Toyota’s Operation in China 1

Joseph Ricardo

American Military University

Bus 601

July 6, 2014

Toyota’s Operations in China

Abstract

As the most successful automobile company in the world, Toyota Motor Corporations new main

target will be the world largest purchasers of the automobile, the Chinese. Toyota Motor

Corporation is already the top selling brand in the world as of 2013, and also has the top selling

single model car in the world the Corolla. They are the second top selling brand in the United

States, the top selling brand in both Japan and Australia. They are currently the third top selling

brand in China but have plans to become the top selling brand in their rival country China.

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Toyota’s Operations in China

Toyota Motor Company has in recent years been critically acclaimed as one of the most

successful automobile manufacturers in the world. Their automobiles imbue value, quality and

economy in their purchase value and fuel efficiency. Just driving down any road here in the

United States of America or around many local neighborhoods, one can’t help but notice the

overwhelming amount of Toyota branded vehicles. Toyota Motor Corporations success has

extended not only in its native country of Japan and throughout Asia, but in North America,

Australia and throughout the world. Toyota is the number one manufacturer in the world and

they have the top selling single branded automobile in the world.

When I was in high school and everyone wanted fancy BMW’s or Mercedes Benz’s I

always wanted a Toyota. Two of my friends had Toyota Corollas, great on gas, little to no need

for repairs or maintenance needed, this was ideal to me. My first car was a Chevy I bought for $

200 it only lasted a few months, then I purchased a Chrysler Acclaim for about $ 500 which I

soon sold and used the extra money to buy my first Toyota. I purchased a 1991 Corolla for $

2,500 in 2000 which I had until I sold it in 2006. I never once had to make any major repairs

besides routine maintenance. My parents decided to reward me with a 2006 Camry, even though

I protested that my Corolla was just fine. They insisted that I get a new car as I was going to

school for free, thought scholarships plus my mother worked at the college. I had my Camry

until 2012 when my parents gave me their 2000 Toyota Solara; again I insisted there was nothing

wrong with my Camry (even though there were a few repairs needed). These vehicles grew on

me because they were never a problem, even as I saw people continually having to take their

brand new vehicles to the shop for repairs. All three of these vehicles have been great on fuel

economy, and needed little maintenance. My story is just one of many stories out there from a

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Toyota’s Operations in China

satisfied Toyota customer. I have no plans to purchase an automobile in the future besides a

Toyota or Lexus, preferably a hybrid for my next car.

In 2013 the Toyota Motor Corporation (Japan) outsold both General Motors (United

States) whose sales were 9.71 million globally as well as Volkswagen (Germany) whose sales

were 9.7 million globally, with a record of 9.98 million sales of their automobiles worldwide

(Horie, 2014). Toyota has now set their 2014 sales goal at over 10 million as they and other

experts are predicting 10.32 million in sales. Worldwide the Toyota Corolla is the top selling

vehicle with over 1 million sales of the unit in 2013. This is an all time annual sales record for

any single vehicle model (Focus2move, 2014). Toyota controlled 11.8% of the total global

market for auto sales in 2013, followed by General Motors with 11.5% (Lowry, 2014). Toyota

Motor Company is currently the most successful automotive company in the 21st century and

there is no sign of their sales letting up.

Toyota Motor Corporation is not surprisingly the best selling automobile manufacturer in

its native Japan. Let us not forget the amount of quality automakers coming from Japan such as

Honda, Nissan, Suzuki, Mazda, Mitsubishi, Subaru just to name a few. There is stiff competition

at home for Toyota and yet their sales nearly double that of their closest competition. Their auto

sales in 2014 almost doubled that of their next closest competitor with 1.5 million sales

compared to Honda with 760,000 sales (Bekker, 2014). This was actually down 6.7% from 2012

where they had 1.6 million sales. Their sales actually saw the lowest drop in sales out of the top

20 auto manufacturers in the country. Yet they still completely dominate the auto market in

Japan, and are at the same time working on expanding operations worldwide. Toyota Motor

Corporation not only dominates its native land but also is the leading auto mobile manufacturer

in many countries, regions and continents around the world.

