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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.

22 comments on “When China Bites…

  1. Houngbo_Hospice
    October 29, 2012

    ” The Chinese are willing to boycott Japanese goods, even if they were produced in China by Chinese nationals whose livelihood depends on it”

    I can't help asking this question: 

    Isn't that a kind of stupidity? shooting oneself in the foot is not a wise way to protest against unfavourable foreign country policies.

  2. FLYINGSCOT
    October 29, 2012

    Every nations does this to some extent.  The French boycott everyone when they get disgruntled.  Argentina stopped buying UK goods when the Malvenas (Falklands) issue flared up.  The issue is China is a big potential consumer and everyone is hoping to make hay there.  Imagine if the USA boycotted all goods made in China or started smashing up all things Japanese or British etc.  It will pass as it always does.  

  3. Houngbo_Hospice
    October 29, 2012

    @FLYINGSCOT

    “Every nations does this to some extent”

    You are correct. In 2008, French Retailer Faces Chinese Anger Over Olympic Torch Incidents. But both countries seem to have settled their differences. We may expect that the same thing would happen between China and Japan.

  4. prabhakar_deosthali
    October 30, 2012

    This has happened even in India where Indians forced Suzuki to shut down the production of their Car plant, Similar protests and shut downs happned in Honda Scooter plant.

     

    These agitations happen in the garb of labor unrest but are actually targeted at these Japanese Auto companies doing good business in India and benefitiing the local industry and employment as well

  5. bolaji ojo
    October 30, 2012

    In the case of Chinese anger towards the Japanese, the resentment goes back decades and is not being fueled by a single event. This is why I think Japan has a lot to lose in this case.

  6. bolaji ojo
    October 30, 2012

    I believe they were trying to make a point and the local Chinese who got hurt were considered “collateral damage.”

  7. Eldredge
    October 30, 2012

    It's one thing to boycott products – seizing property that belongs to someone else and destroying it goes to another level. It does point to addtiional business volatility beyond the usual marketing mishaps.

  8. Houngbo_Hospice
    October 30, 2012

    @Bolaji – I think Japan has a lot to lose in this case.

    We can say so. But a Japan with no interest in China could be a real threat China's progess, and China should understand that.  Both countries should work to safeguard their bilateral relations and leaders should make sure their people understand that (IMHO). 

  9. Houngbo_Hospice
    October 30, 2012

    @Eldedge,

    seizing property that belongs to someone else and destroying it goes to another level.  

    That's unfortunatly a common practice in most countries with uncontrolled mobs, especially if they are “helped” by the authorities themselves.

  10. hash.era
    October 31, 2012

    It happens everywhere Hospice, especially in my country SL. They take it forcefully whenever they see a bare land for some period of time. After that removing them from that place is virtually impossible.

  11. Taimoor Zubar
    October 31, 2012

    “It's one thing to boycott products – seizing property that belongs to someone else and destroying it goes to another level”

    @Eldredge: When protestors are protesting they're looking to get themselves be noticed and get in the news headlines by doing as much damage as they can. They do not worry about whose property they're damaging and who will ultimately lose.

  12. Taimoor Zubar
    October 31, 2012

    “Isn't that a kind of stupidity? shooting oneself in the foot is not a wise way to protest against unfavourable foreign country policies.”

    @Hospice: I agree. It does seem stupid to damage your own property and set fire to factories in your own country even if it might be owned by some foreigner. What about all that labor that the factory is giving employment to.

  13. Mr. Roques
    October 31, 2012

    This has to do with China's patriotism and deep sense of nationality. Foreign companies might want to create new brands or divisions, designed for the Chinese market… Nissan has Infiniti as its luxury brand, but it could create a new one that is closer to chinese clients.

  14. Houngbo_Hospice
    October 31, 2012

    @Roques,

    You don't live on patriotism and nationality when your economy depends on foreign investments, do you? China may be an attractive market, but the country's industry is not much thing by itself. 

  15. bolaji ojo
    October 31, 2012

    Hospice, That logic or rational thinking is not being displayed in China right now by the people protesting against Japan. Logic and nationalism sometime don't go together.

  16. bolaji ojo
    October 31, 2012

    Eldredge, Nobody said doing business in China was going to be boring!

  17. Eldredge
    October 31, 2012

    @Bolaji – Absolutely true! Certainly, doing business in China (either as a supplier, or as a marketplace) offers enormous potential. I am not certain that comapnioes have properly assessed the risks that counterbalance the potential.

  18. Eldredge
    October 31, 2012

    @Bolaji – Absolutely true! Certainly, doing business in China (either as a supplier, or as a marketplace) offers enormous potential. I am not certain that companies have properly assessed the risks that counterbalance the potential.

  19. Eldredge
    October 31, 2012

    @Hospice – Or at least not dissuaded by the authorities.

  20. itguyphil
    October 31, 2012

    Is doing business online in China as lucrative?

    I have heard from some marketers that the more they become invested in the online culture like us, this potential will increase. But keep in mind the differences in policies (censorship, etc).

  21. Daniel
    November 1, 2012

    Bolaji, Chinese people's can boycott any foreign products, including those manufactured in their domestic market because they have duplicates for all such products. But such emotional feelings will obliviously disappoint the foreign investors, who build business on trust of domestic market and people. I think next time onwards companies may have a second thought before investing in China, especially when situations like manpower is not so attractive like older days.

  22. Daniel
    November 1, 2012

    Taimoor, I agree with you. Emotional feelings are good and there are different ways to express it. But in China they expressed their emotional feelings in a distructive way by damaging some of the Japanese company’s factory and facilities. From a company point of view, they may lose trust on government and peoples , when such things are happening.

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