GADFLY: China and Toyota should be made for each other, but they’re in different lanes

Sydney — The world’s biggest car maker and the world’s biggest car market should be made for each other. So why is Toyota Motor misfiring in China?

As recently as 2015, it was the number two marque in the country, behind the eternally dominant Volkswagen (VW). Since then, though, sales have flat-lined, while rivals have picked up their game. In December, even Hyundai Motor — still recovering from an informal boycott thanks to political tensions between South Korea and China — shifted more units, leaving Toyota barely clinging on in the top 10.

Part of the problem lies in its model range. The category that’s taken the Chinese market by storm has been the sub-compact SUV, which fits the styling of a Land Cruiser into the parking space of a Corolla. Toyota hasn’t had a contender in this segment, leaving the market wide open for the likes of Honda’s XR-V and Geely Automobile Holdings’s Emgrand X7. The roll-out this year of the C-HR, with a high top and a wheelbase barely longer than a Yaris, should help matters — but it’s late to the game.

There’s also a shortage of manufacturing capacity. A target of selling 1.4-million cars in China during 2018 should be considered a "stretch goal" that will be hard to achieve without upgrading production lines, Reuters reported last week, citing company insiders. Even then, Toyota would almost certainly find itself trailing VW, Honda and Geely — not to mention General Motors, which moved more than 4-million units last year if you put all its marques under a single umbrella.

There’s also a shortage of manufacturing capacity. A target of selling 1.4-million cars in China during 2018 should be considered a ‘stretch goal’ that will be hard to achieve

One could argue that a company with almost half of Japan’s domestic market that’s gunning against Ford for the number two position in the US can afford to bide its time — especially given the changes looming as Beijing strives to electrify the country’s automotive industry. In Europe, Toyota has been perfectly happy for many years with a market share that trails even premium marques such as BMW and Daimler, and in India it’s a relatively minor presence.

Financial results on Tuesday showed Toyota generated operating income of ¥673.6bn ($6.2bn) for the third quarter, beating estimates. The Japanese car maker also raised its profit forecast for the third time this fiscal year, helped by America’s love for SUVs. Operating profit is now expected to rise to ¥2.2-trillion in the 12 months ending March 31, from a ¥2-trillion forecast in November.

Hybrids’ dismal showing

Toyota also has some potential strengths in China that may be under-appreciated. Its sales of hybrid cars there have been dismal of late, with the mighty Prius typically shifting no more than a few dozen a year — but with plug-in hybrid versions of the Corolla and Levin models reported to be coming, that could turn on a dime.

Beijing plans to treat plug-in hybrids — which use batteries as their main power supply, rather than conventional hybrids that are mainly dependent on the engine — as essentially the same as fully electric cars. Given the steep learning curve that fully electric vehicles (EVs) are facing to fulfil China’s mandates and make a profit, that halfway-house approach might prove potent for Toyota.

Still, no automobile company with ambitions to global dominance can afford to let things slide in the world’s biggest car market. Nor one that wants to keep on the right side of its local joint-venture partners, FAW Car and Guangzhou Automobile Group.

With Geely in aggressive expansion mode, Nissan Motor planning to spend ¥1-trillion in China to crack the EV market, and even Hyundai and Kia Motors targeting 1.35-million units in the country this year after a horror 2017, Toyota risks being left behind.

Patience is a virtue — but if you’re not aiming at pole position, you risk ending up in the pits.

• This column does not necessarily reflect the opinion of Bloomberg LP and/or its owners.

• Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Bloomberg