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Toyota’s Operations in China

Toyota is also a very successful brand here in North America and particularly in the

United States. Toyota has four of the top ten selling vehicles here in America. Their Camry came

in at number three with 408,484 sales, falling behind only two American brand automobiles the

Ford F-150 and the Chevrolet Silverado (Wayland, 2014), two trucks which would make the

Camry the number one selling car in America. Their Corolla came in ninth with over 300,000

sales and their Prius and Rav4 came in 16th and 17th respectively. Toyota is the second top selling

automaker in the United States with 2.05 million sales for the 2013 year as of November, second

only to Ford Motor Company who had 2.2 million sales as of that same time (Young, 2013).

Toyota’s American sales were only 150,000 less then Ford’s which puts them in a good position

to outsell them in 2014, with the right marketing and/ or sales program. General Motors did sell

2.55 million but they sell their automobiles under several different brand names and only their

Chevrolet brand came close to Toyota’s sales with 1.79 million sales. Toyota is in a very

opportunistic position to eventually take the top spot as America’s number one auto

manufacturer in sales. Toyota’s only problem is the longevity of their vehicles which makes their

product one of the top sellers in used automobiles. Their automobiles rank only second in both

luxury (Lexus) to Acura and in non-luxury (Toyota) to Honda in their retained value as of 2014

(Edmunds, 2014).

Toyota was the top selling automobile in Australia for the 17th year in a row in 2013.

They control an 18.9% market share on the Australian continent, with a total of 214,630 total

sales (Holden, 2014). Their top selling car is the Toyota Corolla the best selling single

automobile on the continent with 43,498 sales. Their HiLux and Camry also hold the number 3

and 6 spot with a total of 39,931 and 24,860 sales respectively.

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Toyota’s Operations in China

Toyota’s market share in Europe is extremely low at only 4.4% in 2013 (Bekker, 2014).

Toyota falls behind numerous other companies such as Volkswagen, PSA, Renault, GM, Ford,

and BMW, who share the top six spots in the European market respectively. In fact Toyota was

ranked at the 10th most popular brand in auto sales in Europe. Toyota’s sales were stagnant in

Europe rising only a miniscule 0.1% from 2012 to 2013. They are planning to increase their

market share to 4.8% in 2014. With the increase in popularity of hybrid cars in Europe Toyota is

planning to increase its sales in 2014 (Automotive News Europe, 2013). Toyota’s manufacturing

plants in France, the U.K. and Turkey are at full capacity, which means Toyota is ready to

saturate both the European and Russian markets. Europe remains the only major market where

Toyota is not placing sales within the top five.

Toyota Motor Corporation’s focus is primarily in the Asian, Australian and North

American markets. They will continue to focus on expansions in Europe and other regions of the

world, as they continue to dominate their main markets. It will be the new and developing sector

of the Asian market, that we will be discussing; a country whose streets were primarily

dominated by bicycles only a little over a decade ago.

The focus of this discussion will be the Toyota Motor Company’s operations in China.

Before we venture into Toyota’s operations within the Republic of China let us first review the

brief history of the automotive industry in China. The popularity of the automobile and

affordability has only begun to grow within that country in the past two decades. We will also

review the history of political tensions between China and Japan the home of the Toyota Motor

Corporation. This analysis of conflict will allow us to see the difficulties and challenges this

Japanese auto manufacturer has had to face in growing their operations in China.

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Toyota’s Operations in China

Just to show how much of a success Japan’s Toyota Motor Company’s has had with its

sales in China let us take a brief look at the history of conflict and tension between the two

countries within our modern times. The history of their modern conflict goes back to 1894,

where Japan and China went to war, the result was a victory of Japan within none months due to

their forces being better equipped (BBC, 2014). In 1895 China cedes Taiwan to Japan and allows

Japan to trade within China (This will allow Toyota to begin operations in the country by 1936).

