TEXT-Fitch: China, Japan Island Dispute Could Hit Japan Tech, Autos

(The following was released by the rating agency)

SEOUL/SINGAPORE, September 18 (Fitch) Fitch Ratings believes that major Japanese auto and technology manufacturers' ratings may come under pressure if the clash between China and Japan over the Senkaku/Diaoyu islands escalates and is prolonged.

A number of Japanese companies, including Panasonic, have temporarily suspended production at some of their Chinese facilities as anti-Japanese demonstrations demanding a boycott of their products flared across 85 cities in China at the weekend. Japanese companies' sales and reputation with Chinese consumers are likely to be affected, at least in the short term.

However, there is little visibility on the extent to which their sales in China might be affected, and how long anti-Japanese protests may continue. Sharp Corporation ('BBB-'/RWN) and Nissan Motor Company ('BBB'/Stable) have the highest sales exposure to China among Japanese corporates rated by Fitch.

Sharp's sales from China represented 20% of its total sales during the year ended March 2012 (FY12). Fitch recently placed Sharp's 'BBB-' rating on Negative Watch due to weak fundamentals in its TV and solar panel businesses along with poor liquidity. Amidst the company's woes, one of its strengths is strong brand recognition in China. Panasonic's ('BBB-'/Negative) and Sony's ('BBB-'/Negative) revenue exposure to China was significant at 13% and 9% respectively in FY12.

Both companies currently report low operating profitability and face unfavourable exchange rates and declining sales from Europe. Nissan has the highest exposure among the Japanese auto companies rated by Fitch, with China absorbing about 26% of its global car sales during FY12. Honda's and Toyota's exposure to China was also significant at about 20% and 10% of their respective total global unit sales during the same period.

Near-term rating drivers for Japanese auto manufacturers focus on their exposure to the US, the direction of the yen, and sales in emerging markets, including China.

Tensions between China and Japan over disputed islands in the East China Sea escalated when Japan announced it was nationalising the uninhabited islands on 10 September. Chinese surveillance ships moved closer to the islands and anti-Japanese demonstrations took place in 85 Chinese cities over the weekend of 15-16 September, inflicting damage on Japanese stores and products.

Subsequently, the Nikkei reported that a number of Japanese companies, including Panasonic, Cannon Inc, and Lion Corporation, are halting production at some of their facilities in China.