By Bill Russo （罗威）
Market Conditions in 2011
The 14th Shanghai International Automobile Industry Exhibition (Auto Shanghai 2011) will be held from April 21 to 28. The overall theme for this year’s show is “Innovation for Tomorrow”, which underscores China’s emphasis on building capabilities for development of advanced vehicle technologies. While we will certainly see a great showcase of new technology from both the domestic and multi-national automakers, I will also be tracking several emerging themes at this year’s show.
Let’s start by reviewing the market conditions coming into 2011. Since the onset of the global financial crisis in 2008, the China government released a series of policy incentives to stimulate vehicle demand, which resulted a strong market rebound to 46% annual growth in 2009 and 32% in 2010. Going forward, China’s extraordinary growth will “downshift” to single digits within the next three years, and we will then likely see a stable growth of 3 to 5% per year reaching total sales in excess of 30 million by 2020. In 2011, continued urbanization and growing demand from lower-tier cities will continue to drive the market up, but the growth will slow down to a 10 - 15% annual growth resulting from the termination of major government subsidies and tax incentives.
Recently, profound changes have been taking place in consumer demand and in the competitive landscape, which is impacting the business focus and performance of carmakers in China. On the demand side, first-time buyers from Tier 3 and lower cities are playing an increasingly vital role in driving future market growth. However, purchase motivation and shopping behavior of lower-tier buyers are distinctive from buyers in Tier 1 and Tier 2 Chinese cities. Another emerging trend has been the shift of product preferences for increasingly savvy Chinese consumers. As income levels rise, demand is shifting towards vehicles and segments offering more appealing styling design and functional features.
On the supply side, automakers are faced with an ever more challenging business environment, featured by “hyper-competition”, a likely “credit crunch”, and rising costs which all result in profit deterioration. Pressure of inflation and overcapacity is pushing carmakers to constantly scrutinize investment and production scale in line with demand changes.
To address these challenges in 2011, carmakers must realign their strategic focus toward the fastest growing segments, while allocating resources to where they can outperform their competitors. They have to make sure their product and service offerings address the buyers in the lower-tier cities, which is especially challenging for international brands who have historically been focused on the first and second tier cities in China’s coastal regions.
To unlock volume potentials, a variety of strategic approaches must be considered and evaluated by international carmakers. Leading automakers are increasingly taking an approach that I call “adaptive brand innovation” to extend their product reach and grow share. They are delivering products with China market-specific adaptations and modifications, while extending the range of segment participation to new price-points and product categories. Leading companies are also introducing new brands and products with their Chinese partners.
For green cars, or “New Energy Vehicles”, 2011 will be the 2nd year of demonstration projects funded by China government in 25 select cities. We can expect that government subsidies offered to private buyers since June 2010 will have a mixed effect on the development of hybrid, plug-in hybrid, and battery electric vehicles. It will likely take up to five years before we can derive a meaningful volume figure on the consumer side. It will take that long before the impact of production economics, policy incentives and charge infrastructure can be determined.
Five Key Themes for Auto Shanghai 2011
With the termination of policy incentives, we can expect to see a deceleration of China’s double-digit growth rates to a more stable and sustainable pattern. However, the China auto market will still grow at rates significantly higher than the global auto industry average due to continued urbanization and growing demand in lower tier cities.
In Auto Shanghai 2011, we will likely see several key themes emerge:
1. Automakers will set expectations for more moderate demand growth
In the 12th five-year plan, the China government will attempt to transition from stimulus to market-driven growth. Steps are being taken to tighten credit and government investment in order to tackle inflationary forces, while accelerating urbanization and encouraging consumption. However, urbanization and growth of per-capita GDP will continue to drive the demand for automobiles. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.
As Auto Shanghai is a major PR stage for global and domestic carmakers, they will likely set expectations for sales in 2011 over the near-term horizon. I expect that automakers will set more stable and moderate market sales growth expectations.
2. Innovations that target new “individualistic” choices for Chinese consumers
As income levels continue to rise, demand will shift towards vehicles and segments offering more appealing content and features, which creates opportunities for manufacturers to improve their product mix. While conventional sedan cars have enjoyed the highest market shares in China, consumers are now seeking more innovative designs. Emerging buyers, particularly the younger generation born in the 1980s and female buyers, are increasingly valuing recreational lifestyles and are seeking more individualistic choices. Safety features and telematics systems that provide a friendly interface between occupants and the car’s electronic systems are becoming mainstream, which will be evident in the cars that will be on display this year.
We will be looking at several new product introductions for evidence of this trend:
· Sub-compact cars: Chery Riich G2 (global debut), Chevrolet Aveo (new generation), Kia Rio (3rd generation), FAW Besturn B30 (China debut), and a new global concept car from Mitsubishi.
· Compact cars: New Honda Civic, Nissan Tiida (China debut)
· Mid-size cars: VW Passat B7 (Asia debut)
· Luxury/Full Size cars: New Audi A6 (Asia debut), Mercedes-Benz CLS, SLK (Asia debut), Volvo S80L and S60
· New Energy Vehicles: Volvo V60 PHEV, Toyota Prius PHEV, Ford Focus, C-Max EVs, VW Golf Twindrive PHEV, BMW Mini E electric car, BYD F6DM, Chery Riich M1, SAIC Roewe 550 PHEV, FAW Besturn B50 EV, BAIC C30, C70 EVs, etc.
