Will This Be the Fall of Japanese Automakers?

Toyota (NYSE:TM) may cut its group production plan for the 2012 calendar year by around 200,000 vehicles in response to a drop in sales in China due to a territorial row over a group of islands in the East China Sea, according to the Mid-Japan Economist newspaper.

The proposed cut would reduce Toyota’s 2012 production by about 2 percent. The original target of 10.05 million, which includes output at Daihatsu Motor and Hino Motor, would make Toyota the first automaker to produce more than 10 million vehicles in a single year.

The Mid-Japan Economist, a newspaper based in central Japan, where Toyota’s headquarters are located, did not cite sources in its report. However, according to China Daily, a spokesman for a Chinese subsidiary of Toyota said that factories in China would adjust production amid falling demand.

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According to The Asahi Shimbun, one of Japan’s five national newspapers, Toyota is planning to cut production at its main Tianjin plant by close to 20 percent in the last two months of the year. The plant accounts for about 60 percent of Toyota’s total production in China. No indication has been given by Toyota officials about production levels at its Guangzhou plant, its second largest in China

Growing tensions between the two countries have dampened sales in China, with some stores receiving fewer customers and subsequently fewer orders, said the spokesman for Toyota Motor CHINA Investment Co. Ltd. But factories in China, all established through joint ventures with Chinese partners, will not close down.

“Because every Toyota factory in China is a joint venture, any decision regarding their operation is the result of negotiations between all partners,” the spokesman said.

Relations between Japan and China took a turn for the worse last month when a row over disputed islands erupted in violent anti-Japanese protests across China. At issue was Japan’s announced intention to purchase part of the Senkaku Islands, known as the Diaoyu Islands in China. Beijing has repeatedly maintained that the islands are part of China’s inherent territory.

Toyota isn’t the only automaker taking a hit — assembly lines at all Japanese automakers operating in China are slowing drastically amid the fallout from the dispute. Honda (NYSE:HMC), Nissan, and Mazda have all reported their sales down by over a third. And the prospects for improvement seem grim, at least for the next several months.

But with no end to the dispute in sight, there are concerns that reduced production could be long term. Even before anti-Japanese protests erupted last month, the market share of Japanese automakers in China had been falling, in part due to increasing competition from American and European automakers like General Motors (NYSE:GM) and Volkswagen, both of which have reported an expanded share of the Chinese market, up to 15 percent each. And Ford (NYSE:F), though a late entrant into the very crowded market, has made big gains in China in recent months.

Ford, General Motors, and other non-Japanese automakers are only being given an extra boost by the struggles of some of their key rivals in China. Their successes lie largely in their business models, which have positioned them well to step in and fill the space left by Japanese automakers.

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