In 1931 Japan invades Manchuria (Northeastern China) and installs its own government within

the country. In 1937 Japan begins aggressive actions against China in pre-World War II. They

capture the cities of Shanghai, Beijing and Nanjing, the atrocity of killing over 300,000 citizens

in the latter city will become infamously known as the “Rape of Nanjing”. The conflict between

Japan and China during World War II was known as the Sino-Japanese War. At the outbreak of

the Second World War, Japan moves in to take over French Indo-China. Normal diplomatic

relationships did not occur until 1972 after a visit to China by the Prime Minister of Japan. In

April of 2001 there was a huge trade dispute between China and Japan over Japans high import

tariffs on Chinese agriculture. In response China issues high import taxes on Japanese vehicles

and other imports. The year 2005 saw tensions rise between the two nations again after the

printing of a Japanese history book omits certain atrocities by Japan in World War II, leading to

violent protests and a deteriorated relationship with Beijing. In September of 2010 diplomatic

relationships between the two countries deteriorate again when Japan arrests a Chinese trawler

crew in long disputed region of the East Chinese Sea. After releasing the crew Japan refuses to

apologize after China’s demand for one. So as we can see the relationship between China and

Japan has continued to go through ups and downs even into modern times.

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Toyota’s Operations in China

China also feels that its Confucius ideals were exported to countries such as Vietnam,

Korea and Japan; and that those countries are the children of Chinese culture and philosophy.

This entitlement that China feels also leads them to believe that they are the natural leaders of

these countries, due to China’s long history and influence on these countries. China still

continues this paternalistic ideology in their relationship in developing countries such as Vietnam

and Laos, which is rooted in the old tradition of Qing Empire of the 18th century.

Yet times have changed and Japan has become a global leader in the world with their

countries superior technology, and a very high standard of living compared to that of China. On

the other hand China’s economy is in a fast paced growth even though their standard of living is

a lot lower than that of Japan and many in their country live in poverty. This long history of

conflict and the current tensions between these two countries gives us an idea as to how difficult

a Japanese countries success in China is, as the two have a long history of conflict and still hold a

lot of animosity toward one another.

China has always seen Japan’s global position and wealth in the world as an ill-begotten

gain at the expense of China, a gain they feel was awarded through the shedding of Chinese

blood (Westad, 2013). In February of 2011, Japan’s global economic position was overtaken by

China as the world’s second largest economy. China was finally become able to outpace their

Japanese rivals. Due to their extensive manpower and low wages they have been able to grow

their economy to surpass that of Japan. Even thought their economy has surpassed that of Japan’s

their standard of living and per capita wealth is still far behind that of Japan. China’s per capita

wealth was around $ 6,800 in 2013 and Japan’s was around $ 38,000, actually down from

$46,000 in 2012 (The World Bank, 2014).

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Toyota’s Operations in China

Just recently in 2012, Toyota was forced to halt its operations in China due to protests

over their purchase of islands claimed by both countries in the East China Sea. They are claimed

as the Senkaku Islands by Japan and by the Chinese as the Diaoyu Islands, Taiwan also claims

these islands as well. China actually cancelled a ceremony which was to mark the 40th

anniversary of restored diplomatic relations with Japan due to these events. The people of China

boycotted Japanese products for three months from September to November. Protesters set fire to

their auto showrooms and were on a rampage destroying Japanese vehicles at local auto

dealerships. The result was an estimated decline in sales of 20 to 30% (Yamaguchi and Ozasa,

2012). Different territories of China have held on to the animosity of the two countries, mainly

the Zhejiang and Jiangsu provinces which were two of the provinces that Japan invaded and

occupied in the 1930’s (Shirouzu and Takada, 2013). In February of 2013, China puts a radar

lock on a Japanese naval ship in the disputed area. In November of 2013 Japan warns China that

their newly claimed “air defense identification zone” in the East Chinese sea is dangerous and

could lead to unexpected consequences. Shandong the one of the largest auto markets in China

also holds on to animosity between the two countries. Yet the province of Guangdong’s Japanese

auto market sales are in the 41% range.

Toyota’s operations in China first began with its export of four G1 truck units to the

country in July 1936 (Toyota Motor Corporation, 2012). Between 1938 and 1939, Toyota opened

two assembly plants in China in both Tianjin and Shanghai where they assembled buses and

trucks. In 1940 the Tianjin plant was divided into two separate operations, one being the Hokushi

Jidosha Kogyo Toyoda Steel Works, (which is currently the Steel Works, Ltd.) and the Toyoda

Physical and Chemical Research Institute (Toyota Commemorative Museum of Industry and

Technology, 2014).

