Japanese Automakers Recovering From China Turbulence

Japan’s top automakers are regaining some of the market share they lost during the spat between Japan and China over the sovereignty of an uninhabited chain of islands in the East China Sea.

But Fitch Ratings says it expects heightened competition from other manufacturers to slow the momentum for the rest of the year.

The ratings agency says in a new report that while it expects the popularity of current and new models to support solid growth in sales volumes for Japanese manufacturers, fierce competition will come from market leaders such as Volkswagen and General Motors, as well as from Ford and Hyundai.

The major European, South Korean and U.S. automakers continue to expand their presence in China to capitalize on strong long-term growth prospects, Fitch says.

China's car market grew 11.2% year-on-year to 9.63 million units in the first half of 2014, according to the China Association of Automobile Manufacturers. Nissan sales climbed 14% to outpace the market and raise its market share to about 6%, while Toyota and Honda maintained market shares of about 5% and 4%, respectively.

Fitch is expecting the double-digit growth in China's car market to moderate in the second half to the mid- to high-single digits, as the country’s economic expansion slows.

“Regulatory factors could further temper market growth, such as more stringent environmental legislation, while government policies to promote the purchase of domestic brands could curb some demand for foreign marques,” the report says. “Nevertheless, we expect passenger-car demand in China to remain solid over the medium term.”

The contested islands are called the Senkaku Islands by the Japanese, while the Chinese know them as the Diaoyu Islands. Their administrative control was transferred from the U.S. to Japan in 1971.

Since the discovery of potential undersea oil reserves in the area, Japan’s sovereignty is disputed by both China and Taiwan. Chinese claim the discovery and control of the islands from the 14th century, while Japan controlled them from 1895 until its surrender at the end of World War II.

Tensions between the two countries rose at the end of 2012, when the Japanese government formalized its control over three of the islands by purchasing them from the private owners for ¥2.05 billion ($20.1 million).

China's Foreign Ministry reacted with a warning it would not sit back and watch its territorial sovereignty violated.

Toyota, Nissan and Honda saw vehicle sales in China plummet by double digits as violent demonstrations against Japanese automakers and dealerships forced a halt in production.

“The unresolved, underlying political issues mean that the risk remains of a repeat of the 2012 events – and subsequent loss of sales,” Fitch says.

The Chinese government’s Xinhua news agency cites data from the automotive news website auto.gasgoo.com as showing Japanese brands sold about 1.46 million cars in China the first half of this year, up 15.5% year-on-year.

This gave them a combined market share of 16.5%, a slight uptick from 16.4% a year ago, but well short of the more than 20% level before the 2012 islands dispute.