TOKYO -- Japanese automakers are rethinking their strategies in China and Thailand after double-digit sales declines there in the April-June period, with consumers in those key markets and beyond increasingly shifting to electric vehicles.
That comes at a time when investors are paying close attention to the performance of these high-profile companies as a recent strengthening in the yen threatens to eat up their exchange-rate gains and pressure profits.
Major Japanese carmakers such as Toyota Motor and Honda Motor expanded their revenues in Asia during the quarter that ended in June, helped by a tailwind from the yen's weakness over the period.
Toyota's revenue in the region hit 2.2 trillion yen ($15 billion), up 14% from the same time last year, while its operating income increased 32% to 245 billion yen. Honda's revenue in Asia came in at 990 billion yen, up 4.4%, although sales of four-wheeler cars dropped 23% to 264,000 units.
While sales trends varied from market to market, there were especially clear signs of a slump in China and Thailand.
Honda reported on Wednesday that it sold 209,000 cars in China in the three months to June, down 32% from the previous year. In light of that, the company is now aiming to sell 3.9 million cars there this fiscal year -- 220,000 fewer than previously forecast.
"The market for internal combustion engine cars is decreasing while that of 'new energy vehicles' is increasing at an unexpected pace," Honda Chief Financial Officer Eiji Fujimura said in a news conference, using the term in China that includes EVs, plug-in hybrids and fuel cell vehicles. "The price war also makes business very difficult."
Japanese brands' share of sales in China was 12.2% in the first half of 2024, while local brands secured 62%, according to Tokyo-based research firm MarkLines. The Japanese portion was well down from 21.3% for the whole of 2019. Among the top 10 new car models sold in June in China, five were from China's BYD, with Nissan Motor being the only Japanese brand featuring -- in sixth place.
"Demand for internal combustion engine cars remains high ... but we cannot be optimistic," Nissan President Makoto Uchida told a news conference in July. The company made 169,000 vehicles in China during the three months to June, down 17% from the same period last year. In June, it shut down a plant that accounted for 8% of its production capacity in the country.
"We need our locally developed new energy vehicles to contribute to our growth," Uchida said, referring to four concept models Nissan showcased at an auto show in Beijing in April.
Toyota's new car sales in China for the April-June period, including the luxury Lexus brand, dropped 18% versus last year to 411,000 vehicles. "The speed of the expansion of new energy vehicles is unexpected," said Masahiro Yamamoto, Toyota's accounting group chief officer. "To endure this period [of rapid change], we must spend substantially on promoting sales and supporting dealers."
Masatoshi Nishimoto, who leads research and analysis of Japanese automakers' production and development strategies at S&P Global Mobility, said Chinese brands are running ahead in their home market as they can make low-cost EVs using locally produced batteries, meet Chinese consumers' preference for highly digitized cars, and launch new models quickly.
"Japanese automakers aren't necessarily inferior to their Chinese counterparts, but they are disadvantaged," said Nishimoto. Adjusting production capacity and strengthening cooperation with local partners would help cut development costs in China, he added.
Companies can then spend any surplus funds in other key markets like the U.S. and India, where geopolitical tensions hinder Chinese automakers from entering and give Japanese brands the upper hand, Nishimoto said.
Chinese car companies are also challenging Japanese automakers in Thailand, where the electric vehicle market is growing and Chinese EVs are eating up market share with the help of subsidies from the Thai government.
Among the 10 major market players in Thailand, Toyota held the top share at 38% in the six months to June but sold 15% fewer cars than the same period last year, according to MarkLines. Sales by Honda, Nissan and four other Japanese brands also declined. Sales only improved at China's BYD, accelerating 32% from the first half of 2023.
Honda announced in July that it would consolidate its two production bases in Thailand into one by 2025. Suzuki Motor also said in June that it would stop making cars in the country.
Such moves are understandable as Japanese companies do not produce the small EVs that are popular in Thailand, according to Nishimoto. "Japanese automakers will likely be waiting to see for a year or two more on whether the recent Thai EV market growth will sustain, and in the meantime Chinese brands will likely stay strong."
Streamlining operations is becoming more important as the yen's surge over the past week threatens transaction gains. A weaker-than-expected yen generally boosts Japanese automakers' financial performance as their overseas profit made in foreign currencies becomes larger when converted into yen.
Investors were forced to discard hopes that a weak yen would continue to boost automaker profits.
"Japanese automakers' earnings for this quarter were helped a lot by the weak yen, but that won't be the case from the next quarter onwards," said Koji Endo, managing director at SBI Securities. "The focus will then be on whether they can offset that loss by succeeding in markets like the U.S. and India."