Getting China’s car brands back in the driving seat

Latest figures show a sharp slowdown in new car sales in China, with total sales for new vehicles in 2014 standing at 19.7 million, compared to 17.9 million in 2013. This pace of growth in China is half of what it was just a year ago, while the 9.9% year-on-year growth is the first time since 2009 (during the economic crisis)that we haven’t seen adouble-digit increase.

While some may argue that this is a relative slowdown (and perhaps even inevitable), it is worth looking at the various factors which are pushing down the automotive market in China.

The first issue is the strict limit imposed on new car sales. Chinese streets are so congested that cars can hardly move. In cities with large and wealthy urban populations, such as Hong Kong, Beijing, Shanghai and Guangzhou, traffic jams are unavoidable,as is increasing air and sound pollution. Variousmeasures have been taken to limit the numberof new registration plates and cars, while Beijing instituted a lottery back in 2011 that meant only one in 150 residencescould win a registration plate.

In Shanghai, a registrationplate is known as“the most expensive iron in the world” as each costs around 74,200 RMB (11,893 USD) - the retail price of some cars! Naturally, this has made many people stop and think twice before committing to a new Audi or BMW.

The economic slowdown in China – perhaps overstated at times in the media -also plays an important role here. GDP for China in 2014 is only 7.4%, undershooting the government's target of 7.5 percent and marking the weakest expansion in 24 years.Both in Hong Kong and mainland China people are being more cautious with high value goods acquisitions, with evidence of a similar slowdown in luxury goods.

The third factor is oversupply in the market, with huge stocks sitting with car dealers who are struggling to sell them to the market. As a consequence dealers have hadto sell vehicles at amuch lower price, while many car dealerships in China have been forced to shut down their networks altogether, faced with deteriorating profits and unrealistic targets. To keep dealer networks motivated, some OEMs like BMW, Volvo and Toyota have distributed cash incentives to ensure commitment from their sales networks over time.

We are also seeing international automotive companies increasing their lead over Chinese rivals, with the likes of General Motors, Audi and Volkswagen continuing to invest billions in China while stealing market share from domestic producers.

This is partly as a result of multinational brands moving towards morelocalization of their cars, both in terms of development and production. This creates cars that havea strong brand reputation, are customized to the needs of Chinese drivers, andbring onboard the latest onboard technology from mature markets.

In spite of this, there have still been a number of domestic brands who fit into this group of the ‘high performers’ – most notably Chang’an, Dongfeng, and (Great Wall) Haval.

Eado from Chang’an offers consumers a strong safety performance via the ESC (Electronic Stability Control) which is rarely seen in other cars of this class.Chan’An grew 37.8% year-on-year, with Eado contributing to 71% of this increase.

Haval (Great Wall) has developed affordable and attractive SUVs in China. Being specialized in this area they have a good reputation of developing good “all-round” cars. On top of that they offer 5 years warranty (normally SUVs are covered for 3 years). These factors have resulted in an impressive 53% growth from the previous year.

DFM was also successful in 2014 with its FengshenLingzhi, which offers a panoramic roof (rarely seen in other MPV vehicles), an affordable price and a 5 year guarantee – all leading to a 57.7% year-on-yeargrowth.

In terms of what domestic brands need to do to be more competitive, the answer is simple. As shown by the examples above, it’s about launching models within growing segments, innovating intheir designs andusing the latest technology to attract the more demanding customers. Car personalization – such as bespoke upholstery, registration plates or interiors – is also becoming increasingly popular.

Domestic brands neednot have a complex compared to multinational brands. Instead, they should set their own standards and be bold and consistent in the offer they bring to drivers.Those players who can compete with the multinationals in terms of innovation, excitement, quality and service will almost certainly begin to win back market share.