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Toyota’s Operations in China

In 2000 Sichuan Toyota Motor Co., Ltd. begins production in China, a joint venture

production plant with China FAW Group Corporation (Toyota, 2005). They began the

production of their hybrid Prius vehicle there in 2005 in hopes that China’s new eco-friendly

automobile policies would spur sales of the vehicle. In 2002 Tianjin Toyota Motor Co., Ltd.

begins production in China. By 2011 another joint venture operation with China FAW Group

Corporation produced 2 million engines (4-Traders, 2011). In 2004 they opened a joint venture

auto manufacturing plant with the GAC Group (Chen, 2011). They began manufacturing the

Camry in 2006, the Yaris in 2008, the Highlander SUV in 2009, and the Camry hybrid in 2010.

As of 2011 the GAC- Toyota venture production hit the 1 million mark. As of 2014 Toyota has

announced plans to bring 15 new models to China by 2017 as part of their effort to double their

auto sales in China to 2 million (Yu, 2014).

China’s automotive industry began in 1931 during the Republic era. Let’s not confuse

this with the beginnings of the American auto industry which took off under Henry Ford and his

Model T. China’s automotive industry was very slow to grow. In fact their automotive industry

did not grow until the 1990’s as in 1992 their vehicle sales finally topped 1 million (Mack,

2014). By the year 2000 their automobile sales topped 2 million. After China joined the World

Trade Organization in 2001 their auto sales grew on average of 21% from 2002 to 2007. In 2008

China became the second largest automobile manufacturer surpassing the United States and

falling only behind Japan. In 2009 their auto sales were over 13 million. China became the first

country to have automobile sales of over 20 million, with sales of over 22 million in 2013 (China

Briefing, 2014).

Even though Japan and China have had a long history of political, cultural differences,

Toyota has been able to become the third top selling automobile brand in China. The top selling

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Toyota’s Operations in China

company in China is the Volkswagen, the German automaker sold over 2.4 million units in 2013

(Kennedy, 2014). The second largest automobile manufacturer was South Koreas Hyundai

followed by Japan’s Toyota Motor Company. A little over a year after the major boycott of

Japanese products in 2012, Toyota was able to hit record sales of 917,500 units in China, up

from 840,000 vehicles in 2012 (Shirouzu, 2014). Toyota is expecting their sales in China to top

1.1 million for the year of 2014, 20% up from 2013.

In April of 2014 the new Toyota Corolla was introduced in China at the 2014 Beijing

Auto Show. The price of the car is between 17,000 and 21,000 American dollars or 107,000 to

134,000 Yuan’s (Ning, 2014). It is being manufactured by Toyota and FAW’s joint venture and

is the “international version” of the Corolla which is sold in North America as the Toyota Levin

and manufactured by Guangzhou Toyota in China.

Toyota has also recently in 2014 securitized car loans in China in hopes of freeing up

investment funds in the number one auto market in the world. They freed up a total of 800

million Yuan (128 million dollars), the same amount as Ford. By pooling together these loans

and offloading them to a Special Purpose Entity they will reduce their overall risk by taking debt

off of their balance sheet.

While China has aspirations of turning Shanghai into a modern Detroit, or automotive

capital in the world, more than 70% of auto mobile sales in their country come from foreign

markets (Schuman, 2014). The problem in China is they lack the technology, experience or

brand power over their foreign competition. China’s biggest exports are to third world countries

whose main concerns are more about price, then quality and name brand.

China has a few problems with their increase in automobiles in their countries. One major

problem is the fact that so many Chinese are just starting to drive for the first time and are not

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Toyota’s Operations in China

properly trained to drive. China’s streets are among some of the worse in the world as they are

saturated with millions of people who are just learning to drive an automobile for the first time.

These people are not just teenagers getting their licenses like here in America; these are people

of all ages and walks of life. In 2009 China had 67,759 accident related deaths on the road more

than twice that of the United States (Pierson, D., 2011). Also we need to remember the fact that

China has 40% less automobiles on the road than here in the United States. At driving schools

now in China they have to watch a 30 minute film showing charred human remains, injured

cyclist and people flung in the air like rag dolls from automobile accidents as well as the families

of the victims. Another problem in China is there is little enforcement of traffic laws and

therefore many drivers will just abandon what they learn in driving school.

