A Future Perspective on China’s Auto Market

The 2000-2010 boom in the automotive market in China made it the world’s largest single country new market by 2010, overtaking the US.

The country’s very large population, overall increase of living standards and rapid pace of urbanization -which has created 14 modern metropolises with populations over 10 million, and 150+ cities with populations over 1 million – were natural market factors that fueled this extraordinary growth period.  And as the market continued to grow and develop, players rushed to enter the market making competition more intense and fierce, business models became more creative and increasing sales channels added to the complexity of the market causing the growth rate to slow down: however, still leading the world in new car sales every year.  The Chinese automotive potential is still very large and untapped as many regions and cities are yet to develop and modernize but companies will need to redefine their market penetrations strategies to be more focused, segmenting the market and adapting to the evolving behaviors and maturity of the consumers.

China’s vast territory and geographic diversity is one dimension that can be segmented. based on regional topographic differences, cultural and consumer heterogeneity.  Companies are able to select target markets, establish their expansion agenda, and improve their marketing effectiveness by focusing and developing in-depth market understanding.  The Chinese auto market has strong regional characteristic unlike the North American and European market.  One such difference is the massive migrations to cities over the last few decades,that brought opportunities for the population to move from poverty to prosperity..  Many consumers, especially in tier 1 or tier 2 cities, have already purchased a first, entry-level car and some will be ready to upgrade to newer or better models.  In contrast, buyers in,tier 3 or tier 4 cities are still buying their first automobile and currently contribute about 40% of total new car sales.  It is expected that sales of new cars in Tier 3 and 4 cities will continue to grow to reach 60% by 2020. While most multi-national firms such as Toyota and VW focus their business and sales activities around tier 1 or tier 2 cities, local car manufactures focus on the lower tier cities with products that fit better to the purchasing power of the consumers in these areas. As markets in large cities gradually reach a saturation point, local automakers can expect to see more intense competition from foreign firms as they attempt to enter the lower tier markets.

To understand the market better it can also be segmented by vehicle category and originating country.  Foreign firms dominate China’s premium car market with German automakers accounting for 80 percent of market share; other European, Japanese, and US brands make up the remainder. However, competition is heating up as many local auto firms enter into this category.  For the foreign firms to defend their market share they must understand the purchasing decision-making criteria of the consumers: their preferences, know about the applicable policies and regulations that impact the operation of a vehicle (ie. emission control limits), invigorate their brand reputation, and excel operationally to provide best customer service with the right price for the vehicles.  Some examples:

• Target the growing segment of the market by offering the right products: foreign automakers can review their product-cycle plans based on past experiences and identify the most favorable segments in which they might participate. For example, despite the rising demand for high-end electric vehicle, sales of SUVs have taken-off in the past few years and the momentum in this class is expected to continue as the number of wealthy people increase. The Chinese consumer will choose a larger car depending on affordability, especially as Chinese-multinational joint ventures aggressively enter the market with C models (5-door hatchback).
• Develop a China-specific product portfolio: the large amount of entry-level consumers will encourage premium brands to further localize their vehicle portfolio to reduce cost and make their cars more affordable. Many local auto firms seek to form joint venture partnerships with foreign automakers to offer China-specific car models – for instance, a premium-branded car with a dynamic exterior but less advanced powertrain technology.

In summary, the auto market potential in China is very large but at the same time very complex.  To be successful in this market, a company needs to define segments in the market and develop clear strategies to address each segment.   In this article 2 segmentation criteria were discussed: 1.  Geographic, where consumers in different regions in China have different transportation needs depending on the topography and economic development of their region 2.  Consumer preference and culture, where the brand reputation is important, trendiness, lifestyle and practicality of the auto are key criteria when making a purchasing decision.

The local market understanding can be obtained either by establishing a direct local presence or by partnering with experts in the industry and it is key to define the right market penetration strategy: right target market, proper product positioning, necessary support organization, sales channels and dealer network.

References:

• McKinsey: Disruptive trends that will transform the auto industry 
• A Study on Western Companies in the Chinese Automotive Market in Relation to Branding
• The Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry
• PwC Automotive Industry Bluebook China Automotive Market

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