Escalating China-Japan Tensions Spell Trouble

BMI View : While we recently wrote a piece on Toyota facing headwinds on its China sales due to the territorial dispute between China and Japan (see our online service, September 10, 'Toyota's Sales Forecasts Neglect Hard Landing Effects'), the recent violent protests could lead to a drop in total vehicle sales in China. We are maintaining our sales forecasts for now and would revise them downwards should the situation deteriorate. Going forward, other brands might win market share from Japanese firms as the latter suffer a loss in brand reputation.

Over the weekend, Japanese stores, factories and restaurants were vandalised as tensions between Japan and China over ownership of the disputed islands in the East China Sea reached a new high. Chinese citizens have become increasingly violent with recent reports stating that protestors have overturned Japanese cars and set Japanese car dealerships on fire. This sudden outburst of pent-up anger has historical significance ( see our online service, August 16, 'East Asia Territorial Disputes: Geopolitical Implications'). Moreover, as this week marks the 81 st anniversary of Japan's invasion of Manchuria, emotions in China are expected to run high.

Tug Of War
Northeast Asia- Regional Map

Such a negative backlash on Japanese companies might trigger a fall in passenger car sales for the rest of the year. With Japanese cars forming a significant portion of total passenger car sales in China, a sharp drop in demand for them would cause downward pressure on BMI's sales forecasts. Toyota's sales were already down by 15% in August year-on-year (y-o-y) and it remains to be seen how badly its figures will be hit for the quarter. BMI forecasts total vehicle sales in China to increase 5.2% y-o-y in 2012, to roughly 19.5mn units. While we are not revising our sales forecasts as of yet, we are closely monitoring the situation and would downgrade our forecasts should the situation deteriorate.

Bullish On China's Prospects
China- Vehicle Sales, Mn Units

At the moment, all eyes are on the Chinese authorities. Should they move to curb protests (as they have stated is their intention), we might see a return to normalcy in car sales as Japanese dealerships will be able to resume their operations. It is also possible that the current negative sentiment towards Japanese companies will die down and the two nations will proceed to resolve their dispute amicably. However, the damage to Japanese auto makers' brand reputation would take a longer time to heal given the nationalistic element to this saga, and we could see a shift in demand to other brands in the country. To be sure, consumers who previously wanted to buy Japanese cars may look to hold off purchases or buy other brands instead. Such a scenario would allow Korean or even domestic car brands to grab market share from Japanese brands going forward.

This article is tagged to:
Sector: Autos
Geography: China, China, Japan, South Korea, China, China

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