Japan’s auto giants are beginning to make inroads into China’s burgeoning EV market — in collaboration with local partners. Katayama Osamu reports.
Today, the main actor in the automobile market is China. Specifically, China is becoming so important for Japanese car manufacturers that they are unable to develop a growth strategy without it. You could say that if you conquer China, you will conquer the whole world.
In the past, Japanese car manufacturers regarded the US market as an important market. For example, the North American market made up about 40% of Honda Motor Co.’s global sales, and it was said to be a one-legged batting stance for North America. Japanese cars received high praise from American consumers due to their good fuel economy, and Japanese small-sized cars and medium-sized sedans, such as Toyota Motor Corporation’s Camry and Corolla and Honda’s Accord and Civic, were always ranked highly as popular cars.
But the US car market is now showing quite a different landscape. Spurred by a decline in gasoline prices, an increasing number of users are switching to light trucks, such as pickup trucks, sport utility vehicles (SUVs) and vans, and sales of sedans are sluggish.
In addition, the number of cars owned will decrease in the near future in the United States because self-driving cars and ride share services will become common. Some even predict that in this situation, the number of sedans will have decreased by 70% by 2030. In response to this change in the market, Japanese car manufacturers are hastening to switch to SUVs.
In fact, the change in the US market goes beyond the change in the type of cars. The number of US cars sold, which was previously good, is showing signs of reaching a limit. In 2017, the number of new US cars sold was 17.23 million, a 1.8% decrease from the previous year and the first decrease in eight years, although the demand for repurchasing new cars has run its course.
Shiroyanagi Masayoshi, Senior Managing Officer of Toyota, made the following statement about the US market at a third quarter account settlement explanatory meeting that was held on February 6: “The market is showing a tendency to decrease, and cars are struggling a lot.” Kuraishi Seiji, Vice President of Honda, also said at an account settlement explanatory meeting, “The US market has shifted from the growth phase to the adjustment phase.” Affected by an increased pileup of a bounty on sales due to the overheated sales competition in the United States, Nissan Motor Corporation lowered its operating income forecast for March 2018 to 565 billion yen, a 24% decrease from the previous year. Tagawa Joji, CFO of Nissan, said at an account settlement explanatory meeting that was held on February 9, “In response to the US market peaking out, we are optimizing dealer stocks.”
Mazda Motor Corporation sold 220,000 cars in the US market from April to December, a 5% decrease. CFO Fujimoto Tetsuya said at an account settlement explanatory meeting on February 7, “We feel a sense of crisis regarding the decrease in the number of cars sold.”
The Shift to China
In this situation, the Chinese market receives an increasing number of the cars sold in the global market. In 2009, China became the world’s largest car market, ahead of the United States. The Chinese market reached 13.64 million new cars sold, exceeding 10.42 million in the US market. The demand subsequently expanded to inland areas and local cities, following cities where high income earners live.
On January 11, 2018 the China Association of Automobile Manufacturers announced that the number of new cars sold in 2017 had hit an all-time high of 28.87 million and 9,000, a 3% increase from the previous year. A sharp increase in sales of small-sized cars was significant due to the reduction in the tax on small-sized cars that was implemented from October 2015 to December 2017. In response to the increase in demand in the Chinese market, Japanese car manufacturers are gearing up to conquer the Chinese market. They are shifting to China.
On February 5, 2018 Dongfeng Motor Co., Nissan’s joint concern with China, announced its new mid-term plan. Nissan announced that it would increase the number of cars sold annually from 1.52 million in 2017 to 2.6 million by 2022 and achieve sales of 300 billion Chinese yuan.
Seki Jun, Senior Vice President of Nissan and President of Dongfeng Motor Co., said at a media round table that was held on February 15, “The top two car manufacturers [Germany’s Volkswagen is on top and General Motors of the United States comes in at second place] have already surpassed 2 million cars sold annually. That is, the axis of competition will be 2.4 million to 2.5 million on an annual basis. We will jump from the second group and fight to grab the top two positions.”
In 2017, Toyota achieved good sales of the Camry and the Lexus in the Chinese market. From now on, Toyota will market SUVs and sell 1.4 million cars in the Chinese market in 2018, an 8.5% increase from the previous year.
