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Toyota's premium pricing power evaporates in China

(Agencies)
Updated: 2010-03-17 10:44

Smallest gain

In 2009, Toyota's local sales rose 20 percent, the smallest gain among the top 15 brands in China, according to Fourin Inc, a Nagoya, Japan-based auto industry researcher.

Sales at BYD Co, the Chinese carmaker backed by Warren Buffett, surged 162 percent, led by its F3 compact car, the nation's best-selling model. Hyundai Motor Co, South Korea's biggest automaker, increased sales 94 percent.

Carmakers in China benefited from a government program that cut the sales tax on cars with engines of 1.6 liters or smaller to 5 percent from 10 percent. The government said Dec 10 it would raise the rate to 7.5 percent.

While Toyota's Yaris, Corolla, Vios and Prius models qualify for the lowered tax on smaller cars, Chinese automakers sell competing models for less than half of Toyota's price, said Seiki Shu, Fourin's chief of China research.

Even as the tax incentives for small cars were implemented last year, Toyota began China production of the RAV4 and Highlander SUVs.

"All overseas carmakers will lose market share to the Chinese, but Toyota will continue to lag its foreign competitors," said Koji Endo, managing director at Advanced Research Japan in Tokyo.

Market growth slowing

Overall market growth is slowing. Passenger-car sales rose 55 percent in February after more than doubling in January. Toyota expects its sales growth in China to slow to 13 percent this year.

"We are doing our best to meet our sales target," said Toyota spokeswoman Ririko Takeuchi. She declined to disclose plans for upcoming new models.

"If you're not strong in the 1.6 liter and below segment, it's hard to expand in the inland areas" of China, Toyota's Executive Vice President Yukitoshi Funo said in December. "I'm not happy with our weak positioning there."

Toyota's profit margins in China may narrow as the carmaker offers incentives in response to recalls and increased competition. Toyota introduced zero-percent financing for the Crown and Camry sedans from this month. Toyota's joint venture with Guangzhou Automobile Group Co in January also started offering to waive 2.5 percent in taxes for Yaris buyers.

'Competition remains fierce'

"Competition remains fierce," Intelligence Automotive's Chotai said. "It's always been a delicate balance between volume and margin."

While Toyota is developing a new low-cost compact model for the Chinese market, it may become cautious about buying cheaper parts from local suppliers as the global recall casts a spotlight on its quality, Fourin's Shu said.

"Toyota needs to decide whether it should continue prioritizing profit or take a risk with its low-cost project to expand market share," Shu said.

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