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Japan struggles as 'comeback kid' in China

FOR Japanese carmakers still suffering the repercussion of last year's political spat with China, the problems they face on the mainland go beyond waiting for anti-Japanese sentiment to ebb. There have also been some serious business mistakes that need correcting.

More than half a year after the Diaoyu Islands territorial row triggered a national boycott of Japanese goods, sales of Japanese cars are yet to return to positive territory. That's longer than past disputes have taken to burn out.

"Our original expectation was for sales to come back in half a year, so now we have to push harder with our new product introductions in the autumn," Hiroji Onishi, Toyota's China head, said last month.

In fact, nearly all Japanese carmakers are pinning their hopes on new product releases to win back Chinese drivers - a customer base that was eroding even before the diplomatic dispute because of too few new models being offered.

Serious catch-up

Now carmakers have to play some serious catch-up.

Toyota is on track to bring 20 new cars to China before 2015, while Nissan plans 15, and Honda, 10. Mazda had said it will start localizing three models - the CX-5, CX-7 and Atenza - beginning in June. Suzuki is expected to manufacture its new SX4 compact sedan and S-Cross city SUV in China this year, with a production version of its Authentics concept car to follow in 2014.

Among all the wrong calls Japanese carmakers made on product planning in China, the biggest one was to underestimate the growth potential of the compact segment, which has now become a make or break battleground.

That's not only because it is China's best-selling sector but also because it plays a vital role in developing the customer base for mid- to high-end car sales.

"If we don't make small cars, we will lose future profits," said Feng Xingya, executive deputy general manager of GAC Toyota, which expects to have 40 percent of its sales come from small cars by 2015.

The re-styled version of its Yaris hatchback, to be launched later this year, and the new Vios sedan to be made by FAW Toyota will be the start of Toyota's fight-back in the no-frills, entry-level segment of China, where the two cars haven't made much of a market impact so far.

Yaris sold little more than 12,000 units last year in China, barely reaching the monthly level of some of its strong competitors, like Volkswagen's Polo and Chevrolet's Sail.

Li Hui, deputy general manager of GAC Toyota, once admitted publicly that "Yaris fell out of touch with China's consumer demands."

That's not surprising since Yaris, like many other Japanese small cars, was developed mainly for the US, European and home market.

Featuring a cute front look reminiscent of Japanese cartoons, the existing Yaris model lacks what Chinese people call daqi, or sense of road presence. Besides, the interior of the car is not very generous, compared with others in the same price range in China.

After redesign, the Yaris has a more edgy look and a bigger interior. But at the end of the day, it all comes down to price because most first-time buyers are very budget-conscious.

Though the official price is yet to be announced, Toyota China's Onishi has said it will be difficult to hold it below 60,000 yuan (US$9,768). That means it is going to be a tough uphill battle against joint-venture cars with prices starting at 50,000 yuan, not to mention those made by local manufacturers with sticker prices as cheap as 30,000 yuan.

"Small, expensive cars have no future in China," independent auto analyst Jia Xinguang warned, citing the suspension of Nissan's production of March as an example.

Nearly all global brands have had nerve-wracking experiences trying to contain costs in China, but for Japanese carmakers, the belt-tightening has been particularly challenging.

Zeng Zhilin, research director at consulting firm LMC Automotive, Asia Pacific, said part of the problem stems from the Japanese supply chain, where suppliers are drawn from "keiretsu" partners, many of whom are owned or controlled by parent automakers.

"Unlike their counterparts from US and Europe, Japanese carmakers have a very exclusive supply chain," Zeng said. "It is hard for them to bring down the cost when competition is often absent."

Though Japanese carmakers can now secure most of their components in China, the majority of them are still made by "keiretsu" companies, with materials imported from home. Real localization, with Chinese firms as suppliers, has been mostly limited to non-vital electrical and interior parts, which Zeng said reflects Japanese wariness toward technology-sharing.

Highly centralized

At the same time, the Japanese car industry is still highly centralized in Japan, where headquarters make the major decisions and often aren't attuned to changing trends in China, according to Ye Sheng, auto research director of market research firm Ipsos.

To be sure, the Japanese are starting to get the message. Japanese carmakers unveiled a series of products tailor-made for the China market at this year's Shanghai auto show.

Besides the new Yaris and Vios models, which were developed on feedback from 1 million respondents in a research survey of 50 Chinese cities, Toyota rolled out the FT-HT Yuejia, a six-seater designed specifically for young Chinese couples who have two kids and four parents to tote around.

Honda also presented a trio of China-specific offers, which include the Concept M - a venture into the non-commercial van market, and the Jade and Crider - mass-produced versions of the Concept S multi-purpose vehicle and the Concept C mid-size sedan design inspired by China's emblematic dragon.

And there was the global debut of Friend-ME - Nissan's first concept car with Chinese designers fully engaged in the process of design and development. Based on the idea of "four-seats, one-mind connectivity," the car enables information sharing among all those on board. The car is aimed at China's tech-savvy new generation.

It is heartening to see Japanese carmakers reaching out for the Chinese market more actively, Ye said, but it will take more than a change of attitude to recoup market share.

"They need to give their products a more distinctive character," he said. "Japanese cars still lack selling points that can catch the eye of Chinese consumers."

Take the petrol engine as an example. Japanese carmakers don't have anything fancy to offer like the turbo-charged technologies developed by their US and European rivals. While many carmakers are pioneering innovations like 10-speed transmission, the Japanese are still perfecting the five- or even four-speed gearboxes in some of their key models.

It is not that they are "backward" in research and development, said Ye, who acknowledged that a Japanese gearbox often feels smoother than others with more advanced functions. But their products are certainly not very attractive to a market that has a weakness for novelties.

In fact, the Japanese do have innovations they are keen to share with China. There are the electric hybrid cars, whose green technologies can help China address its worsening air pollution.

Hybrid technology

Takeshi Uchiyamada, vice chairman of Toyota Motor Corp, said his company believes hybrid technologies are currently the most realistic energy-saving, emission-reducing solution. Worldwide sales of millions of electric hybrids, including over 5 million by Toyota, have proven their technical and commercial feasibility.

At the Shanghai auto show, Toyota unveiled Yundong Shuangqing II, a hybrid concept car equipped with Chinese-developed powertrain. Betting on China's rising demand for green cars, the company aims to produce an electric hybrid system locally in 2015.

It would be overly optimistic to think that production localization can power hybrid cars in China to Toyota's global level of 15 percent in the short term. As Ye noted, consumers willing to pay extra for to be eco-friendly are still a rare breed in China.

Takanobu Ito, CEO of Honda Motor, also seemed cautious about the sales prospect for electric hybrids. He acknowledged they are not the first choice of Chinese car buyers.

Higher price is still the biggest obstacle to more widespread sales of hybrid cars in China. Hybrids don't enjoy any of the green incentives offered by the government to buyers of all-electric cars. And there is no sign of any change in that policy anytime soon.

Some market observers speculate that the Chinese central government is reluctant to extend incentives to hybrids because Japanese carmakers are viewed as the main beneficiaries rather than domestic ones. Whether that's true or not, it's probably not an issue that preoccupies the Japanese. Their future recovery rests in their own hands.




 

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