto sales of Japanese automakers
The battle has permeated the borders and is now raging on the industry front. China has been boycotting Japanese products including cars. Sales suffered severely in the second half of 2012. In September 2012 Toyota’s sales fell by almost 40% y-o-y, followed by a decline of 44% in October, 22% in November, and 16% in December. For the full year sales was down 4.9% over 2011, almost 25% below expectations. Honda and Nissan also reported similar trends with 2012 sales down 3.1% and 5.3%, respectively. In January the Japanese automakers reported good sales growth and Toyota Motor Corporation (ADR) (NYSE:TM) led the pack with 23.5% y-o-y increase. Honda and Nissan posted 22% increases each. It is true that the numbers included seasonal impact of the Chinese New Year falling in January this year but there was no denying the fact that sales were improving. However the respite was short lived and soon February numbers reflected sharp declines. Toyota and Nissan posted around 46% declines each while Honda reported a drop of over 27%. For January and February combined sales were down 13.3%, 4.1%, and 14.1% for Toyota, Honda, and Nissan respectively.
Other automakers from all over the world zero in
Taking advantage of the situation, GM is increasing its lead over Toyota Motor Corporation (ADR) (NYSE:TM) and currently holds the largest market share in China. In the January-February period the company sold 525,835 vehicles which are 7.9% higher than year ago. The increase is mainly driven by the growing popularity of Wuling microvan (sales up 25%), Buick (up 12%) and Chevrolet (up 5.4%). GM’s Shanghai joint venture posted record sales increase of 12.4%.
Volkswagen is also expanding aggressively in China. It is only slightly behind GM in terms of sales while being far ahead in terms of profitability. It has stepped up its investment plans in China and is now planning to increase its production by 70% by 2018. The company will build 7 plants here which will take its count of Chinese manufacturing facilities to 19. This will increase annual capacity from the current 2.3 million vehicles to 4 million vehicles. Volkswagen is also building a budget car specifically for the Chinese market.
Ford is still behind its peers in terms of market share due to the fact that it entered China much later. However, its “15 by 15” strategy will ensure that it catches up with the others before long. As part of this strategy, Ford will introduce 15 new models by 2015. The company is already witnessing healthy growth with January-February sales up by 46% and vehicles sold climbing up to 105,209 units. Ford Focus, which emerged as the most popular passenger car in China in 2012, is proving to be a major growth driver.
Toyota’s operational challenges
Toyota has a tough job at hand if it has to regain its lost glory in China. With more tension ensuing over diplomatic issues I do not foresee this in the near-term. To add to the company’s woes its US February sales have also been weaker than expected. Toyota recorded sales growth of just 4.3% vis-à-vis Ford’s 9.3% and GM’s 7.2%. The company, like its peers, is also suffering in Europe where the market continues to remain glutted. Investors did cheer for Toyota Motor Corporation (ADR) (NYSE:TM) when it announced that it is expecting to be profitable in 2013 and 2014, but by the company’s own admission itself it expects a further contraction of 5-10% in the European automotive market in 2013. Now with China too adding to Toyota Motor Corporation (ADR) (NYSE:TM)’s sales pressure, the company is poised for quite a challenging year ahead. The upside in the US truck market is one of the few factors that remain in its favor.
The article China’s Cloud Looms Over Toyota originally appeared on Fool.com and is written by Eshna De.
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