Japanese Automakers Set Sights On Recovering Losses From China-Japan Territorial Dispute Over Senkaku/Diaoyu Islands

What does a territorial dispute over a few uninhabited rocks off the coast of Taiwan have to do with auto sales? For Japanese automakers, it has meant a grim year for sales in the world’s biggest and fastest growing auto market: China.

The outrage over Japan’s claims to the Senkaku Islands (or as they are known in China, the Diaoyu) grew so fierce last year that the local Shengdu City-based manufacturing partner of Toyota Motor Corporation (TYO:7203) in October offered to repair free of charge vehicles damaged by protesters lashing out at Japan over the conflict.

But the Japanese auto giants are hoping the worst is behind them, and they all expect to regain lost ground in terms of sales, even if it means simply getting back to square one while competitors continue to build on their 2012 gains.

Consider the China numbers for the Japanese carmakers: Toyota’s vehicle sales fell nearly 5 percent in the People’s Republic last year to about 840,000 vehicles, the first decline in more than a decade. Nissan Motor Co. Ltd. (TYO:7201) sales dropped 5.3 percent to about 1.2 million units. And Honda Motor Co. Ltd (TYO:7267) saw sales retreat 3.1 percent to about 600,000 units. Mazda Motor Corporation (TYO:7261) saw a 13 percent drop in sales to about 187,000 units.

Last month’s numbers suggest that the worst is over, with all Japanese automakers reporting improved month-to-month performance.

Toyota sold nearly 91,000 units in China in December, a nearly 16 percent decline from the previous year but better than the 22 percent decline seen in November. Nissan sold more than 90,000 cars last month for a 24 percent decline compared to the same month the previous year, but the decline was smaller than November, when sale fell 29.8 percent. Honda unloaded more than 63,000 units in December, down 19.2 percent; sales fell 29.2 percent in November.

Considering the robust performance of the Japanese in the U.S. market, the declines haven’t caused any earth-shattering loss of profit. Nevertheless, the sooner the Sino-Japanese dispute settles down the sooner the Japanese giants can start to recover in the marketplace, assuming another conflagration doesn’t erupt in the ongoing geopolitical tussle.

Volkswagen AG (FRA:VOW), for example, sold nearly 30 percent more Audis in China last year. According to the China Association of Automobile Manufacturers, or CAAM, German brands gained 2.4 percent in the first 11 months of 2012. On Monday, Ford Motor Company (NYSE:F) announced that it sold a record number of vehicles in China last year, more than 626,000 units, or 21 percent more than the year before.

“In the short term, the carmakers don’t care much about profitability,” Kochi Sugimoto, an analyst at BNP Paribas in Tokyo, told the Financial Times. “More important is that sales patterns go back to normal.”

Back to normal is what these companies apparently expect in 2013, even as the territorial dispute lingers.

After missing the 1-million-unit target for 2012, Toyota expects to rebound by selling 900,000 vehicles in China this year while Honda is aiming for 750,000 units sold by the end of December.

Meanwhile, China-based manufacturing for the Japanese automakers appears to be getting back to normal.

Honda manufacturer Dongfeng Motor Group Co. Ltd (HKG:0489) of Wuhan, Hubei province, has said its production output has returned to normal while Honda’s other local fabricator, Guangzhou Automobile Group Co., Ltd. (HKG:2238) of Guangzhou, Guandong province, said production would return to normal this month, according to the Wall Street Journal.