For Japanese Automakers, China Dispute Might Be Worse Than Tsunami

By Sterling Wong  SEP 19, 2012 5:00 PM

Calls for a boycott of Japanese brands will hurt the likes of Toyota and Honda.

 


MINYANVILLE ORIGINAL A year after the devastating tsunami, Japanese automakers are bracing themselves for another crisis that will seriously impact their businesses.
 
This time, the crisis is political, not natural. Last weekend, the simmering tension between China and Japan over the sovereignty of islands in the East China Sea (known as Diaoyu in Chinese and Senkaku in Japanese) boiled over as protestors in scores of Chinese cities took to the streets in anti-Japan demonstrations. (See also: 5 Things You Should Know About the China-Japan Territory Dispute.)
 
According to Reuters, Japanese diplomatic missions, shops, restaurants, and car dealerships were the targets of protests, with Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan (PINK:NSANY) reporting that their stores in Qingdao were attacked by arsonists.
 
As a result of the protests, Honda shuttered its five assembly plants in China on Tuesday and Wednesday to recalibrate production outputs given that the anti-Japan sentiment will likely impact sales. Toyota, Mazda, and Nissan also suspended production in China for two days.
 
There are calls for Chinese citizens to boycott Japanese products, but patriotism is not the only thing that is motivating locals to avoid all things Japanese. There is also the issue of safety, what with Japanese cars overturned or set ablaze in the weekend protests.
 
“The repercussions for Japanese carmakers are very serious and will last for a long time,” Cui Dongshu, deputy secretary general of the Passenger Car Association, told Bloomberg. "There are plenty of choices. Why bother with Japanese brands if there are concerns of safety due to anti-Japan sentiment?”
 
Luo Lei, deputy secretary general of the China Automobile Dealers Association, said that the dip in sales caused by Sino-Japanese tensions could hurt Japanese automakers more than the tsunami and earthquake of 2011 did. “The impact caused by natural disasters can be fixed quickly, while it takes a longer time and more effort to make hostile sentiment against Japanese cars go away,” Luo said in a September 17 interview, according to Businessweek.
 
Given the persona non grata status of Japanese brands in the mainland, China’s Passenger Car Association estimates that Japanese automakers will relinquish their lead to German automakers for the first time in seven years.
 
Other car companies that Chinese consumers might turn to include General Motors (NYSE:GM) and Volkswagen (PINK:VLKAY), which both already enjoy strong sales in China.
 
John Foley from Reuters notes that often times, calls for boycotts do not work because of the “free rider” effect, where customers agree with a boycott but do not practice it themselves with their favorite products. However, he does point out that “cars may be an exception, since they’re highly visible and easy to vandalize.”
 
For now, Japanese auto manufacturers appear confident that they will be able to ride out the storm.
 
"Our business in China is firmly rooted. We won't change that long-term strategy even if we experience near-term difficulties," Honda executive Masaya Nagai told the Wall Street Journal.

Twitter: @sterlingwong
No positions in stocks mentioned.

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