Markets (Page 146)

If there’s any surprise over the fact that China dethroned Japan in 2023 to become the world’s top automaker it relates to how fast that happened.

Overall, auto exports jumped 58% last year from the prior one, topping 4.91 million units, says the China Association of Automobile Manufacturers. Along with deploying its increasing strength in electric vehicles, China Inc managed to tap Russia’s sanctions-hit market with unexpected aplomb. Detroit is not thrilled, of course.

But the truly tantalizing question is how all this goes over in Japan, where, 12 years on, officials are still struggling to get their heads around China’s surpassing Japan in gross domestic product terms. That GDP changing of the guard happened, depending on your preferred data set, sometime between 2010 and 2012.

Since then, Japanese governments in succession have convinced themselves that GDP isn’t the key metric: It’s per capita income, in which Japan leads what’s now Asia’s biggest economy by nearly three times. Yet the blow to Japan’s collective psyche from losing the GDP crown was a devastating one.

Arguably, shock over trailing China helped Shinzo Abe retake the premiership in late 2012. Abe’s economic revival scheme wasn’t pitched as a beat-China strategy – but that’s precisely what his strategy to loosen labor markets, cut red tape, rekindle innovation, catalyze a startup boom and revive Tokyo’s role as Asia’s indispensable financial hub amounted to.

Years of Tokyo complacency since then have been good to China, enabling Xi Jinping’s economy to fill the void created by deflation-racked Japan. The 12 years since Abe’s Liberal Democratic Party returned to power have been a lost period for major economic retooling.

Efforts to produce more tech “unicorns,” for example, went particularly awry. Today, Japan is trailing Indonesia in the race to generate $1 billion-plus valuation startups.

The same muddle can be seen in Japan’s almost linear obsession with hybrid vehicles as the EV market shifts into overdrive.

True, officials at Toyota Motor and Japanese peers are realizing their mistakes in having dismissed the EV future that’s fast coming into view. Toyota is playing catchup with new models. Japan’s top automaker is tripling EV output as it chases China’s BYD, which recently surpassed Elon Musk’s Tesla.

The question, of course, is whether it may already be too late as Tesla, Detroit, Germany and China beat Toyota to the market. “No one,” says Michael Dunne, CEO of auto industry advisory ZoZoGo, “can match BYD on price. Period. Boardrooms in America, Europe, Korea and Japan are in a state of shock.”

Toyota’s blunder is reminiscent of Japan Inc missteps of the past. It’s worth nothing that hybrid transport — including the Prius — was always a compromise, not a technological destination. But because Toyota pioneered it, the company refused to admit that something better had come along.

A similar lost opportunity played out in the 1980s during the Betamax versus VHS video competition. Sony argued that its Betamax technology was superior; the global market favored the more user-friendly VHS format. The years that it took Tokyo to accept defeat set Japan back.

Will China’s stunning success in an industry that Japan long dominated in the Asia region and beyond catalyze officials in Tokyo and the greater Nagoya region?

“For the first time, I came face to face with the competitiveness of Chinese components,” Toyota EV Chief Takero Kato said in September. “After seeing manufacturing processes not used in Japan,” Kato says he thought, “We’re in trouble!”

China Inc is, for example, making big inroads into once reliably Japanese markets such as Thailand. Already, EV models account for 10% of the Thai market. The so-called “Detroit of Asia” is now China’s number 2 destination for Chinese EVs. Ditto for plug-in hybrid vehicles.

Perhaps sensing the risks, Japanese Prime Minister Fumio Kishida last month met with Thai Prime Minister Srettha Thavisin. In Tokyo, Kishida proposed a dialogue framework to ensure that Thailand’s auto industry will strengthen its competitive advantage in EVs and the range of next-generation automobiles. More importantly, that Thailand will remain in the Japan camp.

Also last month, Srettha, a businessman-turned-politician, announced that four Japanese automakers will invest 150 billion baht ($4.3 billion) in EVs in Thailand over the next five years. They include Toyota, Honda Motor, Isuzu Motors and Mitsubishi Motors.

At that time Srettha’s spokesman said, “The prime minister has stressed that Japanese carmakers can play an important role in promoting EV production in Thailand.”

