Analysis: Effect of territorial disputes on Japanese automobile sales and brand reputation in China

Gasgoo.com (Shanghai) - With tensions rising over the disputed Diaoyu Islands, waves of protests endorsing the boycott of Japanese goods have been flaring across China. The effects of these activities have taken their toll on sales of Japanese branded products, including automobiles, in the country. Various reports highlighting declining Chinese sales of Japanese vehicles have been circulating through the media throughout the month. China's Ministry of Foreign Affairs has gone as far as warning Japan to stop 'harming Chinese territorial interests' in order to prevent further economic damage to its enterprises.

Furthermore, due to overly conservative localization strategies, Japanese automobile manufacturers' development in China has lagged behind those of their competitors from Europe and the US. Their combined market share has fallen from 23.5 percent in 2010 to 22.7 percent last year and 22.3 percent in the first half of this year. In response, Toyota and Honda both began implementing bolder strategies for the country, increasing the speed with which they introduce and localize new models and technologies.

In order to gain a more through understanding of the effect of territorial disputes on the development of Japanese automobile manufacturers in China, Gasgoo.com (Chinese) held an online survey on the issue.

The first question of the survey asked participants what degree of influence worsening ties between the two countries has had on the sales performance of Japanese automobile enterprises in China. Opinions were evenly split. 46 percent of participants responded that the Diaoyu Islands dispute has had a massive influence on Japanese manufacturers' performances in the country. Meanwhile, 48 percent said that although the row is harming vehicle sales, its overall effect is not large. The remaining six percent of participants were undecided.

Steps by the Japanese government to purchase and nationalize the islands in July led to protests in China to boycott Japanese goods. August sales figures for the top six Japanese automobiles manufacturers in China have already been released. According to the figures, four of the manufacturers, including Toyota and Mitsubishi, experienced negative sales growth during the month. Nissan, which has maintained double digit growth rates for a consecutive five months earlier this year, was only able to manage sales growth of 0.6 percent. Only Honda was able to sustain relatively high sales growth rates.

Several take the sales numbers as proof that the anti-Japan protests are hindering sales of Japanese manufacturers. The last wave of demonstrations saw protestors shouting slogans encouraging boycotts of Japanese automobiles. Incidents of Japanese vehicles having their windshields smashed or even flipped upside down have been common in several cities, which may have influenced the decision of some prospective buyers to reevaluate their purchases.

However, it is impossible to measure the exact effect the protests have had on sales of Japanese vehicles. Several analysts point out, several Japanese models are now well outdated, and are both technologically lacking and more expensive when compared with other foreign automobiles. Furthermore, the natural disasters Japan suffered last March pushed several manufacturers to work especially hard in the latter half of the year, with their Chinese sales figures for last July and August being especially high.

The fact that Honda was able to maintain 15 percent sales growth in August further suggests that the influence of the protests has not been excessively large. Honda's success is a sign that Chinese consumers consider a variety factors when purchasing a new vehicle than simply looking at its brand name's country of origin.

The Diaoyu Islands dispute is only one of the historical issues that have soured relationships between China and Japan. As trade ties between the two countries became increasingly close between the two countries over the last two decades, political disputes have been overlooked in the automobile industry. However, the Japanese government's control over far right elements in the country has been loosening as of late. The second question of the survey asked participants if they felt political changes in Japan will harm the reputations of Japanese brands in China in the long-term. 57 percent of participants agreed that they will. By comparison, 33 percent of respondents answered that there is no permanent harm done to the brand images of Japanese manufacturers, and that once the current crisis passes, their sales will recover as well. Ten percent were undecided.

There has always been controversy on the opinions Chinese consumers have towards Japanese brands. During times of elevated political turmoil, it is typical for consumers to make irrational decisions. When compared with similar models from Germany, the US and South Korea, Japanese vehicles are typically considered to be at a disadvantage. Several analysts have pointed out that there is a considerable dial of bias against Japanese automobile brands among buyers.

However, there is also a school of thought that believes that the majority of consumers in any market will make their purchase decisions based primarily on the assets of the products they are considering. Japanese manufacturers have been active in China for over ten years and control over 20 percent of the passenger automobile market. Their products have traditionally been praised for their fuel efficiency, attractive designs and comprehensive aftermarket customer service. However, outdated technology, poor speed of localization and other factors have allowed American and European to surpass them in terms of market share.

Whether or not Japanese manufacturers can recover to compete with other foreign brands is another matter of concern. When asked what sort of future expectations they had for Japanese manufacturers in China, 46 percent of participants said that they were not especially positive. 23 percent of respondents said they were optimistic, while 31 percent decided to remain neutral.

Aside from recent anti-Japan sentiment in the country, excessively conservative marketing strategies and slow localization plans are key reasons why many don't hold high prospects for Japanese manufacturers. Slowing growth rates in the Chinese market are a signs that the Chinese market is becoming more mature. Resource limitations and policies aimed at limiting the number of new sales mean that competition between various companies will become even fiercer as the number of potential new sales shrinks over the near future. Especially important is the pace with which foreign manufacturers localize their products for the Chinese market. This is a big problem for Japanese manufacturers, which are notorious for reacting slowly to changes in the market. Although Toyota and Honda have both announced their intent to reform their strategies for China, they are still at a disadvantage when compared to other foreign enterprises which have long since enacted such changes. Worsening political ties between the two countries may force Japanese manufacturers to be even more cautious about making new investments in China.

In the final question of the survey, participants were asked what methods Japanese manufacturers should take to improve their reputation and sales in China. 43 percent answered that the best way for them to perform well is to improve the quality of their products as well as their sales and aftermarket services. 52 percent of participants feel that the solution to the problem lies within Japan, however there are differing opinions within that camp. 43 percent of respondents, the majority of the above population, believe that manufacturers are best making public statements in support of peace movements, while 18 percent maintain that they should cut off relationships with far right activist groups.

Providing quality products backed by good customer service is a basic requirement for any enterprise to succeed in any given industry. More controversial are what other steps Japanese manufacturers could take. Nissan's head of marketing has previously stated his desire to see the territorial dispute resolve quickly and peacefully, so that his company can continue serving Chinese consumers. Several maintain that Japanese manufacturers should be doing their best to persuade their government to resolve the issue, as prolonged conflict with China is not at all in the country' economic interest. However, there are also those who advise Japanese manufacturers to temporarily halt their investments and expansion plans for China.