Honda sold the Civic in the Chinese market in 2017, with the number of cars sold reaching 1,441,307, a 15.5% increase from the previous year. Honda produced 1.44 million cars for the Chinese market, exceeding the 1.2 million cars sold in the US market for the first time.
“The number of cars sold in the Chinese market in 2017 fell short of the US market. But considering market trends, we will surpass the US market in the near future,” said the aforementioned Kuraishi of Honda, at an account settlement explanatory meeting on February 2, revealing his expectations for the Chinese market.
Mazda sold 309,407 cars in the Chinese market in 2017, which was the highest number of sales in the car manufacturer’s history. Mazda now sells its highest number of cars not in the US market, but in the Chinese market. For its annual plans, Mazda reduced its sales goal in the US market by 10,000 and raised its sales goal in the Chinese market by 16,000.
In August 2016, Mitsubishi Motors Corporation also began manufacturing its Outlander SUV, for which demand is growing in the Chinese market, in China, and recorded a significant increase in the number of cars sold in the Chinese market. Mitsubishi sold 130,000 cars in 2017.
Iketani Koji, CFO of Mitsubishi Motors Corporation, said, “China is an important market. We will strengthen our sales in China, including inland areas. We will undertake training at dealerships.”
Given the number of cars per person in terms of population, the Chinese car market still has huge potential. It is natural that Japanese car manufacturers are becoming more dependent on the Chinese market because the number of cars sold in the US market has reached its limit.
NEV Regulations: Opportunity Knocks?
What is the key to capturing the Chinese market? The key is how to cope with the Chinese government’s environmental regulations.
The Chinese government will introduce the NEV regulations of imposing mandatory sales of new energy vehicles (NEV), such as electric vehicles (EV), plug-in hybrid electric vehicles (PHEV) and fuel cell vehicles (FCV), on manufacturers of completed cars that conduct production activities in China at a certain level in 2019.
China has serious environmental problems and has launched the policy of selling NEVs as a national strategy for measures against environmental problems. This policy also has a hidden intention. China cannot win against Japan and Western countries that get ahead in the area of gasoline vehicles and hybrid vehicles, however hard it may try. But the pace of development is almost equal in the case of EVs, which are in the middle of development competition. It is no fairy tale that local Chinese manufacturers will catch up with the other manufacturers in the world and become leaders in the area of EVs.
That is, Japanese car manufacturers need to obtain a share of EVs in the Chinese market before local Chinese manufacturers become competitive. Japanese car manufacturers must hasten to cope with NEVs, including EVs, instead of hybrid vehicles. If Japanese car manufacturers fall behind, they could lose their presence in the Chinese market.
If you look at this picture from a different perspective, you will find that the regulations for NEVs can be seen as a significant opportunity for Japanese car manufacturers. If Japanese car manufacturers launch and expand NEVs and expand their shares at a stretch, they will be able to shake off the bastions of Volkswagen and General Motors.
In terms of this, Nissan clarified a Chinese strategy ahead of other car manufacturers. Dongfeng Motor Co., Nissan’s joint concern with China, aims to achieve third position in the Chinese market by launching NEVs.
Nissan’s weapon for capturing the Chinese market is the EV technologies that it has accumulated over the course of many years. I do not need to quote Carlos Ghosn’s statement that Nissan is a leading company in the area of EVs. Nissan can be said to be the pioneer in the field of EVs.
Nissan launched the Leaf EV in 2010 ahead of other car manufacturers around the world, and it also launched the fully remodeled second-generation Leaf in the fall of 2017. The alliance between Renault, Nissan and Mitsubishi is a leading EV company that recorded global sales of a total of 540,000 EVs. They therefore have an accumulation of knowhow of essential knowledge about EVs, such as range, charging infrastructure and cost.
Dongfeng Motor Co., Nissan’s joint concern with China, has announced its policy of investing 60 billion yuan (about 1 trillion yen) by 2022 and launching EVs for half of more than forty types of new cars in the Chinese market or launching e-powered cars for which power is generated by engines and driven by motors. In addition, Dongfeng Motor Co. announced that it would electrify all models of the Infinity, a luxury car brand that is popular in China, by 2025.
