Takeo Aso and Atsushi Horikawa
The territorial dispute between China and Japan is clouding the outlook for Japanese automakers. But we think that bilateral business pragmatism will eventually trump the current political tensions.
Since September, regional tensions have mounted after the Japanese government purchased two disputed islands in the East China Sea from private owners and nationalized the territories. Street protests erupted in China and some Japanese nationals were attacked. Investors have grown increasingly anxious about the potential impact of this environment on Japanese companies with significant business in China. Shares of automakers have plunged in particular since the crisis began—as car brands have been especially prone to nationalistic abuse.
These fears are understandable. Our research shows that some major Japanese automakers generate more than a quarter of their earnings from joint ventures with Chinese partners. Sharp and continuing sales declines in China have fueled investors’ fears that the public opinion backlash might inflict a painful cost on these Japanese companies, as they seek to capitalize on the long-term growth of the Chinese auto market (Display 1).
We’re not so sure that the alarmists are right. Both the Chinese government and auto industry have very good reasons to cool things down.
China’s government knows how valuable it is to cement ties with Japanese companies. Deterring Japanese investments into China would be counterproductive, especially in the auto industry. Chinese companies have been importing Japanese manufacturing know-how and R&D capabilities, which have supported the rapid development of the industry. An effective technology transfer will be essential to their continued success.
Meanwhile, Japanese companies will probably do whatever it takes to keep businesses on track in China. For example, Nissan recently said it would cover the costs of damage to its cars from the riots. This reminds us how Hyundai tried to address American anxiety over job security in 2009, which was affecting new car sales at the time. The Korean carmaker offered insurance that would cover the car-finance liability for any car purchased by American drivers who lost their jobs. This is smart public relations, and it shows that there are creative ways for companies to defuse negative sentiment at relatively low cost.
Of course, in the short term, much will depend on the Chinese government, which controls the streets and can turn the protests on and off as it pleases. In the longer term, for the vast majority of Chinese car buyers, practical considerations will probably outweigh nationalist loyalties, especially if carmakers provide intelligent incentives. Similarly, we think it’s just a matter of time before China’s government acts in its best business interests by promoting cooperation. In this context, we think there’s a good chance that the current turmoil will be short-lived, so Japanese automakers should benefit from a rebound in Chinese sales.
Despite the turbulent situation in China and the dramatic recent sales decline, the prospects for Japanese automakers must be viewed in a global perspective. We think the stock market is still underestimating the potential for a strong rebound in US auto sales from depressed levels in the recession (Display 2), which will probably be the larger driver for Japanese companies’ profitability over time.
Against this backdrop, investors should try to look beyond the current turmoil and look at the long-term prospects for Japanese carmakers.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Takeo Aso is Director of Research – International Value Equities and Atsushi Horikawa is Director of Research – Japan Value Equities, both at AllianceBernstein.