Toyota’s China playbook is a masterclass in survival against the odds

Even though shipments last year were 14% lower than the 2022 peak, that’s nowhere nearly as devastating as its global peers. Sales at Ford were more than 80% lower than its 2016 all-time high. Revenue at Volkswagen, whose ubiquitous boxy Santanas symbolized private car ownership during China’s go-go years, was down about a third last year from its record.

The turning point for the domestic auto sector came around 2020, two decades after a mechanical engineer named Wan Gang returned to China after years spent working for Audi in Germany. He promised Chinese authorities that while foreign automakers dominated petrol cars, Beijing had a chance to pull ahead by betting on electrification. Eager to reduce its dependence on imported oil, officials put him in charge of a state-led effort to develop a market for clean-energy vehicles.

Wan’s words would prove prophetic. In 2021, electrified vehicles accounted for just 18% of sales. Just three years later, it jumped to 50%. By 2030, it’s expected to rise further to 81%. The shift from internal combustion to clean-energy engines caught most foreign players by surprise.

Toyota was an exception. That’s in large part due to its decision to start making hybrids back in 1997, with the launch of its first-generation Prius in Japan. Sales of versions of the Corolla, Levin, Camry and Highlander have helped the carmaker weather the EV transition in China, its second-largest market by volume.

From 2023, it also began offering heavy discounts on some models. Julie Boote, an automotive analyst at research firm Pelham Smithers Associates, told me this strategy boosted shipments but took a toll on the bottom line. During the 2021 fiscal year, she estimates that profits from Toyota’s joint ventures as well as sales of its vehicles imported from Japan stood at 525 billion yen ($3.4 billion). Three years later, the figure nearly halved to 290 billion yen.

That’s still head and shoulders above than even its Japanese peers. Their combined share of China’s passenger car market dropped from a peak of 26% in 2020 to 14% last year, according to auto analyst Tatsuo Yoshida of Bloomberg Intelligence. Honda and Nissan are struggling, while Suzuki and Mitsubishi have essentially withdrawn.

As for Toyota, another strategic pivot is emerging. Although it has always worked with local affiliates FAW Group and Guangzhou Automobile Group for joint manufacturing, as legally required, the dynamic is changing. The Japanese carmaker was once the senior partner transferring its technology. Now, it is starting to localize like never before by integrating and showcasing Chinese technology.

The result? Toyota’s March launch of its fully electric bZ3x sport utility vehicle was priced at 109,800 yuan ($15,000). That puts it in the same league as cut-price, high-tech cars from BYD. It’s also about $6,000 cheaper than one of its predecessors, the Izoa, launched around 2020 as one of Toyota’s first dedicated EVs for China. At this price, the bZ3x has been popular, having sold more than 50,000 units since launch to October.

But this strategy has an inherent risk. Increasing localization may inevitably blur the lines between brands. If foreign carmakers lean so heavily into Chinese technology, why would buyers not just purchase homegrown models in the first place? Anyone pursuing this path must consider the longer-term consequences.

In the clearest sign yet of Toyota’s ambition in China, it will be following in Tesla’s footsteps by opening a fully-owned manufacturing facility. Located outside Shanghai, it will assemble Lexus vehicles starting in 2027 and is expected to produce roughly 100,000 units at first.

Toyota’s turnaround, without a massive restructuring or GM-style $5 billion write-down, seems to be working. Boote believes that profits from the China operations will grow 14% compared to last year. And despite continued rumblings between Beijing and Tokyo over Taiwan, there have been no calls in China for any boycotts of Japanese products.

It’s a very different picture from 2012, when sales of Japanese cars plunged and didn’t recover for months as a territorial dispute over islands in the East China Sea sparked protests across China. Although the current situation may deteriorate further, the response from Beijing appears much more measured. Toyota should be able to pull through. ©Bloomberg

The author is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region.