2013 China Automotive Perspective: "Time for a Model Change"

Booz & Company 2013 China Automotive Perspective

By John Jullens, Bill Peng, Bill Russo, and Huchu Xu

As the Danish physicist Niels Bohr famously pointed out, it is exceedingly difficult to make predictions, especially about the future.  For the Chinese automotive industry, this has never been more true than today, with next year’s expert forecasts ranging from a respectable 6% growth rate to as high as 15% - an astonishing 150% spread.  This unusually high level of uncertainty reflects the fact that the industry has arrived at a crucial inflection point in its lifecycle. 

Several factors suggest that a structural shift is indeed underway.  Industry growth has, in fact, already slowed to a mere 4.3% in 2012, primarily due to the elimination of Beijing’s aggressive purchase incentives that were put in place after the recent global financial crisis.  In addition, new vehicle ownership restrictions in China’s largest cities and rapidly increasing fuel prices will further restrict sales in the coming years, especially for entry-level models.  As a result, industry growth rates will likely downshift permanently from the double-digit levels of the past to a slower and more sustainable pattern in line with expected GDP growth of around 8%. 

At the same time, many consumers in China’s vast interior provinces will soon cross the so-called mobility threshold and start purchasing entry-level cars instead of scooters and motorcycles.  These first-time buyers will be very different from their richer cousins in megacities, such as Beijing and Shanghai, so that demand will likely become much more binary, with increasingly up-scale replacement demand from high income consumers in the East versus decidedly more down-market first-time demand from lower income customers in the West.

As industry growth slows, manufacturing overcapacity will begin to reach critical levels, especially for many domestic brands who invested heavily in new plants during the last few years in anticipation of continued strong customer demand.  Many will have to raise incentives to sell down excess inventories, inadvertently force their competitors to do the same, and triggering the opportunistic, deal-based, sales process that is so characteristic of the industry elsewhere.  In fact, it is not unlikely that the competitive dynamics in China will increasingly start to resemble those in the mature markets, where firms experience large annual profit swings, strong price-based competition, and unrelenting pressure on improving operational efficiency to contain costs.

Developing business plans under conditions of high uncertainty is, of course, notoriously difficult, as the traditional linear, “as-is/to-be”, strategy formulation process tends to break down and produce counterproductive results.  The key is to adopt a more flexible, scenario-based, approach, while simultaneously investing in no-regret initiatives that will be valuable under any potential outcome. 

For automakers in China, there here are at least four such no-regret initiatives that would be worthwhile investments for most automakers:  

1.     Dual Strategies

Automakers will have to develop very different strategies for the higher tier markets in the East and the lower tier markets in the West.  In the East, they’ll need to focus on developing premium brand strategies and facilities, adopting conquest strategies to attract competitive-make drivers, introducing loyalty initiatives to retain existing buyers, and upgrading their talent bench and other organizational capabilities.  In the West, they’ll need to develop value brand strategies and facilities, focus on new customer acquisition strategies, expand their dealer networks, and introduce basic human resource management and other capabilities.

2.     Lifecycle Management

Automakers and especially dealers must significantly strengthen their customer management capabilities, both to identify and acquire uncommitted customers from competitive brands as well as to protect their own customer base from the poaching attempts of others.  They must transition from a business model that is primarily focused on new car sales towards one that generates profits and customer loyalty throughout the entire ownership cycle of a vehicle, including maintenance and light repair, insurance, after-warranty service contracts, and active used vehicle management.       

3.     Digitization

Now that communications technology and especially bandwidth have finally reached acceptable levels, it is time for automakers to dust off their grand digitization strategies of a decade ago.  Telematics, in particular, could greatly improve the relevance of automakers’ relationship marketing efforts through direct wireless contact with the vehicle itself.  To do so, automakers must greatly improve their ability to integrate their off- and online marketing efforts across devices ranging from the traditional pc to the by now ubiquitous smartphones.  Leveraging social media to support, for example, new product launches, will become increasingly important, especially when corporate and dealer marketing efforts can be seamlessly integrated. 

4.     Dealer Capabilities

Rethinking the traditional 4S format and upgrading individual dealer capabilities will be crucial as automakers expand their retail networks into the emerging markets in the West while competing for market share in the higher tier markets elsewhere.  For example, they’ll have to experiment with less capital intense, unbundled, dealer formats that are more appropriate for China’s sparsely populated rural markets.  In addition, they must invest heavily in training and development to prepare all dealers for what promises to be a far competitive environment in the future.  Such training should, at a minimum, include lead management, service retention, complaint handling, and e-Enablement in general.        

In conclusion, while it is indeed impossible to predict the future precisely, it is quite clear that Chinese automotive industry has entered the early stages of a major transition phase.  Automakers would do well to explore each potential future scenario while, at the same time, investing in no-regret moves, such as the ones suggested above, as the industry’s competitive landscape will likely look quite different at the other end of what promises to be a wild ride over the next few years.