It may only be three months old but 2010 is already shaping up to be a terrible year for Toyota. After being forced to recall millions of its most popular models due to faulty brakes and accelerators, the Japanese giant has lost not only millions of dollars but also, for many people, its reputation for making some of the world's most reliable cars.
In the United States, sales dropped 8.7 per cent after customers shied away from the brand. Meanwhile, Ford, one of its biggest competitors, saw its February sales grow 43 per cent on last year.
But as Toyota struggles to repair its dented image - company president Akio Toyoda visited Beijing and Washington last month to deliver apologies for the quality problems - there is one bright spot: China.
Unlike the US, its competitors have been largely unable to capitalise on the scandal here to steal some of the automaker's market share.
Supported by the rapid growth of China's middle class and government policies, including nearly US$15 billion in tax breaks and subsidies designed to encourage consumption in the wake of the financial crisis, China passed the US as the world's largest auto market for the first time last year. Car purchases increased almost 50 per cent last year, bringing the number of cars on the country's road to about 31 million - five times more than in 2005.
It is this demand that has kept Toyota going in China. The company sold 626,886 units in 2009 and, despite the global recalls - which included the RAV-4 SUV in China - sales continued to rise in January and February, said the company. Only Volkswagen sells more cars.
"Toyota's recall in the US has had little impact on our business in China," said Zeng Qinghong, general manager of Guangzhou Automobile Industry Group (GAIG), which produces Toyota in China. "Demand in the market is still very robust."
With soaring demand and a major market leader reeling, why were Toyota's competitors unable to take advantage in China?
One reason, said John Zeng, an analyst with market research firm IHS Global Insight, is that the recall scandal has largely been seen as an "American problem". Cars made for the Chinese market come from different suppliers and go through different manufacturing processes, he said, adding that the media coverage of the problems here have been less widespread than in the US. However, that could be due to the fact that, unlike in the US, there have been no reports of crashes caused by faulty RAV-4 accelerators or breaks.
"The RAV-4s were just recalled (in China) out of caution. It's not like in the US where consumers have been hurt or died because of the problems," said John Zeng.
A more important factor for Toyota's resilience in China, however, may be its domestic competition. Although expanding, Chinese carmakers such as Geely, Chery, and BYD are still seen to lack Toyota's experience, expertise and rigor. Analysts say the buyers of these cheaper cars are those customers who cannot afford to buy better.
Just 6 per cent of Chinese customers listed "quality" as the top reason for buying a domestic brand in a survey by global marketing services firm J.D. Power and Associates last year. The appeal, the poll found, was their price. Tony Liu, head of automotive business at Sinotrust, a Chinese market consultancy, estimated that Chinese brands are 30 or 40 per cent cheaper than foreign- or joint venture-made cars.
"When they got into the market, they realised it's very difficult to compete with foreign brands. Pricing is the best weapon to fight back," said John Zeng.
In the long term, if Chinese manufacturers want to compete with international companies like Toyota, whether in China or overseas, they must close the perceived quality gap, said Mei Songlin, chief analyst for J.D. Power and Associates in Shanghai. However, that means strengthening research and development, improving management and developing more sophisticated marketing techniques. In short: a wholesale corporate upgrade.
"(Chinese brands) lack experience, technology and experienced managers," said Liu. "They are new to the industry and because they are new they will make mistakes."
As late as the 1980s, China had no major consumer auto market. To attract technology and expertise, the government encouraged joint ventures with foreign carmakers. This head start, coupled with the knowledge and experience of major international carmakers, allowed these joint ventures to dominate the market.
The top three automakers in China are all joint ventures - Shanghai Volkswagen, Shanghai GM and FAW Volkswagen - and last year almost 70 per cent of all passenger vehicles sold on the mainland were joint venture cars. Even the largest manufacturer of the country's ubiquitous minivans is a joint venture between state-owned engineering company Shanghai Automotive Industry Corporation, General Motors and Wuling, a small Chinese manufacturer.
In the face of this competition, analysts say newer Chinese firms are forced to essentially trade quality for price to enter the market in the only place they can: at the bottom.
"Chinese branded cars always give me an impression of not being reliable. They have only been around for a decade, while the foreign brands have existed for a century," said Pan Yue, a Beijing-based consultant, as he justified buying a Volkswagen instead of a Chinese car.
Market expert Liu added: "In most industries, if you don't have the brand name, you don't have the technology. You start at the bottom and you build a low-end product and try to get into the market, then grow up with your product."
As a result, much of the domestic automakers' growth has been driven by sales of small, cheap sedans to first-time buyers more worried about price than reputation.
"We make mostly economical cars, so our customers are usually lower middle-class people," said Lu Wei, general manager of a Chery dealership in Beijing. This is particularly true in the country's interior, which is a major source of revenue. "One big factor is the growing consumer group in the inner provinces," said John Zeng. "When people in tier-two and tier-three markets try to find affordable cars, they are usually made by local manufacturers."
