Toyota’s Premium Pricing Power Evaporates in China (Update1)
March 16, 2010, 8:57 PM EDT(Adds share price in ninth paragraph.)
By Makiko Kitamura and Yuki Hagiwara
March 17 (Bloomberg) -- Drivers in China are no longer in a hurry to own Toyota Motor Corp.’s cars.
Neil Hu, a sales manager at a Toyota dealership in Beijing, said he has stopped charging a 5,000 yuan ($732) premium to customers who want to skip the waiting list for RAV4 sport- utility vehicles. He took the initiative after the Japanese carmaker recalled 75,552 of the SUVs in China last month to fix gas pedals that may stick.
“I heard the situation in the U.S. is pretty bad for Toyota,” Hu said. “The recall has impacted us as well.”
Toyota, which grew more slowly than competitors in China in 2009, will likely lose more market share and see a decline in local profit margin this year, analysts say. The carmaker has relied on a reputation for quality and safety to sell high margin, mid- to large-size models even as the world’s biggest auto market shifts to cheaper, smaller cars, encouraged by government incentives.
With Toyota’s brand damaged by global recalls of millions of vehicles, profit margins for its SUVs and Camry and Crown sedans may shrink, said Ashvin Chotai, London-based managing director of Intelligence Automotive Asia Ltd., an industry consultant.
“With this recall saga, Toyota’s premium pricing power in China is gone,” Chotai said. “Toyota’s cars don’t have enough good value for money.”
Akio Toyoda Apology
Toyota has lost $24.5 billion yen in market capitalization this year as it recalled over 8 million cars globally to fix defects linked to unintended acceleration. The company faces at least 118 class actions in the U.S. and at least 36 individual lawsuits claiming deaths and injuries caused by sudden acceleration of Toyota or Lexus vehicles.
President Akio Toyoda flew directly to Beijing on March 2 to apologize for the vehicle defects, after attending U.S. Congressional hearings about the recalls in Washington. He skipped Europe’s Geneva auto show, underscoring the growing importance of the Chinese market.
Toyota rose for a fifth straight day in Tokyo, advancing 0.9 percent to 3,580 yen as of 9:44 a.m. local time. The carmaker’s shares have fallen 7.7 percent this year.
The company’s February China sales rose 30 percent to 45,400 vehicles, underperforming the overall passenger-car market’s 55 percent surge.
Smallest Gain
In 2009, Toyota’s local sales rose 20 percent, the smallest gain among the top 15 brands in China, according to Fourin Inc., a Nagoya, Japan-based auto industry researcher.
Sales at BYD Co., the Chinese carmaker backed by Warren Buffett, surged 162 percent, led by its F3 compact car, the nation’s best-selling model. Hyundai Motor Co., South Korea’s biggest automaker, increased sales 94 percent.
Carmakers in China benefited from a government program that cut the sales tax on cars with engines of 1.6 liters or smaller to 5 percent from 10 percent. The government said Dec. 10 it would raise the rate to 7.5 percent.
While Toyota’s Yaris, Corolla, Vios and Prius models qualify for the lowered tax on smaller cars, Chinese automakers sell competing models for less than half of Toyota’s price, said Seiki Shu, Fourin’s chief of China research.
Even as the tax incentives for small cars were implemented last year, Toyota began China production of the RAV4 and Highlander SUVs.
“All overseas carmakers will lose market share to the Chinese, but Toyota will continue to lag its foreign competitors,” said Koji Endo, managing director at Advanced Research Japan in Tokyo.
Market Growth Slowing
Overall market growth is slowing. Passenger-car sales rose 55 percent in February after more than doubling in January. Toyota expects its sales growth in China to slow to 13 percent this year.
“We are doing our best to meet our sales target,” said Toyota spokeswoman Ririko Takeuchi. She declined to disclose plans for upcoming new models.
“If you’re not strong in the 1.6 liter and below segment, it’s hard to expand in the inland areas” of China, Toyota’s Executive Vice President Yukitoshi Funo said in December. “I’m not happy with our weak positioning there.”
Toyota’s profit margins in China may narrow as the carmaker offers incentives in response to recalls and increased competition. Toyota introduced zero-percent financing for the Crown and Camry sedans from this month. Toyota’s joint venture with Guangzhou Automobile Group Co. in January also started offering to waive 2.5 percent in taxes for Yaris buyers.
‘Competition Remains Fierce’
“Competition remains fierce,” Intelligence Automotive’s Chotai said. “It’s always been a delicate balance between volume and margin.”
While Toyota is developing a new low-cost compact model for the Chinese market, it may become cautious about buying cheaper parts from local suppliers as the global recall casts a spotlight on its quality, Fourin’s Shu said.
“Toyota needs to decide whether it should continue prioritizing profit or take a risk with its low-cost project to expand market share,” Shu said.
--With assistance from Tian Ying in Beijing and Seonjin Cha in Seoul. Editors: Ian Rowley, Terje Langeland, Kae Inoue
To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net
To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net
