This fragmentation also makes it very difficult to focus and allocate resources to the development of critical technologies as well as brands. This is an area of particular weakness for Chinese OEMs who have relied on their foreign partners to take the lead in the development and integration of key technologies. Foreign vehicle manufacturers, through their JVs have also lead the establishment of branded vehicle distribution networks. Chinese-branded vehicles have largely played the role of “bottom feeder” by selling a cheaper form of transportation to first-time consumers who are not as concerned over whether their product meets world-class standards.
The majority of Chinese consumers understand this quite well – which is the reason why foreign brands held a 66% share of the China market in 2008. The China government understands that in order to create a healthy industry, they must first raise the perception of “Made in China” cars in the minds of Chinese consumers. This is why there is a goal for Chinese OEMs to achieve a 50% share of domestic sales in 2010. The stated expectation is for the domestic manufacturer to introduce vehicles with their own brand trademark either through their existing joint ventures or other subsidiaries. We can therefore anticipate the following trends:
1. The government will likely require a foreign partner seeking to form a new JV to provide the support needed to introduce a Chinese local brand.
2. Domestic vehicle manufacturers will seek to improve brand image, enhance quality and target international expansion. Having enjoying rapid growth the China domestic market, several Chinese car companies including Chery, Great Wall and others have already started to export Chinese-manufactured vehicles to Australia, Latin America, the Middle East, Africa, and Southeast Asian countries. It stands to reason that less mature markets have demographics that lend themselves to new market entrants who compete primarily on price
3. Foreign vehicle manufacturers may actively participate in local brand development in order to expand their market reach and receive preferential treatment. Honda is in fact taking this approach and is investing RMB 2 billion to develop a local brand with Guangzhou Automotive through their joint venture.
To support the growth of local brands, the government in 2009 has reduced tax rates by 5% on the purchase of vehicles below 1.6L engine displacement, as well as fiscal subsidies to rural customers for vehicle replacement. These policies clearly favor the local brand manufacturers who tend to build small, compact cars with smaller engine displacements. Such policies have helped companies like BYD and Geely become the shining stars of China’s domestic market by offering competitively priced small cars which meet the quality requirements of Chinese consumers, many of whom are entering the market for the first time.
Brand Equity - With Chinese Characteristics
The capabilities of local Chinese OEMs have come a long way in a short time. Chinese firms will learn quickly as they grow their share of the domestic market. However, much work needs to be done to gain acceptance of the Chinese consumer of Chinese manufactured goods. This must be the first priority as it stands to reason that if it is difficult to convince a Chinese consumer, it will be even harder to convince a foreign consumer to accept a “Made in China” car. The fact is that with the proper attention to quality management discipline and with the transfer of critical know-how in the area of vehicle synthesis and development, it is indeed possible for Chinese firms to capture greater share of the domestic market, and eventually of the global markets.
While building equity in Chinese domestic brands is a tremendous challenge, there is a significant benefit of the joint venture approach taken in the development of the Chinese domestic auto industry. While learning from their global partners how to become global players is easier in theory than in practice, this approach has helped China establish a global supply base, with virtually all international auto parts companies now represented in China. By building and leveraging the capacities of such suppliers, and by selectively acquiring the assets of such suppliers, Chinese automakers are striving to build a more upscale image. Several examples were previously noted in Trend #3: Acquisition of Foreign Assets and Key Development Competencies by Chinese Companies.
Using this approach, Zhejiang Geely Holding Group has introduced several products and uniquely positioned brands, including Gleagle, London Taxi, Shanghai Maple, and Emgrand. New models such as the EC718 will be introduced under their new Emgrand brand at price points (starting at RMB 82,300) not previously achieved using the Geely brand. Convincing consumers to pay more for a relatively unknown brand will require a clear value proposition. Geely intends to increase their brand equity by sourcing from the world's leading auto parts suppliers, and in the process upgrade their image from a maker of "affordably priced cars" to one that delivers "safe, fuel efficient, and environmentally-friendly cars".
This year, Chery Automobile Company has taken a similar approach with the expansion of their brand portfolio to four brands: Riich, Rely, Karry and Chery. Such an approach carries significant risk, as the investment and resources needed to develop unique products and market separate brands is quite significant. Alfred Sloan’s pioneering concept of “different cars for different buyers” was the centerpiece of GM’s early 20th century expansion – and this was perfect for an American industry in its infancy. However, the cost of engineering unique products for as many brands as GM had in its portfolio became too great. GM’s reluctance to give up brands because of their historic value became a major financial burden. After GM’s sale of Hummer, Saab, Opel, Vauxhall and the wind-down of Pontiac, only 4 brands will remain: Chevrolet, Buick, Cadillac and GMC Truck.
Geely’s Chairman Li Shufu apparently understands the brand equity challenge. He was recently quoted as saying “A brand is closely related to its cultural background. Isolated from that background, it is worthless,” stressing that it would not be very easy for Geely or any other Chinese carmaker to grow its brand portfolio. He noted: “A brand is like a person's name. Even if I change my name to Hu Jintao, I am not Hu Jintao.”
A significant part of addressing this challenge will be to overcome the perception that “Made in China” is equivalent to “Cheap and Poor Quality”. However, great rewards accrue to those firms who understand how to adapt their positioning to the unmet needs of the local consumer. Successful firms find a way to take their brand value proposition and uniquely position it relative to competition in their target markets – creating a unique selling proposition (USP).
In the next article in this series, I will describe how "China’s Changing Demographics and Growing Tier 2 & 3 Demand" will continue to be the engine for the development of the China auto industry, as well as the growth of the global auto industry.
Click here to view article published in GLG News
Click here to view article published in gasgoo.com's China Automotive News
Click below to view: