Small should have been beautiful; how Toyota misread China market
BEIJING (Reuters) - Toyota Motor Corp (7203.T) blames its China underperformance on the widespread anti-Japan protests triggered by a territorial row. Some company insiders and dealers, though, say the world's biggest car maker misread the world's largest market.
They say Toyota's launch of the Yaris subcompact in 2008, aimed at building brand loyalty and driving the Japanese firm to China sales of 1 million vehicles a year, failed to register with its target market - China's army of price-conscious buyers.
The Yaris, a success elsewhere, also failed to attract China's new emerging middle class. To some dealers and those within the company, the Yaris lacked what the Chinese call 'daqi' or 'road presence'. Next to Nissan Motor Co Ltd's (7201.T) pricier Tiida, for example, it feels cramped and lacks pizzaz.
Crucially, for more frugal first-time buyers, the Yaris was over-priced, costing from 87,000 yuan ($13,900), 55 percent more than General Motor's (GM.N) Chevy Sail, and putting Toyota at a competitive disadvantage in a must-win market.
"The Yaris is too expensive, way too sleek for its target market. This group of consumers is very, very price sensitive," said an operator of a few dozen Toyota dealerships across China.
Sales of the Yaris in China averaged just 1,250 a month, according to January-August data, and that's before the impact of the often violent protests against Japanese products in a row over disputed islands in the East China Sea. By contrast, Nissan sold 12,000 of its Tiida subcompacts per month and GM shifted 17,000 Chevy Sails.
The misstep in China is a black eye for Toyota CEO Akio Toyoda, the founding-family scion who used to run the firm's China operations, and who also has had to deal with a major recall and last year's Japan quake and tsunami that paralysed parts production.
A decade ago, he and his lieutenants set the "aspirational" goal of selling 1 million cars a year in China, taking around a 10 percent market share, said a senior China-based Toyota executive, who did not want to be identified because he was discussing non-public information.
The automaker will again likely miss that goal this year, with Toyota officials blaming the territorial row between Asia's two biggest economies. Its longer-term pledge to boost sales to 1.8 million cars a year by 2015 also looks a stretch. Toyota and its local partners sold 883,400 vehicles in China last year.
Some Toyota dealers lament what could have been - if the automaker had had an entry-level model that sold as many as 100,000 vehicles a year, as initially envisioned for the Yaris.
"If they had executed their small car planning right, Toyota could have easily hit the 1 million unit sales milestone or 10 percent market share objective several years ago," said a major operator of Toyota dealerships, who declined to be named because of the sensitive nature of his comments.
Toyota spokesman Akihiro Yamamoto declined to comment on the dealer's view, saying only the company should "continue to strive to provide products that satisfy and appeal to more Chinese consumers".
Toyota's fix for the Yaris problem is a new, affordable minicar which it has developed specifically for China. Toyota sources said the car is loosely based on the no-frills Etios, which sells for as low as $8,350 in India and is expected to hit showrooms in China as early as next year.
The automaker is adding a few upgrades to appeal to Chinese consumers, taking the price tag closer to $10,000, according to the company sources, who spoke on condition of anonymity because the details are not public. That would make it more competitive with GM's Chevy Sail, which costs about 56,000 yuan ($9,000) and well below the Nissan Tiida, which starts at about 100,000 yuan ($16,000).
To succeed, say some Toyota insiders, the firm has to heed the lessons from the Yaris, and think more locally.
"Our way of beefing up operations in China is to bring in more people from Japan," says a top Toyota executive critical of his company's China strategy, who declined to be named due to the sensitivity of the subject. "We should be localising our business here, promoting Chinese managers, and listening more attentively to Chinese consumers. But we don't."
Toyota's Yamamoto said it is a stretch to associate the Yaris' slower-than-expected sales with the degree of localisation of the company's operations in China. "We're promoting more local Chinese employees to management ranks and will continue to do so," he said.
The new car, and the moves to more localised thinking, suggest Toyota has taken its past mistakes on board.
Almost a decade ago, Toyota's Japan-based product planners ignored the advice of sales executives in China to use an affordable car under development that had been designed for emerging markets, like China. The planners thought the car lacked edge for Chinese buyers and decided to introduce it in India instead. That car later became the Etios.
Nor did Toyota seek help from its minicar affiliate Daihatsu Motor Co Ltd (7262.T), believing Daihatsu cars were not upscale enough.
It also felt no immediate need to come up with a low-cost China car designed from the ground up. Instead, several top executives pushed the Yaris because it was one of the few lower priced, left-hand-drive, small cars available - and it had a global supply base for parts that could be used in China.
Yamamoto declined to elaborate on the new low-cost model, but pointed to a concept car Toyota showed earlier this year for hints. The 'Dear Qin' has been styled to woo China's entry-level consumers, especially first-time buyers in their 20s and early 30s.
Masaki Taketani, director of research firm IHS Automotive, said Toyota upgraded the bare-bones Etios but kept it affordable by using a new, low-cost platform called Entry Family Compact. The platform meshes some new technology with lower-cost underpinnings from an older, retired small car model.
Toyota is likely to launch a sedan version of the new model in China next September, followed by a hatchback in December, he said. Toyota and its parts suppliers have told IHS they are counting on the new sedan and hatchback to generate combined annual sales of up to 250,000 - a goal IHS' Taketani thinks is optimistic. Given the intense competition in the low-cost small car segment, he reckons Toyota could do well to sell 100,000 cars combined.
"Gradually, Toyota is getting around to filling the gap in its low-cost small car line-up in China," he said. "But it's still doubtful that the new car's going to be a runaway success like GM's Sail and Nissan's Tiida." ($1 = 6.2503 Chinese yuan)
(Editing by Emily Kaiser, Edwina Gibbs and Ian Geoghegan)
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