Foreign Carmakers Try Brands Just for China

Bloomberg Business Week, March 3, 2011

GM, Honda, and others are reaching out to less affluent shoppers in China's interior with basic entry-level models

By Liza Lin

Chinese tour guide Chen Libin drives about 300 kilometers each day around the Inner Mongolia grasslands for work, so reliability is a key consideration in determining how he'll spend up to 80,000 yuan ($12,153) on a new car. Chen says models by domestic automakers such as Tianjin FAW Xiali Automobile start breaking down after two years, while foreign cars go at least five years without major problems. That's why he's holding on to his aging Xiali A+ sedan until General Motors (GM) and Honda Motor (HMC) roll out their new China-only cars later this year. "These brands are definitely something I will consider," says Chen of GM's upcoming Baojun and Honda's Li Nian. "Foreign technology offers drivers more comfort, fuel efficiency, and a lower cost of maintenance."

Car shoppers such as Chen are the holy grail for GM, Honda, and Nissan Motor, which are creating brands targeted specially for the world's biggest car market. Their goal is to boost sales in China's interior, where incomes rose almost 11 percent last year. The cheaper brands will help them compete on price against local manufacturers without diluting the cachet their core brands enjoy in more affluent regions of China, says John Zeng, an industry analyst at J.D. Power & Associates (MHP) in Shanghai. "It's a win-win situation," he says. "Consumers pay a lower price for foreign-brand technology, and the foreign makers benefit from an increase in sales volume without hurting their brand image."

These made-for-China brands will use older model platforms and have few extra features, says Leah Jiang, an analyst with Macquarie Research in Shanghai. Automatic transmissions, antilock brakes, auto-climate control, and reclining seats may be left out to keep prices as low as 50,000 yuan ($7,600), says Koji Endo, an auto analyst at Advanced Research Japan.

The market for low-cost cars in China is dominated by domestic automakers BYD, Geely Automobile Holdings, and Chery Automobile. Local brands sell three of every four cars priced below 50,000 yuan and more than half of those costing between 50,000 and 80,000, says Jiang. "I'm not worried about these new brands at all," says Jin Yibo, assistant general manager for Chery, which enjoyed a 36 percent sales increase last year. "Chinese cars offer better value for money, and we understand the local market and consumer very well." Still, BYD on Feb. 25 said it slashed prices on five car models to boost its competitiveness.

Vehicle sales in China grew more than 32 percent in 2010, to almost 18.1 million. Sales are expected to increase about 15 percent this year, with two-thirds of buyers coming from cities where the average annual income is less than $5,000, according to J.D. Power. "If these brands are successful, they are going to have a much higher growth rate," says Bill Russo, a Beijing-based senior adviser at Booz & Co. "The number of people that can shop at that price point is much larger."

GM, the largest foreign automaker in China, will start selling the four-door Baojun 630 compact sedan this spring through its SAIC-GM-Wuling Automotive joint venture. The car will be available at more than 100 dealers, the company says. GM, which hasn't announced Baojun prices, is targeting 15 percent growth next year, following a 29 percent increase last year, to 2.35 million vehicles. Baojun means "treasured horse."

Volkswagen, China's second-largest foreign car manufacturer, and local partners SAIC Motor and FAW Group may create a China-specific brand, said the company's China chief executive, Karl-Thomas Neumann, in January. Honda, Japan's second-largest carmaker, and local partner Guangzhou Automobile Group expect to start selling the Li Nian S1 sedan early this year. Pricing has not been announced. The brand, based on the City model Honda sells in other emerging markets, will have small engines and will be aimed at entry-level buyers. "We are aiming that these Li Nian users will step up to the Honda brand," says Takayuki Fujii, a Beijing-based spokesman for Honda. Honda sales in China increased 12 percent last year and are expected to grow 10 percent this year, the company says.

Nissan, Japan's second-largest automaker, and local partner Dongfeng Motor Group say their upcoming Qi Chen, or "morning star," is intended to meet demand for cheaper models. Endo says it likely will be priced between 50,000 and 70,000 yuan. The car will have the "technologies, quality level, engineering standards" of a foreign brand, says Nissan Chief Operating Officer Toshiyuki Shiga. "I can see some optimistic forecast in this market."

The bottom line: As cars become commonplace in China's coastal regions, foreign automakers are launching cheaper brands for the nation's interior.

With Tian Ying and Li Yanping. Lin is a reporter for Bloomberg News.

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