Will Political Tension Continue to Restrict Toyota's Prospects in China?

Toyota (NYSE: TM  ) kick-started the year on a joyful note -- it registered a sizable growth in sales in China in 2013. It had received a big blow in 2012 when it suffered its first annual slip in revenue in a decade. What made it worse was that the cause of the sales dip was not within the control of the automaker; it was caught in fallout from anti-Japanese sentiments arising from a territorial dispute between Japan and China. But, Toyota has impressed all by staging a huge comeback in 2013. Let's take a look at Toyota's road to success in China as the story unfolds...

Source: Toyota Motor

Toyota's China sales -- ups and downs
Toyota saw a 4.9% year-over-year drop in car sales in 2012 following political tension between China and Japan which spurred the Chinese population to boycott Japan-based goods, including cars. The chart below illustrates that sales took a steep downward turn starting in August 2012 and continued falling until October 2012. Though figures in the following months improved on a quarterly basis, Toyota continued to register year-over-year slumps until August 2013. 

But beginning September 2013 things improved -- the company witnessed sales gain of 63.5% over the prior year's comparable period. Since then the trend has remained positive. Banking on the recovery signs, Toyota aimed for total sales of 900,000 units in China by the end of 2013 and comfortably outperformed its own target with sales of 917,500 units. The sales growth was largely driven by increased demand for Toyota's redesigned SUV brand, the RAV4. The automaker also customized its Yaris and Vios models for the Chinese market by making them longer.


Source: Company and industry reports

Toyota was not the only Japanese automaker to suffer from the political backlash. Domestic competitor Honda (NYSE: HMC  ) also experienced a 3.1% decline in 2012, and like Toyota it made a solid comeback in 2013 with 26% sales growth. It sold a total of 756,882 units with its star performers, the newly launched and locally made Crider and Accord sedans.

Why China means so much?
The biggest reason is China's dominance in the world automotive map. It made history last year by recording over 20 million vehicle sales -- a feat unmatched in any other single market. And, China's growth story is just beginning. The average car ownership rate is around 80 in a 1000, which leaves ample room to grow. The rising per capita disposable income of the Chinese population means that now more people will consider buying a car. This offers huge opportunities to any automaker. Toyota already has a good presence in the region and stands to gain from this opportunity.

But, Toyota has some deeper reasons for pursuing growth in China that is less known. First, Japan will raise its sales tax rate beginning April 2014, resulting in a rise in product prices. Eventually, this may turn out to be a deterrent for new car purchases. Japan accounted for 25.7% of Toyota's 2013 sales and any drop can have company-wide implications. Second, Toyota expects its Asian sales to remain soft in fiscal 2014, mainly due to lower demand from Thailand, India, and Indonesia.

This makes Toyota's performance in China quite critical for its overall success. The company plans to sell 1.1 million cars in 2014, generating an annual growth of around 20%. It will launch new models and expand dealerships to achieve this. However, Toyota will need to watch out for Ford (NYSE: F  ) . The Detroit automaker, which had trailed Toyota, actually beat the Japanese auto giant last year by selling 935,813 units and doubling its year-over-year growth in China. Ford is also looking to grow its capacity, expand dealerships, and offer fuel-efficient, safety-prone cars. 

Toyota's big opportunity
In order to control the growing pollution levels in Chinese cities, the Chinese government aims to have close to 500,000 hybrid and electric cars on the roads by 2015, which is expected to go up by 10 times through 2020. The government is offering an attractive incentive program for the buyers of eco-friendly cars. This means big opportunities for electric, hybrid and other alternate energy vehicles.

Toyota has been a pioneer in this field and can be a big beneficiary. In 2013, the company's worldwide sales of hybrid vehicles topped 6 million units. It has already rolled out its Yundon-Showanchin II hybrid vehicle, aiming to support green revolution in China. The company has more alternative energy vehicles in the pipeline. It has tied up with two local automakers to locally manufacture hybrid cars and its components by 2015. This is the first time that the Japanese automaker is sharing its well-guarded hybrid technology secrets with a partner.

Foolish conclusion
Toyota has done well to regain its footing in China. The growing hybrid-vehicle industry offers the company further means to secure its position as the world's largest automotive market goes greener. If it can maintain its sales momentum, then it can generate company-wide growth and also compensate for weaknesses in other markets.

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