China strategy decides outcome of Japanese automakers' profits

Posted at 11/10/12 7:40 AM

TOKYO - Recent anti-Japan sentiment in China stemming from a territorial dispute is certain to slash full-year earnings results of Japanese automakers with high exposure to the country, but analysts say the bitter experience can be a stepping stone to greater competitiveness.

In October, demand in China virtually halved for major car manufacturers in the wake of Chinese demonstrations over Japan's purchase of part of the disputed Senkaku Islands in the East China Sea and the ensuing boycott of Japanese products, prompting some automakers to downwardly revise their earnings forecasts for fiscal 2012.

Among the most affected is Nissan Motor Co., which has the highest exposure to China. With its sales in the world's biggest auto market accounting for roughly 30 percent of its global sales, the company lowered its earnings projection for the business year ending March 31.

Nissan Chief Operating Officer Toshiyuki Shiga emphasized that its operation in China is gradually getting back to the normal, shrugging off reporters' questions at a news conference about whether the automaker has concentrated too much of its business there.

Shiga said the automaker does not plan to change the current investment plan already in place, but did not deny the possibility of reviewing the company's stance on further investments in China down the road.

"We have to keep observing the future course of Japan-China relations. We will consider our future investments carefully," he said.

Nissan projected that the negative impact of the territorial dispute would cut roughly 60 billion yen in its consolidated operating profit for the current business year and lowered its global sales target to 5.08 million units from 5.35 million. Most of the decline would come in China.

"Nissan may have devoted too much effort" to China, says Shigeru Matsumura, equity researcher at SMBC Friend Research Center.

"(Relying on) China only won't do, and investors would not buy stocks of such companies. Automakers should pay the cost of investing in a variety of countries" amid highlighted business risks and an economic slowdown in the country, Matsumura said.

Honda Motor Co., which also has relatively high exposure to China, trimmed its full-year earnings projection, expecting its sales in China in the January-December period to be reduced by 130,000 units to 620,000 units.

In contrast with automakers such as Nissan which have been putting emphasis on the Chinese market, Japan's largest automaker Toyota Motor Corp. is likely to more than offset plummeting sales in China thanks to growing sales in Southeast Asia and North America, enabling it to revise upward its full-year earnings projection.

Executive Vice President Satoshi Ozawa humbly referred to its relatively bright results for the April-September period as "more than we deserve from our strength."

Toyota, whose sales volume in China accounted for 12 percent of its parent-only global sales in fiscal 2011, has been lagging behind its rivals there, but analysts say this has partly led to the successful outcome.

Nonetheless, consumer aversion to Japanese products in China has also taken a toll on Toyota, with major domestic and foreign manufacturers unlikely to downplay the importance of establishing a strong presence in the world's largest market.

Osamu Masuko, president of Mitsubishi Motors Corp., said at a press conference that it is "impossible to completely avoid doing business in China," adding that the company does not plan to loosen its grip on the Chinese market.

SMBC's Matsumura said that Toyota's upward revision of its group operating profit projection by 50 billion yen, even in the face of uncertainties over how much longer the boycott of Japanese products would last, can be somehow interpreted as a "message that it won't be a loser in China."

"Japanese automakers have managed to overcome the (March 2011) earthquake and the Thai flooding. If they can pull through and learn a lesson from this incident in China, they will be able to grow stronger" and increase their presence in global auto markets, Matsumura added.