When China Bites...

Let me start by completing the sentence in the headline. When China bites, sales decline, profits sag, and the future of a foreign enterprise in the country becomes fuzzy, its investment runs into significant jeopardy, and all the assumptions about the nation's potentials go haywire.

Honda, Nissan, and Toyota are finding out how unpredictable China can quickly become, and the experience of these three Japanese auto manufacturers should have cautionary lessons for other foreign companies operating in the country. In recent weeks, some Chinese people have held protests against Japan and have taken out their anger against Japanese companies and business interests. Some of these protests have been violent and resulted in the destruction of buildings, cars, and other goods manufactured by Japanese enterprises. They've not even spared Japanese businesses that have local joint venture owners.

The implications of those protests and the ensuing boycott of Japanese-branded products -- even by Chinese people who don't agree with the protesters -- can be devastating. Today, Honda Motor Co., for example, slashed its fiscal 2012 earnings and sales forecast by 20 percent, citing a slump in demand in China, according to a Wall Street Journal report. Both Nissan and Toyota have also hinted sales in China would decline due to the escalation of problems in China and the growing calls for boycott of Japanese goods in the country.

Bashing Honda

The protesters had no issues with Honda itself; they were irritated with Japan's actions during the second world war and its government's current policies. In fact, many of the vehicles destroyed were seized from Chinese nationals. There was nothing Honda could have done to protect itself, but it is still paying a price for actions it couldn't control. The WSJ report noted above added:

In an early indication of the toll the bilateral standoff is taking on the car maker's bottom line, Honda cut its profit forecast from its joint ventures -- almost all of which comes from operations in China -- to ¥80 billion, below a previous ¥120 billion estimate and down from ¥100 billion last fiscal year.

Earlier this month, Honda said sales in China plummeted 41% in September from a year earlier. Nissan saw its sales tumble 35% and Toyota reported a 49% drop. The fall in sales for Japan's big three auto makers came after the outbreak of sometimes violent anti-Japanese protests in China last month sparked by Japan's renewed claim to some contested East China Sea islets.

OK, let me get this right. The Chinese are willing to boycott Japanese goods, even if they were produced in China by Chinese nationals whose livelihood depends on it, or even when the plant is part-owned by local investors? That shouldn't be news to many business executives who have always been concerned about the potential for dangers from Chinese nationalism. But the attraction of China continues to outweigh its hurdles.

The history of Western engagement with China tells it all. First, Western companies moved manufacturing to China to gain a competitive edge by taking advantage of its lower-cost labor option. Then they began eyeing the potentially huge -- though still emerging -- Chinese middle-class as holding the possibility for future sales growth. As with everything China-related, though, the reality is often much more complicated than most Western CEOs and investors can ever imagine.

If that's the case -- and it certainly is based on the experience of Honda -- then Western companies and especially electronics manufacturers need to be aware of the anomalies inherent in the Chinese experience. I am not asking anyone to abandon China, but it still makes sense to have contingency plans in place for when China bites.