The Japanese In China: Horrors! We're Losing!

There is a major shift underway in the Chinese auto market. Cars are morphing from something exclusively owned by the rich to an everyday item. Sure, luxury cars are big in China. But the volume growth is in low cost cars. As a result, the market share of sino-foreign joint ventures is eroding. Local players, such as BYD are gaining fast. The foreigners are getting worried.

The biggest loser in market share is Volkswagen. They are hit by a double-whammy of capacity constraints, and a focus on bigger models, while the growth is in the small models. They are building new plants in China, and maybe Suzuki will help them build cheaper cars. GM is holding its own, mainly through the preponderance of cheap little Wuling econoboxes in their portfolio.

The market share of the Hyundai and the Japanese is likewise eroding. The Japanese are sounding the alarm.

And they have all reason to be worried. According to The Nikkei [sub] 2009 was not a good year for Japanese car makers in China. In terms of market share, China FAW Group Corp., a joint venture with Toyota, lost 1.6 percentage points. Guangzhou Honda Automobile Co. slipped from 5.5 percent to 4.4 percent. Dongfeng Honda Automobile Co. dropped from 2.9 percent to 2.5 percent of the market. In the first quarter of 2010, that trend continued (see table left.)

Japanese carmakers don’t want to lose the war in China again and are going on the counter-attack for the hearts and pocket books of Chinese customers. Their strategy: They go native in China, they launch new low cost brands especially for China, and build R&D capacity in China to design for the Chinese market.

At the Beijing Motor Show, Honda (rather quietly) debuted a new brand, called Li Nian. Produced by the Guangqi Honda Automobile joint venture, cars should appear in 2011. Rumor has it, their first car will be based on the Honday City, but will cost 40 percent less. Honda also has plans to create a Chinese brand with Dongfeng Honda joint venture. Hondas are considered luxury cars in China, the new brands are supposed to appeal to the working masses. According to The Nikkei, “this is the first time for Honda to create new brands with a local joint venture.”

Nissan meanwhile is busy building a design studio, set to open in Beijing early next year. Task of the Chinese staff: Design cars that cater to the Chinese.

Toyota is in talks with the local government to build an R&D facility in Jiangsu Province.

Says the Nikkei: “For Japanese carmakers, finding a way to gain momentum in China as quickly as possible is of critical importance to their growth, given the potential of the market.”

Design studios don’t win the war, Honda seems to be the most proactive in the counter-attack, and as the numbers show, they have all reason to do something.