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Japanese Dealerships in China Retrench in Wake of Dispute

By Bloomberg News
December 07, 2012 6:07 AM EST 22 Comments
China Deserts Honda-Toyota-Nissan Dealers Over Japan Clash
China Deserts Honda-Toyota-Nissan Dealers Over Japan Clash

Three months after a territorial dispute led rioters to vandalize Japanese cars in China, automakers from Toyota Motor Corp. (7203) to Nissan Motor Co. are luring back buyers with discounts and guarantees. Dealers like William Chen may take more persuasion to invest in the brands.

“Sales of Japanese brands plunged about a third at my outlets,” said Chen, whose family owns about 30 showrooms selling Nissan and nine other brands in the eastern city of Taizhou. “I would prefer safer brands over Japanese ones in the future.”

More distributors than ever are considering quitting Japanese car brands, even as showroom traffic and orders begin to rebound, according to the China Automobile Dealers Association. Failing to sign up enough new dealers will hurt Japanese automakers, benefiting General Motors Co. (GM), Volkswagen AG (VOW) and Hyundai Motor Co. (005380) as they compete to expand in smaller Chinese cities where the bulk of future demand lies.

“It’s definitely going to affect the Japanese automakers’ expansion,” said Ivo Naumann, Shanghai-based managing director at AlixPartners, which advises companies on strategy. “If dealers had to choose between, say Toyota and Volkswagen, why would they choose a Japanese brand if they have to deal with this every two or three years?”

About 1,800 Toyota, Nissan and Honda-branded cars were damaged during anti-Japanese protests in September, according to Guangzhou Automobile Group Co. (2238), which operates joint ventures with both Toyota and Honda Motor Co.

German, American and South Korean brands gained market share in October at the expense of Japanese marques, the China Association of Automobile Manufacturers said in a Nov. 9 statement.

Torched Showrooms

Nationwide demonstrations erupted in China in September after Japan’s government nationalized a group of uninhabited islands that China also claims.

A Toyota and a Honda dealership were burnt down in the eastern port city of Qingdao in September during the protests. The owner, Wang Chongwei, suffered losses of as much as 80 million yuan ($12.8 million), Netease.com (NTES) reported in October. Wang didn’t answer calls and text messages to his mobile phone. An employee who answered the phone at the Toyota dealership said they are focusing on fixing cars for customers.

Though Wang’s case is an extreme one, other dealers selling Japanese brand cars through the country have also been struggling with declining sales. The ensuing consumer backlash sent sales of Japanese car brands plunging 59 percent in October, dragging their collective market share to a record low of 7.6 percent from a 19 percent stake in the first eight months of the year before the dispute escalated, according to China Association of Automobile Manufacturers.

Maximizing Profit

“Investors look to maximize their profits and if sales tank, they will have to switch to other brands,” Liu Qingjun, general manager of Goldenport Holdings Ltd., which builds and operates multi-showroom sites.

A Toyota dealership at its Beijing compound stopped selling cars in November after the islands dispute and the owner is now looking to sign up with non-Japanese brands, Liu said.

“I have never seen so many dealers desert the Japanese brands,” said Luo Lei, deputy secretary general of the state- backed car dealers association, without being more specific. “The psychological impact on buyers and dealers is unparalleled. Automakers have to figure out a way to address it, otherwise it will do long-term harm.”

A very small number of Honda dealerships have stopped operations “out of their own considerations,” said Zhu Linjie, Beijing-based spokesman for the company.

Punitive Measures

GAC Toyota Motor Co., a Toyota joint venture in China, has pledged to waive punitive measures imposed on dealerships for failing to meet sales targets. Automakers typically give bonuses or levy fines on dealers depending on whether they meet annual sales targets.

“If dealers are worried about their survival, we will take measures to help them become more confident about their future income,” Feng Xingya, executive vice president of GAC Toyota, told reporters at the Guangzhou auto show last month.

Feng said a dealer in Beijing stopped taking cars from GAC Toyota. The company is sticking to its target of increasing its outlets in China to 600 by 2015 from the current 350, he said.

Liu Peng, a Beijing-based spokesman for Toyota, couldn’t immediately comment on the automaker’s dealership network.

Nissan, the biggest Japanese automaker in China, aims to expand in the smaller Chinese cities and has strengthened support to dealers, according to Hideki Kimata, senior vice president of sales and marketing at Nissan’s Chinese joint venture with Dongfeng Motor Co.

Showroom Traffic

Showroom traffic has recovered to last year’s levels while orders are at 80 percent, Kimata said. Nissan’s commitment to China hasn’t changed and the automaker wants to assure consumers that the brand is “safe and secure,” he said.

The company’s dealership network in China is stable, Sharon Shen, Nissan’s Beijing-based spokeswoman, said in an e-mail.

“Japanese automakers have been pretty considerate since the spat, providing subsidies to auto dealers to help cover part of their losses,” said Lou Zhibin, deputy general manager of Tianjin Airport International Automobile Area Development Co., a grouping of auto dealerships in the northern Chinese municipality. “Still, nobody is willing to set up Japanese brand dealerships now.”

That will hurt Toyota, Nissan and Honda as they seek to tap first-time buyers in smaller Chinese cities, where McKinsey & Co. estimates will account for 60 percent of new car sales by the end of the decade, up from 40 percent at the end of last year.

Car sales in so-called third- and fourth-tier cities will grow about 10 percent annually until 2020, versus 4 percent a year in Shanghai and Beijing, McKinsey said.

“You can’t blame the dealers,” Zeng Qinghong, general manager of Guangzhou Automobile Group, said last month in an interview. The company is providing loans and buying insurance for their dealers to tide them over, he said.

“Who will keep outlets running if they don’t have any business and keep incurring losses?”

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net

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

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