China gobbling up brand-name cars
On a warm afternoon in late April, Yu Aao sits in the plush customer lounge at the SAIC Anji Buick dealership in Beijing, watching Chinese soap operas and sipping on a cool drink while some routine maintenance is being performed on her car in the adjoining garage.
Just a few months before, Ms. Yu, 25, walked into the same dealership with a bag full of cash and bought her first car, a $34,000 Buick Regal.
Actually, it was her parents who funded the purchase. She says she decided on a Regal because it was “fashionable,” but also because her boyfriend has one too, and he told her they were good cars. Despite dozens of competing brands, Ms. Yu says she didn’t even consider another car.
But don’t think Ms. Yu is some sort of spoiled Chinese debutante. She’s typical of a blossoming group of middle-class 20-and 30-some-things who are driving China’s insatiable demand for new vehicles and the intense competition among foreign and domestic carmakers.
It wasn’t that long ago that the bulk of new cars sold in the country were to the rich elite, hotels or taxi companies as chauffeured vehicles. That’s certainly still a key market for new vehicles, but over the past 15 years, with the rising middle class, there has been a significant shift in consumer patterns in China.
Now, the primary target for carmakers is young professionals like Ms. Yu, who are buying their first cars with the backing of relatives, many of whom have never owned a vehicle of their own, says Ma XiJun, SAIC Anji Buick’s general manager.
Much of the advertising in the country is squarely focused on the pursuit of a life better than one’s parents. That is clearly the message in the recent rebranding of BYD, a leading Chinese manufacturer. Originally, BYD stood for Biyadi Gufen Youxian. It now stands for “Build Your Dreams.”
The echo of 1950s “Americana” is not accidental. As one industry executive put it at the Beijing Auto Show, held in late April, the Chinese market now represents the single greatest opportunity for new car sales since the post-Second World War era in the United States.
While China’s coastal cities, like Beijing and Shanghai, have become mature markets for auto sales, there are still hundreds of inland cities where most manufacturers have yet to make inroads, but have populations hovering around the million-person mark.
It’s little wonder then that most industry observers expect double-digit sales growth in China for at least the next five years, if not the next two decades.
Indeed, almost all manufacturers and analysts have undershot their expectations for the Chinese market.
“The numbers are incredible,” says Tim Lee, president, GM International Operations. “We’re going to exceed two million units this year, which is five years sooner than we ever predicted in our own growth pattern curves. And we’ll be to three-million units by 2015, which is 10 years sooner than we thought it would be.”
To put this in perspective, just under 1.5 million cars and trucks were sold in Canada last year by all manufacturers. China sold 1.6 million units in the month of Marchalone.
Last year, a dismal one for car sales in the United States and Europe, saw China surge ahead to become the top market for auto sales, with 13.6 million vehicles sold compared with 10.4 million sold in the United States, a decline of 21%.
“The tightening credit markets didn’t have an impact on sales last year because people buy with cash in China,” Mr. Ma says. Only about 10% of the 2,500 Buicks sold at Mr. Ma’s dealership last year were bought on credit, with the bulk of sales made in cash pooled together by relatives.
Of course, those sales were also fueled by the $586-billion Chinese stimulus package that created millions of jobs for infrastructure projects and investment. While the stimulus funds didn’t directly go into financing new vehicles, it went a long way in improving consumer confidence.
Many expect China’s current dominant position in auto sales to become a permanent one.
In the United States, roughly 800 out of 1,000 people own a car. In China, only about 80 out of 1,000 people own a car, highlighting the growth potential of the market.
“When I was first starting out, I never thought I would own a car. I thought if I could have a nice bicycle with 28-inch wheels made of a good steel that wouldn’t rust, I would be happy,” says David Shi, Buick’s general manager of marketing and distribution in China. “Now I own three vehicles.”
Most predict that sales will cool this year as the stimulus dollars work their way out of the system. But in the first three months, the market’s momentum continued to outpace the rest of the world, up 70% year-over-year, according to the Chinese Automobile Manufacturers Association figures.
J.D. Power and Associates expects passenger vehicles sales overall to increase 10% in 2010; and 16% for light commercial vehicles. That’s on the back of a record year in 2009. It forecasts, however, total sales to jump 55% over the next five years.
Meanwhile, for auto manufacturers, the lessons being learned in China are being adapted in the other so-called BRIC nations — Brazil, Russia and India.
“China is just overall an exploding market, and we’re beginning to see that India is going to be very similar to that,” says David Cole, chairman of the Detroit-based Center for Automotive Research. “Any time you have that sort of dynamic, it tells you that you have to be in the middle of it.”
Last year, GM’s international operations were the only profitable division in the company. “GM is highly integrated globally, and were they not integrated globally, they could have easily disappeared in the pain of the past couple years,” says Mr. Cole.
Companies who made early inroads into China, like GM, are reaping the rewards.
