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Analysis: Oh, what a sinking feeling: Toyota misfires with Chinese buyers

By Norihiko Shirouzu

BEIJING (Reuters) - The roots of Toyota Motor Corp's China troubles run far deeper than the anti-Japan protests that have swept the country, stretching back to the 2008 launch of the Yaris subcompact -- a spectacular flop with price-conscious Chinese buyers.

The car, a success elsewhere, was meant to help build brand loyalty and send Toyota hurtling towards a still-unattained goal of selling one million vehicles annually in the world's largest auto market.

However the Yaris missed the mark with China's traditional higher-end customers as well as its new emerging middle class.

To some company insiders and dealers it epitomizes all that does not appeal to the status-conscious, lacking what the Chinese call 'daqi' or 'road presence'. Next to Nissan Motor Co Ltd's pricier Tiida, for example, it feels small and lacks oomph.

But for frugal first-time buyers, the Yaris which is priced from 87,000 yuan ($13,900) was a non-starter, costing some 55 percent more than General Motor's Chevy Sail and putting Toyota at a competitive disadvantage in a must-win market.

"The Yaris is too expensive, way too sleek for its target market. This group of consumers is very, very price sensitive," said an operator of a few dozen Toyota dealerships across China.

Toyota sold an average of just 1,250 Yaris cars a month in China in 2012 data through August, before the territorial row between Japan and China flared up in September. By contrast, Nissan sold 12,000 Tiida subcompacts per month and GM moved 17,000 Chevy Sails.

The Yaris shows how Toyota misread the evolution of China's auto market. Surprised by how quickly the emerging middle class grew rich enough to buy cars, the automaker failed to grasp that the vast majority of those new buyers preferred no-frills models.

Even now, with a new entry-level vehicle for China on the way, company insiders and dealers are not sure if Toyota has learnt enough from a valuable lesson about the importance of localizing.

BLACK EYE

The misstep in China is a black eye for Toyota CEO Akio Toyoda, the founding-family scion who used to run the automaker's China operations, and who also has had to deal with a major recall scandal and last year's Japan quake and tsunami that paralyzed parts production.

Back in 2003, he and his lieutenants set the "aspirational" goal of selling one million cars annually by 2010 or taking 10 percent of the China market, said a senior China-based Toyota executive, who did not want to be identified because he was discussing non-public information.

The automaker will again likely fail to sell one million units this year and Toyota officials have laid the blame squarely on the territorial row that halved September sales.

Its longer-term pledge to boost sales to 1.8 million cars a year by 2015 also looks like a stretch. Toyota and its local Chinese partners sold 883,400 vehicles in China last year.

But some Toyota dealers lament what could have been, if the automaker had had an entry-level model that sold as many as 100,000 vehicles a year as initially envisioned for the Yaris.

"If they had executed their small car planning right, Toyota could have easily hit that 1 million unit sales milestone or 10 percent market share objective several years ago," said a major operator of Toyota dealerships who declined to be named because of the sensitive nature of his comments.

Toyota spokesman Akihiro Yamamoto declined to comment on the dealer's view, saying only that the company should "continue to strive to provide products that satisfy and appeal to more Chinese consumers."

THINK LOCAL

Toyota's fix for the Yaris problem is a new, affordable minicar that it has developed specifically for China. Toyota sources told Reuters that the car is loosely based on the no-frills Etios, which sells for as low as $8,350 in India and is expected to hit showrooms in China as early as next year.

The Japanese automaker is adding a few upgrades to appeal to Chinese consumers, taking the price tag closer to $10,000, according to the Toyota sources, who spoke on condition of anonymity because the details are confidential.

That would make it more competitive with GM's Chevy Sail, which costs about 56,000 yuan ($9,000) and well below the Nissan Tiida, which starts at about 100,000 yuan ($16,000).

To succeed, it must not repeat the mistakes of the Yaris and some insiders say that at the core of Toyota's China problem is a failure to localise that has its roots in Japan-centric thinking.

"Our way of beefing up operations in China is to bring in more people from Japan," says a top Toyota executive critical of his own company's China strategy, who also declined to be named due to the sensitivity of the subject. "We should be localizing our business here, promoting Chinese managers, and listening more attentively to Chinese consumers. But we don't."

Toyota's Yamamoto said it is a stretch to associate the Yaris' slower-than-expected sales with the degree of localization of the company's operations in China. "We're promoting more local Chinese employees to management ranks and will continue to do so in the future," he said.

But when looking to add to the ageing Vios model in the mid-2000s, Toyota's Japan-based product planners ignored the advice of sales executives in China to use an affordable car under development that had been designed for emerging markets.

The planners thought the car was too shabby for Chinese buyers and decided to introduce it in India instead. That car later became the Etios.

Nor did Toyota seek help from its minicar affiliate Daihatsu Motor Co Ltd, believing Daihatsu cars were not upscale enough.

It also felt no immediate need to come up with a low-cost China car designed from the ground up. Instead, several top executives pushed the Yaris because it was one of the few lower priced left-hand-drive small cars available and it had a global supply base for parts that could be used in China.

YES, DEAR?

Toyota spokesman Yamamoto declined to elaborate on the new low-cost model, but pointed to a concept car the company showed earlier this year for hints. The car, called Dear Qin, was styled to woo China's entry-level consumers, especially first-time buyers in their 20s and early 30s.

Masaki Taketani, director of research firm IHS Automotive, said Toyota managed to upgrade the bare-bones Etios and keep it affordable by using a new, low-cost platform called Entry Family Compact. The platform meshes a bit of new technology with lower-cost underpinnings from an older, retired small car model, according to IHS.

Toyota is likely to launch a sedan version of the new low-cost car in China in September and a hatchback in December 2013, he said.

Toyota and its component suppliers have told IHS researchers they are counting on the new sedan and hatchback to generate combined annual sales of up to 250,000, but IHS is not that optimistic.

Toyota would be lucky if it were able to sell 100,000 cars combined given the intense competition in the low-cost small car segment, Taketani says.

"Gradually, Toyota is getting around to filling the gap in its low-cost small car line-up in China," he said. "But it's still doubtful that the new car's going to be a runaway success like GM's Sail and Nissan's Tiida." ($1 = 6.2503 Chinese yuan)

(Editing by Emily Kaiser and Edwina Gibbs)

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