Toyota in China: Full Speed Ahead
Toyota (TM) might be closing in on General Motors (NYSE: GM – news) (GM) as the world’s largest carmaker, but in China the Japanese company has
plenty of catching up to do. Despite exporting cars to the mainland since the 1960s, Toyota’s market share is just 3.5% in China, compared to 13% in the U.S. and more than 40% at home in Japan. Market leader GM sold more than 650,000 vehicles in China last year, while second-placed Volkswagen (Xetra: 766400 – news) , with sales of over 500,000, is also way ahead of Toyota’s 179,000 units in 2005.
But don’t expect Toyota to be lagging behind the pack for too long. Just as the auto maker has grown rapidly in the U.S. over the last decade, it’s now gearing up for rapid expansion in China. In December, Toyota President Katsuaki Watanabe outlined plans to ramp up sales 60% during 2006, to 290,000. And ominously for rivals, by 2010, the company aims to triple its current share in China to 10% of the fast-growing market [see BW Online, 12/21/05, “Toyota: King of the Car World in ’06?”].
To meet those stiff targets, Toyota is unleashing a host of new vehicles on the mainland. What’s more, it’s showing it isn’t afraid to build its newest models in China through partnerships with First Auto Works and Guangzhou Auto. On Dec. 15, Toyota and FAW held a ceremony to herald local production of the Prius, which sells for about $36,000 and will be China’s first hybrid.
CUTTHROAT COMPETITION.
Leading Toyota’s rapid expansion in China is Yoshimi Inaba, who splits his time equally between Tokyo, Toyota City, and China. Inaba had only ever been to China once when he accepted the post last June, but brings immense know-how accumulated during various management roles at Toyota, including two spells in the 1990s at Toyota Motor Sales in the U.S., becoming president in 1999.
Inaba will need to draw on all his experience to make Toyota tick in China. Cutthroat competition has triggered a 28% fall since 2000 in the price for a compact on the mainland, and profit margins are falling. Most Chinese car buyers, meanwhile, might be new to car buying, but there are no easy sales [see BW Online, 3/9/06, “A Billion Tough Sells”].
On Mar. 7 in Toyko, Inaba addressed Toyota’s China plans with BusinessWeek Tokyo correspondent Ian Rowley. Edited excerpts of their conversation follow:
Toyota plans to grow 60% in China this year. That sounds pretty aggressive. Is it?
At this stage of the development, percentage increases don’t have so much meaning. We’re starting up a new factory in Guangzhou with a different partner [Guangzhou Automotive]. A whole new factory will be added, hopefully increasing sales by about 50,000 to 60,000 units this year.
What’s the impact of working with two partners?
With two partners — the other is First Auto Works — we have to have a totally separate sales networks. That’s two different channels and two different franchises under the name Toyota. Our guys are working to set up a whole new sales network, and have already appointed 100 dealers [for the GA channel]. For FAW, we already have about 220 dealers in operation already. On top of that, we have Lexus, which is 100% our own operation.
How different is selling cars in China compared with other countries?
The first thing I looked at [when I took charge of China] was the pay scheme at the dealerships. This is very similar to the United States. It’s predominantly commission-based sales, while the fixed salary is very small. That is very different from Japan or even Europe, and dictates the whole dealer network. We can apply many of the things we did in the U.S. to China.
The other thing is that the dealers are much younger and are mainly in the 30s and 40s. Some of the new powerful entrepreneurs in automobile retail are quite young, impressive, and have pretty much the same mentality as U.S. dealers. The whole strategy — how to set up a network in China — can be learned from our experience in the U.S. The dynamics of retail are quite similar. Japan is very different.
But is it difficult to find good people?
Actually, it’s not. There are always 10 to 20 applications, and many of those are from multifranchise retailers already operating. Many of them started as brokers, importing and distributing. Others started as used-car traders.
What about Chinese consumers? How do they compare with other markets?
Many of them, 85% I’d estimate, are new, first-time buyers, whether they’re young or old. That’s quite different and probably the biggest difference I can see between China and other countries. The other thing is the element of status or expression or lifestyle shown in the cars people buy. You get that everywhere, but the sense of pride or showing off is still very, very strong in China. There’s an element of emotion in China that’s stronger than in other countries.
