Employees inspect newly-produced cars at a Toyota factory in Tianjin, China

Japan automakers cut China production after protests

Toyota and Nissan are among the Japan automakers cutting back production in China following anti-Japan protests.

Production slowdowns are a normal feature of the auto industry in mature markets like the United States and Japan, where they are used to keep inventories from ballooning and avoid pressure for automakers to offer deep discounts that erode profitability.

The steps by the Japanese automakers to cut output in China are an anomaly in a market that has driven the industry's global growth for a decade and where most automakers had been adding capacity until China's economic slowdown in recent months.

That caused production to outpace sales, resulting in larger-than-normal inventory levels at many car dealers.

"For the time being, I think you're going to see Japanese automakers' sales in China down by 20 to 30 per cent," said Koji Endo, auto analyst at Advanced Research Japan.

"The last time we had protests like this in 2010, the effects only lasted about a month, but I think this time is going to be different. This is going to have a serious impact."

There were also signs the tensions were having an effect on other sectors.

Most notable was air travel, with All Nippon Airways (ANA) announcing this week that 40,000 seat-reservations were cancelled for flights between Japan and China from September to November.

Nissan, Japan's top automaker in China, said it would halt production at a joint venture in China starting tomorrow, three days earlier than planned, and extending through next week's national holiday period.

Toyota plants in Tianjin and Guangzhou will also suspend production from this week through the holiday, Tokyo-based spokeswoman Shino Yamada said, a few days earlier than planned. 

Production at factories in China may be further curtailed depending on market conditions, she said.

A person briefed on Toyota's plans said the automaker was also preparing to reduce output at factories in Tianjin and Guangzhou through November.

One plan under discussion would keep the factories on two shifts but shut down production on Mondays and Fridays, according to the person, who asked not to be identified because plans have not been finalised or announced.

In addition, Toyota has discussed reducing production of luxury Lexus models at its plant in Kyushu, southern Japan, during October because of the slower demand in China.

As a result, a senior Toyota executive in Beijing said the company probably would fall short of its goal of selling one million cars in China this year.

In 2011, Toyota with its local Chinese partners sold about 900,000 cars.

"It's very difficult to sell cars right now, but that's true with every Japanese brand. Not just us," said the executive, who spoke on condition of anonymity because he was not authorised to speak to the media.

In addition to Toyota and Nissan, Mazda has decided to halt production in China on Friday and Saturday, giving workers two extra days off as part of the national holiday production shutdown.

Suzuki said it also had stopped one of two shifts that it normally runs in China.

Anti-Japan sentiment in China escalated this month after Japan said it would buy a group of disputed island in the East China Sea, called Diaoyu in China and Senkaku in Japan, from a private owner.

It sparked the latest flare-up in tensions that has smouldered since the end of World War Two.

In protests across China, demonstrators vandalised properties of Japanese companies, including a Toyota outlet in the eastern city of Qingdao that was set ablaze.

A senior Beijing-based Toyota sales executive said the long-term impact of the dispute on Japanese brands was uncertain.

"Unlike before, when sales recovered fairly quickly, things seem very different this time," he said.

"But it's still very difficult to gauge what kind of long-term fallout we are going to have."

The executive, involved with sales and marketing of Lexus, said all Lexus outlets in China had reopened and were operating normally.

"But customers are expressing fears about owning Japanese-branded cars and that worries me a bit," he said.

The latest auto production adjustments come on top of general cutbacks Japanese auto makers had been making prior to the protests.

Global automakers in general have been coping with slower-than-anticipated auto sales in China this year.

China's economy grew at its slowest pace in more than three years in the second quarter.

A factory survey in August showed the manufacturing sector contracted at its sharpest pace in nine months.

In the auto sector, Japanese automakers had a roughly 19 per cent combined share of China's passenger car market in August before the protests.

That was down from 20 per cent in July, according to China Association of Automobile Manufacturers.

Bank of America Merrill Lynch analyst Bin Wang said his checks with Japanese auto dealers in Guangdong province since the protests showed that sales were down on average by 60 per cent, adding that the slowdown had boosted sales for German, American and Korean brands.

Endo, at Advanced Research Japan, said he expected Japanese automakers would continue to adjust production if sales remained weak and could take measures such as cutting shifts or slowing line speeds to keep inventory from building.

As a result, he said, parts suppliers in both China and Japan would have to cut output as well.

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