Additionally, in terms of charging infrastructure, Dongfeng Motor Co. has developed a new battery station jointly with a Chinese venture company. It is a stand-up type, and a detachable battery is designed to be inserted into the slit on the side of the car’s body. The aforementioned Seki said, “It takes an average of one minute and 42 seconds to stop the car, get the battery exchanged, pay the money and drive away.”
Other Japanese car manufacturers are also focusing on electrified vehicles, including EVs.
Iketani Koji, CFO of Mitsubishi, said at an account settlement explanatory meeting on February 5, “A strategy for electrified vehicles is important for capturing the Chinese market. From now on, we will launch EVs or plug-in hybrid vehicles (PHV) especially for the Chinese market.”
Toyota is also hastening to comply with the Chinese regulations for NEVs.
Kobayashi Koji, Vice President of Toyota, said at an account settlement explanatory meeting on February 6, 2018 “We will launch an original EV in 2020. We believe that we will be able to catch up with our competitors,” and explained, “We want to grow with China. We also want to growth with North America. We will take the appropriate actions and provide answers in accordance with the environments and social policies of each country. We believe that we will be able to strive to take measures by consulting with our Chinese counterpart.”
In 2018, Honda launched the small Vezel SUV and an EV based on its brother car. Some argue that local Chinese manufacturers may increase their EV shares at a stretch. This is because EVs can easily be created if there are cells and motors. Honda R&D Co. President Matsumoto Yoshiyuki argues that this is not always the case, saying, “It is also necessary to properly manage the heat that is generated by cells. Japanese manufacturers have an accumulation of heat management technologies through hybrid vehicle development, and we see an advantage here.”
Japanese automobile manufacturers work hard to use the Chinese market, which has become the world’s largest automobile market, as the main pillar of their profits, but is there a blind spot? Is there a risk of their being trapped into incentive competitions as the competition between manufacturers grows more ferocious?
Chinese Market Cannot Be Ignored
Cells are a technical issue when mass-producing EVs. Needless to say, the stable procurement of high-quality batteries is the key to securing a surplus when mass-producing EVs. With a focus on this aspect, the Chinese government will provide ecological car subsidies only to cars equipped with batteries made by manufacturers that have acquired government accreditation in order to protect Chinese industries. This is the so-called white list.
Leading global onboard cell manufacturers, such as Samsung SDI, LG Chem and Panasonic, are struggling to acquire government accreditation. That is, in the current situation, it is necessary to procure cells from Chinese onboard cell manufacturers to sell EVs in the Chinese market.
Seki said, “As long as we do business in China, we need to obey the Chinese regulations. If we are told that if we do not use cells made by cell manufacturers that are included on the white list, we will not receive incentives, we will follow that.”
But the problem is that cells are in overwhelming short supply. I remember something that President Okuda Hiroshi of Toyota said in my interview with him in the 2000s.
“When sales in the Chinese market reach 40 million units annually, who on earth will supply the energy for them?”
At that time, Okuda commented about a supply structure for main oil, but the situation remains the same today. If electrified cars, including EVs, increase rapidly in the Chinese market, will cell supplies catch up with them? In addition, will power supplies be sufficient?
Terashi Shigeki, Vice President of Toyota, said, “If you only look at volumes, you will find that you will need 50 times as many cells as hybrid vehicles per unit.”
The fight for the Chinese automobile market has only just begun. And the fight on Chinese soil can be expected to be more complicated and ferocious than Japanese automobile manufacturers have ever experienced before.
The greatest risk is that the Chinese government controls the Chinese car market through regulations. This is a real headache for car manufacturers, including Japanese ones.
But it is no longer possible to disregard the Chinese market, which has become the largest market in the world.
Seki commented, “Now the Chinese car market is just like the jungle. Local brands are growing, and the Chinese market is no longer easy.”
It can be said that Japanese car manufacturers have no other choice but to be boldly aggressive in the Chinese market, whose future is invisible.
KATAYAMA Osamu is an economics journalist and representative of K-Office. He has published extensively, including Sumato kakumei de seicho suru Nihon keizai (Growing the Japanese Economy with the Smart Revolution), and Naze Za Puremiamu Morutsu ha uretsuzukeru noka? (Why does The Premium Malt’s beer sell so well?). Recent publications include Samsun kuraishisu (The Samsung Crisis).