· Concepts Cars: Ford Vertrek SUV, Buick Compact SUV concept, etc.
3. Products tailored to the growing demand in lower-tier cities
In the market expansion of the past several years, carmakers are recognizing the great potential of lower-tier city demand. However, consumers in Tier 3 and lower cities are quite different from those in the more developed Tier 1 and Tier 2 cities. According to AC Nielsen studies, 90% of them are first time car buyers with a car budget of 80,000 RMB ($12,000) on average and they only have 100K ($15,000) disposable income annually per household, however, they have less financial pressure and a more positive life attitude. Compared to Tier 1 city buyers, they have less product knowledge, but a faster purchase process. They value durability, fuel economy and convenience, more than appealing design and high tech features. They are aware of and therefore less discerning among brands, but tend to choose trustworthy and valuable brands known to most of their friends and family.
To gain these lower tier consumers, carmakers have to adapt their product and marketing strategy to address those basic needs. More than providing a cheap car, automakers need to do a better job to smartly deliver lower-priced cars that have acceptable quality and functionality. We should take note of the products that are unveiled that which targeting these emerging lower-tier consumers. Vehicles to watch include BYD F3, Great Wall Voleex C30, Besturn 350, and Chery A3. The local brands of the multi-national companies such as SAIC-GM’s Baojun 630 are also targeting this opportunity.
4. Innovative products and brands for a hyper-competitive automotive market
It is reported that a total of 141 new and refreshed vehicles were launched in China in 2010. This figure will rise up to more than 200 in 2011. However, among hundreds of vehicles in the market, only 20 to 30 models enjoyed monthly sales of 10,000 and above. The China market is now experiencing what many companies doing business globally have called “hyper-competition”. In 2011, we will see even more intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to capture growth opportunities in China. As this is happening, the local manufacturers will strive to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers. It is evident from last year that Great Wall and Geely are on the rise, and are hoping to maintain momentum with their upcoming product introductions, while Chery and BYD have struggled to sustain momentum in the marketplace. Models to watch are Geely Emgrand EX8 SUV, GWM Voleex C70 (mid-sized sedan), BYD M6 (7-seat MPV), and BYD S8 (Coupe).
In 2010, there was a high degree of variance in the sales performance among local and international brands due to differences in their China strategies and product commitments. German brands (VW, Audi, BMW, MB) are obviously taking the lead of upper segments over the American and Japanese ones. This gap may widen in 2011 as Toyota, Honda and Nissan and their JVs may suffer from funding and supply challenges from Japan as in the aftermath of the recent earthquake and tsunami.
Great Wall and Geely are surely on the rise with new product introductions, while Chery and BYD have been slowing down due to internal operational issues.
5. Adaptive brand innovation to extend product reach and grow market share
A great majority of international brands have effectively defended their market positions against local brands. While some of this success is a result of an expanded product portfolio, it is also due to some very smart business strategies. One of the most innovative approaches I have observed is what I call “adaptive brand innovation”. This approach involves delivering China market-specific adaptations and modifications, while extending the market positioning to new price-points and product categories, often with the introduction of new brands and products. These approaches are often taken together with local Chinese joint venture partners.
As early as 2005, international brands began this approach with different levels of modification ranging from exterior facelifts, powertrain upgrades, restyling of vehicles, and wheelbase extensions. Typical examples are the extended wheelbase includes Audi A4L and A6L, BMW 5 and MB E-class in the luxury segment, as well as the long wheelbase VW Magotan for chauffer driven buyers. Adaptation of smaller engines to new vehicles is also a way to increase Chinese consumer interest in the product, such as new generation VW 1.4TSI Polo GTI and Golf 6 that dropped the 1.6L and 1.8T engines used by last generation platform.
Many international companies are introducing new brands and products together with their Chinese partners. While initially in response to government regulations on new joint ventures, they are now pursuing this as a means for capturing the volume opportunities in the lower- priced segments. This approach can include co-developing a new product under an international brand, or creating a new mid-market brand within the context of a JV, or supporting the Chinese partner’s local brand development. Several international OEMs are already moving forward in those directions. Example include the Lavida developed by SAIC and VW, the SGM Baojun (off old Excelle platform), Dongfeng Honda DB1 (off the old Civic platform), GZ Honda Everus car (off Honda City platform), and a new brand to be introduced by FAW-VW (possibly off Bora/Jetta platform).
As the engine for growth in the 21st Century automotive industry, the China auto industry has taken center stage in the battle for global industry dominance. Automakers from all over the world will therefore invest heavily to showcase “Innovation for Tomorrow” at Auto Shanghai 2011. To grow sales potential today, carmakers are realigning their strategic focus to tap into the themes noted in this article.
In summary, I expect automakers will set expectations for more moderate demand growth. We will see innovations that target new “individualistic” choices for Chinese consumers, as well as products tailored to the growing demand in lower-tier cities, while carmaker will launch innovative new products and brands to stand out in a hyper-competitive automotive market. The market leaders will increasingly seek to leverage adaptive brand innovation to extend their product reach in order to grow market share.
Bill Russo, is the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.