An auto industry report by global market researcher Ipsos showed car sales in West and Central China grew 33 per cent in the first half of last year compared to 2008 - 10 per cent higher than the industry average for that period.
As Chinese consumers become increasingly more sophisticated, domestic carmakers have made it clear they have no intention of being stuck at the bottom of the market forever. According to IHS Global Insight, Chery almost doubled its sales to 441,025 units last year and already distributes to more than 60 countries, while Geely sold 314,804 cars in 2009 and plans to sell a million units overseas by 2015.
BYD has seen sales grow more than 100 per cent in China for five consecutive - 445,180 units in 2009 - and will soon introduce its all-electric e6 model in the US and West European markets. Chairman Wang Chuanfu vowed in 2005 to make the company the largest Chinese brand by 2015 and the world's top carmarker by 2025.
However, critics say BYD's production process is not consistent enough to make the high quality batteries required in electric cars, and that its quality and safety standards are inadequate. Car and Driver magazine said last year in a skeptical review of BYD's new cars, including the e6, that "it would take years for any of them to be developed to the point where they would meet US crash and emissions standards, as well as quality expectations". The company exported only 2.2 per cent of its cars last year, less than 10,000 units. By comparison, in 2008 - before the recalls - Toyota sold nearly 9 million vehicles worldwide.
BYD and other domestic enterprises are simply not ready to take on Toyota, said Liu at Sinotrust. "They are over-ambitious. They do not really know how difficult it is to go overseas and start a new market and a new environment. They are not ready for it," he said. "The regulations, the environment, the market, the culture - they have to learn all of this from the beginning. And they do not have the efficient production and brand and the service network they need."
Still, such global ambitions are not unprecedented. "The challenge facing Chinese carmakers is the same challenge Japanese and Koreans had 20 years ago," said Michael Schuman, author of The Miracle: Asia's Epic Quest for Wealth. "How do you break into a market where perception of quality, safety and brand name is so fantastically important?"
Despite rapid improvements, it took Japanese and Korean automakers years to convince international consumers, especially in the US, that their products were safe and reliable, said Schuman. Toyota first entered the US market in 1957. It was not until almost 50 years later the company rivaled the "Big Three": General Motors, Chrysler and Ford.
Chinese companies may be able to grow a little faster but they will still have to be patient if they want to succeed overseas, he argued. "They will have to build trust with consumers. It's a long process and what the experience of the other Asian carmakers tells you is that there's no way around it."
However, Chinese automakers do not seem to want to wait. They have made major strides on quality and safety in recent years, said Mei at J.D. Power. In 2000, each car made by domestic Chinese companies had an average of 8.3 problems within six months of purchase, he said. Last year, that number was down to about 2.6. International carmakers only had 4.4 problems in 2000 and 1.4 today.
Liu Xiangyang, Geely's vice-president, said the company has trained almost 500 employees to supervise and solve quality problems. All vehicles must now meet Chinese quality regulator C-NCAP's four-star safety standard, while 80 per cent of vehicles must meet the five-star standard, he said.
Chinese firms are also hiring international designers and suppliers to gain the expertise the Japanese and Koreans had to acquire over decades, said John Zeng.
Chery's A3, a small hatchback, was developed by Pininfarina, an Italian company that has designed for Ferrari and Maserati. Major autoparts suppliers Visteon, once a subsidiary of Ford, and Delphi, previously affiliated with General Motors, now work with Geely. And last March, Geely paid $56 million to acquire Australian automatic transmission supplier Drivetrain Systems International.
Domestic companies are also purchasing existing foreign car brands as a shortcut to organic growth, Schuman said. Geely is in talks to acquire Volvo from Ford and, if the deal goes through, the Chinese company will start producing Volvo cars at a factory in Beijing with an annual capacity of 300,000 units. The State-owned Beijing Automotive Industry Holdings Company also bought part of General Motor's Saab brand last December. The deal includes production equipment and intellectual property rights for two older models.
Such a strategy presents its own challenges, however. In 2004, Shanghai Automotive Industry Corporation, China's largest automaker, paid $500 million for a 49-per-cent stake in Ssangyong Motors. The South Korean company went bankrupt in January.
The issue was not money or a poor business model, said Chen Qingtai, deputy director of the Development Research Center under the State Council. "We should attribute the failure to a misunderstanding of different cultures and management styles."
If a company expands too quickly, it risks undoing the progress it has already made, said Schuman. "If you jump into international markets too soon, you start with a reputation that your cars aren't very good. It's really hard to shake that reputation," he said.
Mei at J.D. Power added: "In the long term, if you want to be in the Chinese market, or if you grow to export to the US or Europe, quality is even more important. (Chinese companies) will go to US and Europe but they are not ready yet."
And, if they need any further warning of the dangers of growing too quickly, there is always the example of Toyota, said John Zeng. "If that happened to a Chinese brand, it could cause a bankruptcy."Wang Xing contributed to the story
