China’s Electric Vehicle Boom Spells Trouble for Japan’s Automakers
The surging popularity of electric and hybrid vehicles in China has left Japan’s automakers, including Honda and Nissan, struggling to maintain their market share. Once the leading providers of high-quality cars, they now face a daunting reality: too much capacity in local factories built to satisfy anticipated domestic demand.
A Shift in the Balance of Power
The Chinese market, the world’s largest for automobiles, has seen a significant shift in favor of domestic players like BYD Co. This has eroded the competitive edge of Japanese automakers, who are now grappling with excess capacity and dwindling sales. According to James Hong, an analyst at Macquarie Securities Korea Ltd., “Honda and Nissan have been losing the market for some time… We expect both to come up with very large capacity cuts to at least cover some of the fixed-cost burdens they have in China.”
Nissan’s Struggles
Nissan, in particular, has been facing significant challenges. The company’s output in China has halved in recent years, and it has embarked on a cost-cutting plan that will slash global capacity by a fifth to 4 million vehicles. China accounts for more than half of the 1 million-unit reduction, according to Citigroup Global Markets analyst Arifumi Yoshida. The company’s struggles are further compounded by its outdated product lineup and management turmoil since the arrest and ouster of former Chairman Carlos Ghosn.
Honda’s Response
Honda, too, is taking steps to address its capacity issues. The company has announced plans to close factories and reduce capacity by 20% in China. Executive Vice President Shinji Aoyama revealed last month that Honda is in negotiations with local partners on further cuts.
A Potential Merger on the Horizon?
The struggles of both Honda and Nissan have sparked speculation about a potential merger. A combination of the two companies has long been anticipated, and even explored, in the past. A Kyodo report suggests that Nissan and Honda are considering a manufacturing partnership, which would involve building vehicles at each other’s plants. Honda may also study producing hybrid vehicles for Nissan, which is struggling in the US market.
A Broader Industry Crisis
Japanese automakers aren’t the only ones struggling in China. General Motors Co. is facing $5 billion in charges and writedowns related to its operations in the country, while Germany’s Volkswagen AG, BMW, and Mercedes are also struggling to keep pace with technology trends.
A Long Road to Recovery
Nissan expects to produce 3.2 million vehicles during its current fiscal year, well below its capacity to produce 5 million units annually. While the company is taking steps to address its capacity issues, it will likely take time to recover. As Tatsuo Yoshida, senior analyst at Bloomberg Intelligence, notes, optimal capacity utilization rates for legacy automakers are widely considered to be at more than 80%.
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