China’s Collapsing Economy Adds To Headwinds For Japanese Automakers

By Momoka Yokoyama, Bloomberg Markets Live reporter and strategist

Shares of Japanese automakers are finding no respite as China’s deepening economic woes damp sentiment already weighed down by concerns over a US slowdown and a rebound in the yen.

The three biggest in Japan — Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. — slashed production in China as they lose market share to local manufacturers of electric vehicles and a slumping housing market weighs on domestic consumption. The companies relied on the world’s largest automobile market for more than 16% of their sales in July.

Automakers worldwide are seeing sales slump in China amid a sluggish economy and concerns the nation’s producers will pose a competitive threat to incumbent names. A slight improvement in China’s consumption during a major holiday this week from its pre-pandemic level did little to lift sentiment.

“China’s weak domestic demand will have a global impact, and that will be quite a terrible story for Japan too,” said Tetsuo Seshimo a portfolio manager at Saison Asset Management in Tokyo.

Automakers are trying to adapt to the new landscape. Honda has cut jobs and paused production at plants in China amid an effort to trim inventories and work on a broader shift in strategy. Nissan said in June that it ceased production at a plant in Changzhou. That was preceded by Mitsubishi Motors Corp.’s move last year to suspend local operations as car sales slumped and China shifted to electric vehicles.

The effort may be too little, too late. Japan’s automobile-related shares are down 17% this quarter, the second-worst performer of the Topix’s 33 industry groups. Their index is headed for a sixth month of declines after Japan’s auto exports to China plunged almost 31% in August from a year earlier.

But growing optimism that the US will avoid a recession may help stem future losses after the Federal Reserve cut interest rates by 50 basis points in a push to preserve the strength of the world’s largest economy.  

An overwhelming majority in a survey of Bloomberg Terminal subscribers expect a soft landing for the US economy, with 75% forecasting that it will avoid a technical recession by the end of next year.

Japan’s three largest automaker get at least 39% of their revenue from North America, making it their biggest overseas market, according to data compiled by Bloomberg.  

However, an economic slump in China isn’t the only concern for automakers, said Saison Asset’s Seshimo. China’s growing auto industry may gradually take market share away from Japan’s carmakers, causing them to suffer the same fate as the nation’s appliance makers, he said.

Chinese automaker BYD Co. already has 40% of total EV volume in Thailand compared with Japanese brands at under 1%, according to Bloomberg Intelligence analysts Steve Man and Joanna Chen.

“Chinese companies are likely to go on offense with a pricing war abroad, potentially intensifying competition with the Japanese names,” said Mamoru Shimode, chief strategist at Resona Asset Management.