BEIJING/SHANGHAI (Reuters) - A year after their China sales were battered by protests in a territorial dispute, Japan's big automakers are finding it tough to bounce back in the world's biggest market. Demand for cars is rising fastest in provinces where anti-Japan sentiment historically runs deepest - a legacy of Japanese occupation around World War Two.
In relatively more Japan-friendly parts of southern China such as Guangdong, Toyota Motor Corp (7203.T), Nissan Motor Co (7201.T) and Honda Motor Co (7267.T) are returning to sales levels near those seen before a diplomatic row last September over a group of rocky, uninhabited islets in the East China Sea.
A tougher challenge for the Japanese brands are the coastal and northeastern provinces such as Shandong, which overtook Guangdong as China's biggest car market in 2009, Zhejiang and Jiangsu - part of a large swathe of the country that Japan invaded and occupied during the late 1930s.
It's in these faster-emerging markets that the Japanese are struggling to win back Chinese hearts and wallets.
Over the past decade, Japanese automakers set up a strong base in Guangdong, investing heavily in factories that now form an assembly cluster fed by Japanese parts suppliers in the area. According to industry consultant R.L. POLK & Co, Japanese cars had 41 percent market share in Guangdong in 2011, though that has dipped a few percentage points since last year's dispute.
But northern and eastern provinces are now eclipsing Guangdong. POLK says Guangdong has been overtaken by both Shandong and Jiangsu in car demand, and its third-ranking is under threat from Zhejiang and Hebei, which was also occupied by Japan over 70 years ago.
"It's a smoldering brush fire today, but could turn into a big five-alarm fire if Japanese automakers don't deal with it," said Yale Zhang, head of Shanghai-based consultant Automotive Foresight. "As demand in mega-markets like Beijing slows significantly, Toyota and other Japanese brands need to penetrate even deeper into the Chinese market."
Protests erupted across China a year ago after Japan nationalized some of the disputed islets - known as Diaoyu in China and Senkaku in Japan - by buying them from a private owner. As passions ran high, thousands of Japanese brand cars were vandalized, and dealerships were attacked by mobs in Qingdao, a major city in Shandong, among other cities.
In a widely-reported incident in mid-September last year, a 51-year-old Chinese man with his family drove his Toyota Corolla past an anti-Japanese demonstration in Xian in Shaanxi province. The car was surrounded by protesters and the man was so badly beaten he was partially paralyzed, and his car destroyed.
Sales of Japanese-branded cars plunged by more than half in September and October from year-earlier levels, and remained weak well into the first half of this year.
Japanese sales are picking up in parts of China, especially in the south and southeast, but sales executives say recovery is frustratingly slow in Jiangsu, Anhui and Shaanxi. A Nissan sales executive based in Guangzhou said the attack on the driver in Xian had been especially damaging as it scared Chinese buyers away from Japanese cars.
"Recovery in Shaanxi is the slowest for us," the executive said, asking not to be named as business is still sensitive to the issue. "We also have to deal with negative campaigns by dealers representing Western brands," he said, referring to some local dealers who tell customers it's unpatriotic or unsafe to own a Japanese car in China.
Song Fangjie, a 28-year-old construction supervisor from Jinan, Shandong's provincial capital, said he liked Japanese cars' fuel economy, but opted for a Volkswagen (VOWG_p.DE) for its safety. "If Japanese car makers offer better service, I might think about buying one," he said, though he recounted how a friend of his was refused service at a gas station as he was driving a Japanese car.
At Toyota, some executives question whether it's wise to pour resources into competing in these hostile markets.
"I think we're much better off focusing on more friendly southern China at this point," said one senior Toyota sales and marketing executive, though he added the company has yet to finalize its approach. He stressed that dealer location was not a factor when it comes to allocating new vehicles and providing marketing support, but he said South China would be a better testing ground to try out new marketing programs such as maker-certified used cars and vehicle-leasing.
Takanori Yokoi, a Beijing-based spokesman, said Toyota was focusing on the tougher, faster-growth, provinces, rather than avoiding them. He noted the opening of a Toyota China branch this year in Nanjing, Jiangsu's capital - and the site of a massacre under Japanese occupation in late-1937 - and has expanded there, also opening a wholly-owned technical center in Changshu.
Yang Liaoliao, a 25-year-old bank accountant from Qingdao, the home of Tsingtao beer in eastern Shandong, said she chose a German car. "I read reports and saw experiments online saying that Japanese car makers save materials to make their cars lighter, so they're maybe not as safe."
"Unlike people in big cities like Shanghai or Beijing, we're more influenced by traditional Confucian culture, which makes us more conservative. When it comes to buying expensive items like cars, anti-Japanese sentiment won't play a big role,' she said.
Toshiaki Mikoshiba, president of Honda's China joint venture with Guangzhou Automobile Group Co (2238.HK) (601238.SS), recognizes the importance of the emerging provinces, but says his firm is not taking specific steps to take on the challenge.
"Our cars are based on Honda's technology, but are made and sold by Chinese people here in China," he told a news conference in Shanghai last week. "We've planted our roots in China. We would like the people to understand our steady efforts."
Nissan, however, is pushing aggressively into Shandong, Jiangsu and other 'tough' provinces, with its "100 Cities" project - an initiative it began in 2011 to raise its presence in some 130 smaller 3rd- to 5th-tier cities across China. Nissan reckons around a fifth of the revenue from those cities comes from Shandong and neighboring Hebei.
As part of the "100 Cities" program, Nissan takes a mini auto show to rural cities on a big trailer - with around 3,000 such roadshows a year - offering customers who have no Nissan dealer nearby a chance to learn about its product line-up and technologies, and to test drive some new models.
The company also late last year began allowing prospective buyers to drive Nissan rental cars - many of its dealers operate rental car businesses - for up to two days free of charge, if they eventually opted to buy a Nissan model. It also said it would offer compensation of up to 200,000 yuan ($32,700) to cover any injuries to those in a Nissan car resulting from anti-Japanese sentiment, as well as repairing and replacing any of its cars written off in any protests.
Nissan has stepped up those efforts this year as it seeks to regain footholds in China, the executive said - noting demand for Nissan cars in Shandong, for example, is at 95 percent of pre-crisis volumes.
"Shandong and those other provinces are tough markets, but we have objectives and can't turn away from it," the executive said, referring to Nissan's mid-term plan to sell 2 million vehicles a year in China by 2016, up from 1.18 million last year. "We can't keep relying on South China."
($1 = 6.1203 Chinese yuan)
Additional reporting by Shanghai newsroom; Editing by Ian Geoghegan