Volkswagen, for instance, was the first foreign carmaker to forge a joint venture in China, in 1984, after the country pried opened its doors to foreign interests. Its Santana taxi cabs now cover the streets, and its black Audis are driven by the country’s elite and government officials. VW is the most popular brand in the country, with about 13% of market share by unit sales at the end of 2009, according to J.D. Power and Associates.
By contrast, Ford Motor Co., which delivered its first Chinamade Ford in 2003, only holds about 3%of the market.
But Robert Graziano, chief executive, Ford Motor [China] Ltd., says he is undeterred by his company’s late arrival to the party.
“We will grow as the market grows,” he says in an interview. Ford is planning to launch four new vehicles into the Chinese market in the next three years. It will also grow its dealership network by 70 outlets from the 240 it currently has.
With the right products, however, Ford can make some fast gains in the market. Toyota Motors Corp., for example, another late arrival in China, now sits as the No. 2 brand in the country after just seven years.
VW’s and Toyota’s success is partly a matter of perception. Chinese consumers put safety as their No. 1 priority, second only to price. That could be because the Chinese consumer has grown up with poor-quality vehicles, says Joseph Liu, executive vice-president, Shanghai GM.
German brands are deemed by Chinese consumers to be tops in safety, followed by Japanese brands, then American, South Korea and finally domestic brands like SAIC, BYD, Geely and FAW.
Chinese consumers differ from North American and European markets in other areas, however. For example, they are more fixated on the interiors of the vehicles, says Mr. Liu.
GM had to design the Chinese version of the Buick La-Crosse with a control panel in the back seat for air conditioning and heating. This is for the comfort of its chauffeured customers, along with a front passenger seat that can be pushed down with controls in the back seat for more room.
Chinese consumers also put a high priority on service-centre networks. Given most car buyers are first-car buyers, many don’t even know how to change a tire, Mr. Liu says.
Despite the seemingly unlimited potential of the market, the largest and most obvious obstacle for foreign companies competing in China remains the government hurdles, says Tim Dunne, director of global automotive operations for J.D. Power and Associates.
Foreign manufacturers must have a Chinese partner, which means sharing their profits. “The government doesn’t hide that it would like to have domestic Chinese brands account for half of passenger vehicle sales,” Mr. Dunne says. “They make no bones about that.”
That requirement is not so much a barrier to entry as it is to profitability. There are currently 94 companies competing in the Chinese market; of the 13,000 dealerships across the country, about one-third are at the break-even mark or losing money.
While the Chinese market is clearly ripe for consolidation, other government restrictions prevent the outright elimination of competition, including mandating that factories not close in certain regions as a result of consolidation.
Another major factor hindering profitability are lower-margin vehicles. The average new vehicle transaction price in the U.S. last year was $27,500; it was only $17,500 in China, Mr. Dunne notes.
“When you compare the U.S. market to China, it’s not really apples to apples. They sell about two million [microbuses] a year. They cost $5,000 each,” he says.
“Yes, in absolute terms China is selling more in terms of number of vehicles. But in terms of money changing hands, the U.S. is much larger.”
By 2015, J.D. Power estimates about 57% of the vehicles sold in China will be in the less-profitable compact and sub-compact segments, with more than 125 different models to choose from.
By contrast, only about 22% of U.S. sales are expected to be in the compact segments in five years time; nearly 60% of sales will be in more profitable luxury cars, SUVs, pickups and minivans.
But government intervention in the industry is not all negative. The Chinese government has signalled it intends to create some of the most aggressive fuel-efficiency standards in the world. The reason is not so much environmental as it is fuel supply.
“China is the second-largest consumer of oil in the world,” Mr. Dunne says. “As the car industry grows, that number will grow. A lot of those oil resources, like in the U.S., they have to import at huge costs. So, they’re looking for alternatives to that.”
Although it has yet to formalize it into law, the government has signalled it will require vehicles sold in the country to be 20% more fuel-efficient than current models by 2012.
Most manufacturers are scrambling to electrify their vehicles. The economies of scale the Chinese market offers could finally drive down the price of producing hybrid and electric-vehicles batteries, making them more affordable around the world. Geely, for instance, has said it estimates more than two million electric and hybrid vehicles will be sold in China by 2020, and that electric vehicles will outsell traditional power-trains by 2050.
The market appears receptive. A recent Ernst & Young survey found that 60% of Chinese consumers would consider buying a plug-in hybrid or electric vehicle, five times the number of respondents than in the U.S., Japan, Germany, the U.K., Italy and France.
Mike Hanley, Ernst & Young global automotive leader, says this should be heartening for manufacturers planning such vehicles. Even if only a small percentage of those who said they would consider purchasing one did, carmakers would easily sell out their 2010 and 2011 production runs.
For Shanghai GM’s Mr. Lui, the push for greater emissions only highlights the importance of understanding the Chinese market.
“The government can make decisions very quickly,” he says. “They can make an announcement one day and implement it one year later or six months later. That is a bad thing if you don’t have a clear path. That is why I say in order to do business in China you have to find a way to understand the government policy when they develop it. Otherwise, you’ll be killed.”
Photograph by: Feng Li, Getty Images