TOKYO (Bloomberg) -- Denso Corp., Toyota Motor Corp.'s largest component supplier, plans to expand production capacity in China over the next 12 months as rising demand outweighs concerns that labor costs in the nation will increase.
Denso, the world's biggest publicly traded auto parts maker, will add “several hundred thousand units” of capacity in China, mostly to make air conditioners for cars, CEO Nobuaki Katoh said. One of Denso's joint-venture plants in China halted production for four and a half days in June as workers walked out demanding higher wages.
“Demand in China is very strong,” Katoh said in an interview on July 7 in Kariya, Japan, where the company is based. “We need to add to our readiness step by step.”
Passenger-car sales in China, the world's largest auto market, rose 10.9 percent from a year earlier to 839,228 units in June. The Chinese economy expanded 11.9 percent in the first quarter. Toyota plans to start building 100,000 Corolla cars a year at its factory in Changchun in the first half of 2012. Honda Motor Co., Japan's second-largest carmaker, aims to expand capacity in China by 28 percent by the second half of 2012.
At least eight strikes since May have forced suppliers to Toyota, Honda and Nissan Motor Co. to raise wages in China, increasing carmakers' costs. Honda agreed to offer a 24 percent pay increase to 1,910 yuan ($282) a month to workers at Honda Auto Parts Manufacturing Co. in Foshan, Guangdong.
Denso hasn't disclosed how much it raised wages to end the walkout at Denso Guangzhou Nansha Co., a joint venture in Guangzhou, Guangdong province.
Wages will probably continue to rise in China, and “there isn't much impact on our profitability,” Katoh said. “Having more frequent conversations with employees and deepening communication is the most fundamental way” to avert further strikes, Katoh said.
Profits this year may exceed Denso's forecast on strong sales in Japan and the United States, Katoh said. Expiring subsidies for car purchases in Japan in September and possible declining consumer confidence in Europe have made the outlook for the second half of this year less certain, he said.
Denso, which makes battery-control computers and electric-current sensors for Toyota's gasoline-electric hybrid cars, said in April it expects net income to rise 34 percent to 98 billion yen ($1.1 billion) in the year ending March 31. Profit may be as much as 114 billion yen, according to the average of 15 analyst estimates compiled by Bloomberg.
Denso is aiming to halve its production costs for parts to be used in carmakers' low-cost models for emerging markets, Katoh said. The company will increase procurement of materials and components in the countries it sells in, he said.
Toyota will start selling the low-cost Etios compact in India later this year, and Nissan plans to sell a $3,000 car built by Bajaj Auto Ltd. Denso already supplies wipers to Tata Motors Ltd.'s Nano, the world's cheapest car.
Denso's main rival is Germany's Robert Bosch GmbH. While growth is important, the company doesn't focus on expanding market share for the sake of being number one, Katoh said. “You lose modesty that way,” he said. “It doesn't put the customer first.”