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During the last months, Nissan has been suffering the effects of a rising political battle between Japan and China. The two countries have become involved in an escalating diplomatic conflict ever since China stepped up its presence near a chain of uninhabited islands located in the East China Sea and claimed by Japan since the late XIX century. The conflict over those islands, known as Senkaku in Japan and Diayou in China, has resurfaced historical tensions between the two nations, which has triggered a sudden and violent anti Japanese sentiment in the Chinese mainland.

There have been a number of boycotts and even violent protests taking place all over Chinese cities, with Japanese car makers counting themselves among the victims of those. Nissan, the Japanese carmaker with the biggest exposition to the Chinese market, is suffering greatly from this situation. With over 30% of its sales coming from the mainland, the 35% plunge suffered by the company has translated to a reduction of profit estimated at around 20%.

This makes for a dangerous comparison with other Japanese carmakers which have far lower dependence on the Chinese market, with sales there estimated at ranges of 10% of total global sales. It is important for Nissan to consider what are the roots for this situation, and how should it react to them. It is clear the plunge in sales is caused by non-market factors, with clients being driven away from Nissan car dealers for fear of reprisal on the grounds of sympathizing with Japanese companies.

The Chinese government has been slow to quell these protests, even going so far as to fuel them in some cases, and the political scenario is undoubtedly unlikely to come to a resolution as the Japanese government cannot afford to simply relinquish control of the islands, having just recently acquired them from a private owner. The Chinese, on the other hand, cannot afford to appear wear before their increasingly nationalistic and self assured population. In this climate, Japanese investment in China has slowed, which contrasts with the fast growth it experience just a year efore. However, China is still a very important market. Non Japanese carmakers are profiting from this, and their sales are growing quickly in a country with growth for the automobile sector hovering at rates close to 6%. When considering the size of the Chinese car market, it becomes obvious Nissan cannot afford to just step away from it. Besides, there are reasons for optimism. This episode has not been the first anti Japanese rally suffered by carmakers, and it is expected it will eventually subside.

There is a number of actions the Japanese companies can undertake to help reach a peaceful, acceptable solution for all parties. Keidanren, Japan’s largest business lobby group, clearly understands the need for this and Nissan, as one of the biggest national companies with presence in the mainland, would do well to embrace and help broaden the scope of the efforts being made by Japanese companies to reduce tensions with the Chinese citizens. It is not all politics for Nissan, however, as there are many economic factors which must be taken into account when deciding for the future course of the company in the country.

Whereas the political rift between the two countries appears to be widening, the economic bonds between the countries are deeper than ever. Japanese companies find themselves relying on Chinese cheap labor, while the later include a very large part of Japanese technology in their products- to the point of the iPhone being targeted in the Chinese boycotts, due to the high amount of components from that country. However it could be cautious to reconsider its reliance on China and reduce their huge dependence to it. Nissan would do well to explore possibilities, both in manufacturing and sales, in other dynamic Asian economies.

Thailand and Indonesia feature as rising stars in a continent with rapid growth rates, and with a number of Free Trade Agreements being discussed. The Company cannot afford to miss out on those opportunities, and thus should continue to exploit every opportunity given in these markets. Also the United States continues as a big market to take into consideration. It is not only outside of China where opportunities lie, however, as the interior, western part of China is rapidly increasing its share of drivers, and is sure to represent an ever larger slice of the market in the coming years.

American and German carmakers are profiting from this unexpected, politically driven outburst against Japanese companies. However, this must not give way to rash decisions at the reins of these companies. The protests will eventually subside, the market will stabilize and with other, more mature markets such as the European one, showing negative rates of growth, there is no many alternatives for Nissan but to endure the passing storm and cement its presence in the Chinese market.

As many newspapers have shown, Chinese authorities have been playing both sides on this conflict by quietly encouraging recent anti-Japanese protests, manipulating the public opinion and then publicly reining them in. Experts point out that the authorities have caused some of the protests that have increased the anti-Japanese sentiment and affected its industry as a whole. At the same time, officials have been careful to keep control over the masses, leery that gatherings of malcontents could easily turn against their own government.

If Nissan wants to stay on the Chinese market, needs an effective non-market strategy coordinated and complementary to the market strategy they already have. The non-market management is also their responsibility. Nissan?s lobbying strategy must stop these behaviors. It must urge Chinese Government to stop with these calibrated politics to increase pressure on Japan, appealing to the importance for both nations of maintaining good relations.

China was Japan?s largest trading partner last year, and Japan is China?s second biggest trading partner after the United States and also China?s largest outside investor. About 10 million Chinese are employed directly or indirectly by Japanese companies. Lots of independent media outlets are publishing proofs of how propaganda officials and plainclothes police officers have encouraged and given instructions to groups of protesters about how to demonstrate in a more effective way. Also, many blog posts criticizing the protests and violence were wiped off China’s microblogs.

The same has occurred in Twitter and other social media, which has been all but silenced. The biggest proof of government encouragement of the protests is that they happened at all. Demonstrations are banned without legal registration. Moreover, most experts accused the party for using the demonstrations to release built-up pressure and frustration among citizens and to redirect their attention to foreign issues rather than focusing on domestic matters and directing their anger at the leadership.

This is also happening at a moment of succession, when every faction is competing for a seat in the system and when a “pro-nationalism” use of the conflict could make them gain political power and votes. In that arena, it is also very interesting to focus, as a 2nd part of the strategy, on the Free Trade Agreement that Japan, China and South Korea are planning to sign in 2013 and the trilateral agreement on for the promotion, provision and protection of investments they have already signed.

The creation of a free trade area will bring more prosperity to the countries of the region and a bigger integration, which has the potential for, as it occurred in the EU, a gradual process to forget the tensions caused by the past among these countries. Nissan has to empower the common understanding between the parties, inviting them to think about the importance of reducing tensions in order to succeed on an agreement, which will be beneficial to all. In that case, it could be assisted by the third interested party, South Korea.

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