Interview: The Development of China's SUV Market

Directors & Boards Magazine, December 2009


What’s your opinion on the development status and patterns of SUV industry? What is the opportunity and challenge in SUV industry?

Bill Russo:

The overall SUV segment in China is experiencing healthy and steady growth, despite the impact of the global financial crisis and the increase in oil prices. Year-to-date September 2009 SUV sales have experienced a 32% year-over-year growth, totaling 441,600 units. Opportunities for SUV growth still come from fast-growing demand for compact SUVs. Chinese consumer preferences are developing in recent years, and Chinese drivers are beginning to seek the enjoyment of both on and off-road utility vehicles. Compact SUVs provide a good balance of capabilities and low fuel consumption for such consumers. This preference for compact SUVs is evident from the year-to-date sales volumes, where 4 out of the top 5 SUVs are compact, accounting for 50% of total SUV sales. Challenges mostly lie in those large displacement and medium to low-end SUVs. Many products above 3.0L lack brand and technology advantages, and concern over higher fuel cost make customers hesitant to choose them.

What are the brand characteristics of SUV industry

Bill Russo:

In the Chinese SUV market, there are two groups of OEMs that enjoy high brand loyalty which contribute to success in the market. One group are Japanese products such as Toyota RAV4, Highlander, LandCruiser, Honda CR-V, Nissan Patrol, etc. They are volume leaders and dominating the compact and full-size SUV segments. Another group are the German makers, Mercedes, BMW and Audi. Their luxury SUVs are mainly leading the imported and premium segments. Hyundai is also growing very fast after localization of their Santa Fe in Shandong province.

Local brands such as Great Wall, Chery and Jianghuai are attempting to leverage their cost advantages by offering lower-priced models, but are confronting the challenge to establishing their brand value proposition in the SUV segment. Building their brand value proposition must be their first priority, or these manufacturers will not be able to compete in the middle and high end segments of the SUV market

What are your thoughts on the SUV development of the main local OEMs, such as Jiangling Motors Corporation, Chery and etc ? What is the gap between local OEMs and foreign brand?

Bill Russo:

International brands still lead the market in China with products like Honda CR-V, Toyota RAV4 and Toyota Highlander. Chinese brands are improving gradually, and occupy three seats among the top 10 best selling SUVs in the China market. Great Wall leads the domestic SUV market. They sold 5600 units SUVs in September. Great Wall sold over 43000 units from January to September and ranks the third overall in China.

As noted above, the gap between local and foreign brands is mainly in brand image and brand equity, but not limited to that. Chinese manufacturers must strive to close the gap of technology and quality with international OEMs, particularly in safety, emission and durability. Whether they can break through major technical barriers such as powertrain, active and passive safety will determine their competitiveness against foreign brands. Successful entry to developed markets (EU and US) by Chinese brands is also subject to closing these gaps.

For these reasons, the SUV market share of local OEMs has decreased from January to August from 46% 28%.

How does brand image influence on SUV segment?

Bill Russo:

The above mentioned two groups of International OEMs are good examples. One of major sources of profitability is their brand premium, which can be determined simply from price comparison. Honda CR-V is listed at double the price of a similarly-sized sized Great Wall Hover. Having brand equity and a clear value proposition is a key success factor for Chinese SUV makers to compete in the developed markets. It is also very critical to the long-term success in the domestic market. The growing SUV market in China also demonstrates the maturity of the market, as the taste of Chinese drivers grows beyond sedan cars. As consumer buying power increases, they will seek brands that fit their lifestyle and aspirations. Improving brand image is critical to local SUV makers such as Chery, Geely and Great Wall.

Compared with high-end SUV, is low-end SUV still attractive in China market?

Bill Russo:

We first need to clearly define of “high-end” and “low end” SUV. With regard to technology, low-end SUVs have been based on older truck platforms, which fail to meet stricter safety and emission standards. These should eventually phase out from the China market. If it is about price, competitively priced and good quality local brands can still maintain their growth momentum in broad Tier 2 and 3 markets. Great Wall Hover and Chery Tiggo are good examples. By this definition, it seems that the low-end SUV is still attractive but it will hard to predict market volume. But competition in the low-end is purely on price so profit margin is low which may not be attractive to manufacturers seeking to raise their brand equity and image.

Which kind of SUV will take more market share in China market in the future, low-end or high-end?

Bill Russo:

As described earlier, local brand economical SUVs, Japanese compact SUVs and European luxury SUVs are serving different customer groups and markets. It’ll be quite certain that local brands will capture more market share based on their aggressive product launches and pricing advantages.

Do you think there is decline in SUV market? Some of the companies are in poor performance, what are the main reasons ?

Bill Russo:

SUV market can maintain a two digit market growth over the next few years, given the robust demand and product offerings. Some knock-off products without technical and brand advantages will lose in the market very soon. Market share will be dominated by several leading brands that will broaden their product reach in regional market, including Tier 3 and 4 cities.

What is the trend of M&A in SUV industry?

Bill Russo:

The entire automotive industry is restructuring and consolidating, and SUV is no exception. GAIC acquired Changfeng Motor, a SUV producer of Liebao and MMC Pajero is one good example. Similar potential acquisitions also happened between other SUV and car manufacturers, such as BAIC and Fujian Motor, Chery and Jianghuai (ongoing). There are many medium and small SUV producers, like Zhongxing, Shuanghuan, Beijing Auto Works that are quite vulnerable and will face challenges to survival in a hyper-competitive market.

Another type of M&A trend is overseas acquisition and expansion. However, whether it is economically viable to acquire expensive but small volume SUV platforms is a question for almost every intended Chinese OEM. Tata’s experience with Land Rover is a good example of the financial burden and risk associated with such an acquisition.

What is your suggestion on the strategy and innovation of local SUV OEMs?

Bill Russo:

There are several alternatives for China local VMs to close the gap with international peers on technology and brand image, such as M&A, JV, strategic alliance, and license manufacturing. Independent of which alternative is chosen, it is imperative for Chinese OEMs to fully evaluate their core competency and desired value propositions. All local SUV OEMs must focus on improving brand value, quality and differentiation, and not purely rely on low cost. One good example is Huatai Motor, they built their own SUV capabilities from a license manufacturing relationship with Hyundai to produce the Santa Fe, and subsequently developed their own brand SUVs and sedans.

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