Will this continue?
I think so. But the Chinese market is changing so fast. Price will become increasingly important. My theory is that you still have to have a good emotional reason to buy a cheaper car or even an inexpensive car. It’s always a question of the affordability vs. the emotions.
What about Toyota’s brand image?
Well, we’ve been exporting to China — officially or unofficially — since the 1960s and, to my surprise, the Toyota brand is recognized. We should be very careful not to damage that image.
Is it strong relative to other Western auto makers?
Yes, and among Japanese auto makers as well. In China, Toyota is a very well-known brand.
Given that most buyers in China are first-time buyers, do you market differently?
I would not say that there’s a very big difference in terms of our approach to customers. But one thing is that China is a very young market relative to the U.S. or Japan, so you have to tune your marketing approach to a younger generation of people. We also try to promote more customer test-driving experiences — it’s more about personal experiences rather than just image.
Is anti-Japanese hostility in China a problem?
We’re very conscious of this, but it’s not actually [a big problem] on the retail scene. As long as you offer good products, Chinese [will buy] Japanese products. The only area where we might [suffer] a little bit is when it comes to city government or state government purchases. They’d rather choose other brands than Japanese, but that’s a very minor part of our business. Nevertheless, we’re very careful about what we say and how we say it in terms of PR and advertising. We have to be 100% sure we don’t stimulate any anti-Japanese sentiment.
How about the luxury sector? Can the Lexus do well in China?
There’s tremendous potential for the Lexus. The rich [in China] are very rich and often younger guys. There’s a lot of room for us to grow in the luxury segment. China is the only country where we’re offering a product lineup as big as in the United States. We’re offering everything that’s available.
But is Lexus brand recognition a problem?
Recognition with the wider public is very low, but our targets are the [kind of] people who travel to the United States, and their recognition level is already quite high. [It’s] not to the same extent as Mercedes and BMW (Xetra: 519000 – news) , but I think Chinese are now really looking at the U.S. quite a bit, so knowledge of the Lexus is quite common.
Are you still targeting 1 million cars by 2010?
That is a very visionary target, based on the assumption that the market would reach 10 million and that Toyota would take a 10% share. One million is something we can aim for, but maybe the 10 million figure was too aggressive. China has healthy growth — 10%-plus growth for the total market. But [10% growth won’t be enough for] 10 million by 2010. [It will] probably be 8 million or so.
Also, in China, about 50% of the market is very cheap, old-fashioned vehicles. There’s no way we can compete there, so really we’d need to get 20% [to achieve our aim]. Whether we can do that in a short time, I doubt it. But it is still a good vision.
How will the Chinese market develop?
There will be changes in the fundamental structure of the market. The Chinese government will reshape their tax scheme, and that will change the demand structure quite a bit. The trend is going towards smaller, fuel-efficient cars. No segment will shrink, but there is potential for a fast-growing small-car segment.
At the same time, I think the Chinese government will institute emissions and safety controls, and many of the old-fashioned [car producers] will have to upgrade their technology, and prices will go up. Today, the best-selling category of cars in China is [priced] around $6,000 to $8,000. We will have to come down [in price], and they will have to come up. But there will be a shift in mix towards the lower end, that’s for sure.
Who will be the biggest rivals for Toyota in China? Will it be local players?
China is a sizeable auto market, so it can have several local players. It seems to me that the pure, privately [funded manufacturers] like Geely or Chery are the ones to watch, and Hyundai [of Korea]. [The challenge] will be both international and local.
Are you concerned about profitability in China?
One thing in China is that there are no price increases for the near future — it’s always downwards. Everyone looks at China as a growing market, so they prepare more capacity. That means there’s always some overcapacity somewhere and pressure on prices. China used to be a very profitable market for everybody, but now it’s becoming like any other market.
But you’re confident Toyota can succeed in China?
We’re a minor player in the China market, with a 3.5% share, but we’re one of the few manufacturers where demand exceeds supply. Even though we see big potential for growth, we will make sure we’re not in a position of overcapacity. That will be a very key element. And as long as you retain the quality, treat dealers as partners, and avoid oversupply, the results will come. The race for the Chinese market is just around the first corner.