Japan's Carmakers Find China's Fast Lane

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It's no secret that China's auto market is the most dynamic in the world and destined to overtake Japan as the world's second-biggest later in the decade, behind the U.S. Yet just a few years ago, with the exception of Honda, none of the major Japanese players were much of a force on the Mainland. It looked as if the Japanese auto industry -- world beaters in so many other Asia markets, as well as North America -- were making the strategic blunder of the new century.



Volkswagen, General Motors (GM), and, to a lesser extent, Hyundai looked set to be the dominant foreign players in China. And even if the Japanese car brands ever could get their act together on the Mainland, how could they overcome the deep historical animosity felt by the millions of Chinese who remember the Japanese occupation and wartime atrocities of the last century?



Yet late-comer Japanese auto makers are making an extraordinary surge into China's hyperkinetic car market. Japan's six major carmakers operating on the mainland -- Honda, Toyota (TM), Nissan (NSANY), Mazda, Mitsubishi, and Suzuki -- grabbed 26.6% share of the Chinese market in the January-October period, according to the China Association of Automobile manufacturers. That's a larger share than the U.S. or European rivals have in China, and is slightly less than the combined domestic market share of China's entire domestic auto industry.



TILTING AXIS. This is a stunning development, given the long-dominant position of European auto makers, led by Volkswagen, which a few years ago controlled about 50% of the market. In the space of a few years, the Japanese auto makers have penetrated deeply, now approaching the 33%-or-so mark they now enjoy in the North American market, much to the obvious chagrin of GM, Ford (F), and Daimler Chrysler (DCX).



Right now, most of the Japanese gains in China seem to be coming at the expense of the Europeans, VW in particular, according to Yale Zhang, director of emerging-market vehicle forecasts for auto consulting firm CMS Worldwide in Shanghai. Among the reasons for the Japanese carmakers' success is "very good exterior design" that appeals to Chinese consumers, he adds.



VW is still the market leader in China, but its share has fallen to around 15% this year, as of the end of October, according to Zhang. In a bid to stop its free fall, VW and FAW Group, one of VW's key joint-venture partners, recently restructured their Chinese management team. GM, despite its ghastly performance in North America, is also continuing to gain ground on the Mainland -- at VW's expense. GM's share is 11% through the end of October.



PRIMED FOR PRIUS. Analysts credit the Japanese with pumping out a steady stream of newly designed products for the Chinese market -- products that are priced to sell. They also have won the good graces of Beijing officialdom by sharing key automotive technologies with local state-controlled China players such as FAW, Dongfeng Motor, and Shanghai Automotive Industry.



That means a lot, since Beijing has long-term aspirations of developing a thriving domestic-car industry that can not only meet demand at home but develop into a vibrant export sector. Keeping Beijing happy is important because the government signs off on all new plants, which the Japanese auto makers will need as they continue to expand into the Chinese market.



On Dec. 15, Toyota and FAW held a ceremony to herald the joint, local production of the Toyota Prius hybrid-engine passenger car, which will sell in China for about $36,000 in 2006. The China-produced Prius marks the first-ever production of the fuel-efficient model outside of Japan.



BIG SPENDERS. It's of supreme symbolic value for China, which is clouded by some of the world's worst air pollution and is keen to become more familiar with fuel-efficient automotive technology. "Governments around the world had lobbied Toyota to produce the Prius locally," says Christopher Richter, a Tokyo-based analyst with CLSA Asia Pacific. [Toyota has decided to produce a hybrid version of the Camry sedan in the U.S. at its Kentucky plant in mid-2006 as well.]



Toyota already produces and sells other models in China, including the Vios compact and the Reiz, Corolla, and Crown sedans. In 2006, it will start producing its mainstay Camry sedan in China, too. While Toyota only has about a 4% share of the China market now, the company has set an ambitious goal of reaching 10% early next decade, and seems on the right trajectory to get there. Toyota officials see sales jumping more than 50%, to 179,000 units, in 2005, and it is aiming for sales of 250,000 next year.



Collectively, Japanese auto makers are spending big to dominate in China. The six major Japanese car companies plan to spend $2 billion-plus in China over the next five years to boost both capacity and sales networks. Nissan, back in April, announced plans for a major product assault in China that includes producing five models: compact sedan and hatchback versions of the Tiida, the Fuga luxury sedan, the Quest minivan, and the 350Z sports coupe.



DRIVING DOWN ENMITY. And Honda, which was the first Japanese auto maker to expand into China in a big way and enjoys the biggest market share among its country rivals at 9%, is now even exporting from China. This summer, it opened an $82 million export plant with a local joint-venture partner in Guangzhou. Honda is cranking out 1.2- and 1.4-liter versions of its Jazz compact for export to Europe. It also enjoys thriving local sales in China, where it sells everything from Accord sedans to Odyssey SUVS.



As for the traditional enmity between China and Japan, it scarcely matters when it comes to Japanese nameplates. Chinese consumers "say they hate [Japan] but then their next car will be either a Toyota or Honda," quips Michael Dunne, president of Shanghai-based Automotive Resources Asia.



The Japanese auto industry juggernaut that's grabbing market share in the U.S. and Europe seems destined to do the same in China before the decade is out. If so, it will be a remarkable change of fortune for Japan.