TOKYO -- Nissan Motor Co. is most at risk in China among Japan's top three car makers given its huge $1 billion investment in the country's booming but uncertain auto sector, Standard & Poor's said on Thursday.
"Nissan, among Japanese OEMs (original equipment manufacturers), has the most aggressive growth plans, and could potentially suffer from adverse market development," said S&P's senior auto analyst Chizuko Satsukawa.
Satsukawa noted that Nissan's local 50-50 joint venture, Dongfeng Motor Co, had a big workforce, and that would make it difficult to cut China's notoriously high production costs.
"It is uncertain whether Nissan will be able to achieve significant cost reduction and healthy and sustainable returns on the large investment," she told reporters and analysts in a teleconference.
Nissan, Japan's third-biggest auto maker and 44 percent owned by France's Renault, is aiming to sell 300,000 vehicles in China in 2007 under the venture with Dongfeng.
Toyota Motor Corp., however, was well-placed to bring costs down through its strong supplier network, getting help from the presence of group parts makers Denso Corp. and Aisin Seiki Co., Satsukawa said.
Although Toyota also faces risks, particularly from its planned entry into China's fledgling and murky auto financing business, the auto maker has managed financing risk well in other regions, she noted.
Toyota, the world's number-two car maker, is aiming to grab 10 percent of the Chinese auto market by 2010, with an estimated 350,000 units, including sales from minivehicle unit Daihatsu Motor Co.
Strong brand recognition, meanwhile, will put Honda Motor Co. at an advantage compared to its peers, through its early penetration with motorcycles.
Honda, Japan's second-biggest auto maker, is also in a uniquely beneficial position thanks to its soon-to-be-completed export-only assembly plant, which could mitigate the overcapacity problem, Satsukawa said.
Overall, all three Japanese companies were better-placed to succeed in China compared with their European and U.S. counterparts, she said, although thinning profit margins due to falling car prices would likely hit all players.
"The three players are expected to increase their presence in China as they are in a better position to weather price competition amid a potential overcapacity situation," Satsukawa said.
"(But) it's premature to tell whether they'll be able to generate sustainable and healthy returns from their Chinese operations," she said.
S&P said in a report that, although China offers huge opportunities for global firms facing saturated markets at home, the mainland could "prove volatile and cash flows from joint ventures could disappoint", mainly because of overcapacity.
Market leader Volkswagen AG, with around 35 percent market share, would likely maintain its strong position in China, although expansion would be difficult, said Maria Bissinger, S&P's Europe auto analyst.
"It will face competition from new products in the middle of -the market where it has traditionally been strongest," she said.
Volkswagen is investing five billion euros ($6.42 billion) to double capacity in China to 1.6 million units by 2008.
Car sales in China rose around 80 percent in 2003 to break the two million mark and are expected to maintain strong growth at double-digit percentage rates this year. But capacity is set to overshoot demand by 2012, reaching about eight million units, S&P said.
"This is a natural point of evolution. A shake-up needs to happen," said John Bailey, who heads S&P's corporate ratings in the greater China region.