While diplomatic relations between Japan and China face strain, one Japanese giant is demonstrating remarkable resilience in the world's largest auto market. Toyota Motor Corporation, the global automotive leader, is successfully navigating China's rapid and disruptive shift to electric vehicles (EVs), a transition that has left many foreign competitors reeling.
Weathering the Electric Storm
The landscape of China's automobile industry underwent a seismic change around 2020. The catalyst was Wan Gang, a mechanical engineer who returned to China after working for Audi in Germany. He convinced Chinese officials that electrification was the key to surpassing foreign dominance in petrol cars. The state-backed push for clean-energy vehicles, partly to reduce oil import dependence, proved prophetic. Electrified vehicle sales soared from 18% in 2021 to 50% just three years later, with projections hitting 81% by 2030.
This shift blindsided most international players. Ford's sales plummeted by over 80% from its 2016 peak. Volkswagen, once a symbol of China's burgeoning car culture with its Santana model, saw revenue drop by about a third from its record high. In contrast, Toyota's shipments, though 14% below its 2022 peak, represent a far less severe decline.
Toyota's Hybrid Hedge and Strategic Pivot
Toyota's relative stability is no accident. It stems from a decades-long bet on hybrid technology, beginning with the launch of the Prius in Japan in 1997. This early move provided a crucial buffer. Models like the Corolla, Levin, Camry, and Highlander hybrids have been instrumental in helping the company manage the EV transition in China, its second-largest market by volume.
From 2023, Toyota adopted aggressive discounting on some models to boost shipments, a tactic that analyst Julie Boote of Pelham Smithers Associates notes came at a cost to profitability. Estimated profits from Toyota's China joint ventures and imports fell from 525 billion yen ($3.4 billion) in FY2021 to 290 billion yen three years later.
Yet, Toyota remains far ahead of its Japanese rivals. The combined market share of Japanese brands in China's passenger car segment collapsed from 26% in 2020 to 14% last year. Honda and Nissan are struggling, while Suzuki and Mitsubishi have effectively exited.
The Localization Gamble and Future Ambitions
Toyota's current strategy involves a profound pivot towards localization. While it continues its legally required joint ventures with FAW Group and Guangzhou Automobile Group, the power dynamic has shifted. Once the senior partner exporting technology, Toyota is now integrating and showcasing Chinese technology in its vehicles.
The result is products like the fully electric bZ3x SUV, launched in March and priced at 109,800 yuan ($15,000). This places it directly in competition with budget-friendly, tech-savvy models from Chinese champion BYD and is about $6,000 cheaper than its predecessor, the Izoa. The bZ3x has found strong demand, with over 50,000 units sold between its launch and October.
This deep localization carries a risk: blurring brand identity. If a foreign carmaker relies heavily on Chinese tech, consumers may question why they shouldn't simply buy a domestic brand. However, Toyota is doubling down. In a clear sign of commitment, it plans to open a fully-owned manufacturing plant outside Shanghai by 2027 to assemble Lexus vehicles, initially producing around 100,000 units, following Tesla's precedent.
Despite tensions over Taiwan, there have been no widespread calls for boycotts of Japanese goods in China—a stark contrast to the 2012 territorial disputes that severely impacted sales. Analyst Boote forecasts a 14% growth in profits from Toyota's China operations this year. Without massive restructuring or huge write-downs, Toyota's pragmatic, adaptive playbook in China appears to be a masterclass in corporate survival against formidable odds.