Another problem is the increasing pollution problem due to the fast growth of emissions.

In large cities like Beijing automobiles disappear in gray clouds of smog which are choking out

the cities (Watt, 2013).With the recent expansion of the middle-class in China the automobile has

become the new symbol of their prosperity, and the quality of the air in China has suffered as a

result. 20 years ago the roads were dominated by bicycles not automobiles. In the 1990’s the

only people who owned automobiles were government official and companies owned by the

state.

This recent increase in pollution had become a hazard to China’s productivity as well as

their citizen’s health and quality of life. It is estimated that vehicle emissions account for 22

percent of the pollution problems in China, followed by 17 percent from coal burning and 16

percent from construction site dust (Watt, 2013). Toyota offers a number of hybrid vehicles but

the problem is that out of China’s 22 million auto sales in 2013, only a little over 3000 were

hybrids (ICRA Online, 2014). Toyota sold over 1 million hybrid vehicles worldwide but mainly

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Toyota’s Operations in China

in Japan, North America and Europe. Toyota is planning to make their hybrid vehicles more

affordable to the Chinese market as the price of importing them to China is increasingly high. In

November 2013 Toyota decided to begin producing their hybrid vehicle batteries in the in the

Jiangsu Province of China. They are also partnering with Chinese automakers China FAW

Group and Guangzhou Automobile Group, which will help keep production costs low. Toyota is

planning to launch these hybrid vehicles in China in 2015.

Toyota Motor (China) Investment Co. Ltd. has launched several initiatives to help with

the automotive pollution problem in China.  In 2001, Toyota launched the 21st Century Chinese

Capital Metropolitan Environment and Vegetation Demonstration Joint Project between China

and Japan (ChinaCSRmap, 2014). Recently 30 million Renminbi (Approximately $ 8 million

dollars) to Tsinghua University for the co-founding of the Center for Industrial Development and

Environmental Governance (CIDEG) and promised an annual funding of 6 million RMB

(Renminbi) One of this groups main focuses is in resources, environment and sustainable

development.

China and its government really need to work on providing their citizens incentives to

purchase hybrid vehicles as their roads become saturated with vehicles with high emissions that

are polluting their cities and poisoning the health of their citizens. The Chinese government has

been reluctant to offer incentives in subsidies on hybrid vehicles due to their own country not

having the current technology and fears of global competition in the hybrid arena. In September

of 2013 they did not include hybrid vehicles in their three year subsidy plan which included only

electric vehicles. They omitted hybrid vehicles even though the country has an eco plan of

having 500,000 eco friendly vehicles on their roads by 2015 and an even larger goal of 5 million

by 2020, which seems entirely unrealistic considering the low sales of eco friendly cars of only a

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Toyota’s Operations in China

little over 17,000 total in 2013. The big problem with China subsidizing electric vehicles is that

sales are still stagnant due to a lack of infrastructure in power stations to charge these vehicles.

China’s auto mobile economy is now the biggest in the world and Toyota has plans to

move up in that market. I for one believe in due time they will be able to capture the number one

spot in China, as their cars are more reliable, have better fuel economy, and require less

maintenance than Volkswagen and Hyundai. What Toyota will have to do is work on producing

their automobiles at a more affordable rate than their top two competitors. This will certainly not

be an easy task as Volkswagen in Germany and Hyundai in South Korea do not have the history

of conflict with China that Japan does.

Toyota Motor Company has had a lot of obstacles to overcome in the global economy

and especially in the Chinese market. Toyota has a top quality brand product and has been able

to overcome the political and cultural strife between themselves and China. As the leading brand

worldwide Toyota has overcome extremely tough competitions from other global auto

manufacturers such as Volkswagen, GM and Ford. Many of these companies have had a longer

history of success, and better resources. But what Toyota has been able to provide with the

quality of their vehicles, their affordability and excellent fuel economy has allowed them to

surpass every other automaker as the number one auto manufacturer worldwide. With China now

becoming the new leader in automotive purchases, Toyota will have to continue their efforts to

surpass Volkswagen and Hyundai to become the top auto manufacturer in the largest country

both by population and auto sales in the world.

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