In Japan, Kishida’s government is offering decade-long tax incentives to boost production in EVs and high-quality chips to lure more foreign direct investment. The tax breaks will be part of Tokyo’s fiscal 2024 tax reform framework. They will include 400,000 yen ($2,755) for battery-powered EVs and hydrogen fuel-cell cars.

Tesla, unlike many global peers, won’t be roadkill as China grabs more market share, ZoZoGo’s Dunne argues. Musk’s wares benefit from a first-mover advantage and also the goodwill that comes from Tesla’s choice of the Shanghai area as the site of its first production facility outside the US.

“What does this mean for global automakers not named Tesla?” Dunne asks. “BYD will continue to win large chunks of market share from legacy automakers worldwide.”

What’s more, Dunne says, “China’s market, the world’s largest, no longer needs or wants foreign makers. Jeep, Suzuki and Mitsubishi are already gone. VW, Ford, Hyundai, Nissan, and others will depart within five years. GM, once the poster child for successful US business in China, will likely be gone, too. GM sales in China are already down by more than 50% from their 2017 peak.”

Challenges abound, of course,and they include building greater trust among mainland consumers.

“China is the global leader in the transition to electric vehicles, but even its carmakers haven’t been able to resolve consumers’ ‘range anxiety,’” says analyst Ernan Cui at Gavekal Research. She argues that households are increasingly demanding hybrid vehicles that burn fossil fuels as backup, meaning the transition to a fully electric fleet will be slower than the most optimistic forecasts.

Nor is the Chinese market devoid of risks as 2024 opens. “Investors remain cautious as China’s auto market has had a volatile start to the year as competition and macro uncertainties persist,” says analyst Tim Hsiao at Morgan Stanley.

Chinese EV demand is seen cooling as the nation’s post-Covid rebound continues to disappoint. As consumer sentiment and demand stagnate, automakers may find it becoming harder and harder to hit this year’s sales targets. In the first week of January, mainland EVs came in short of expectations, falling 20% on the month, according to Citigroup analyst Jeff Chung.

That means that even BYD “will need to refresh its model lineup or have more competitive model launches given the challenging sector competition into 2024,” notes analyst Shelley Wang at Natixis Asia.

The Warren Buffett-backed company also risks a continued price war with Tesla as buyers “continue to expect ever cheaper cars.” When the price-cutting has to stop, that “may keep consumers from purchasing.”

Yet, some are far more optimistic about the performance of China’s “new economy” sectors, which drive 12% of gross domestic product, helping growth top 5%. “Together with strong performance across new economy sectors, such as EVs and high value-added manufacturing, this should help to support a broadening in China’s economic recovery,” says economist Carlos Casanova at Union Bancaire Privée.

Casanova notes that “more easing is still required to stabilize activity. Fiscal policy stimulus will take over from monetary policy stimulus in 2024, although both will have to be deployed in 2024.”

Last year, Casanova notes, the government delivered targeted support measures, including approximately 2% of GDP in additional fiscal spending for 2024. The People’s Bank of China also injected liquidity via open market operations. A rate cut is less likely, although there is ample room to reduce reserve requirement ratios this year.

Clearly, in any event, China is increasingly committed to developing its green economy. “This policy promotion has already crowded investment into green sectors such as solar, batteries, and EVs,” says Herbert Crowther, analyst at Eurasia Group. “Green loans expanded by 36.8% in 2023, with new market entrants ranging from traditional manufacturers and local governments to fossil energy companies and large state-owned enterprises.”

China’s EV industry growth fueled a 20% expansion in private auto manufacturer fixed asset investment in the first three quarters of the year, Crowther says.

The auto sector outperformed national export and industrial value-added growth in 2023. This surge, Crowther says, was largely powered by EVs –  which accounted for 42% of Chinese auto exports over the past year (up from 30% in 2021) and 27% of auto production volume (up from 12% in 2021). Private sector manufacturing investment increased overall by 9.1%, despite the 0.3% contraction in overall private spending.

As China raises its economic and innovative game, the interesting question is what alarm bells – and responses – are triggered in Japan. Competition is always a positive dynamic between Asia’s two biggest economies. In the EV space, Japan is about to get more than it ever bargained for.

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