China automakers look to smaller cities for growth

Shanghai, December 31 (Gasgoo.com) China's local auto companies and joint venture automakers are looking to the tier-2 and tier-3 markets, or smaller cities, for sales growth in the new year 2009, because these markets are keeping their two-digit growth rate.

Statistics from China Passenger Car Association show that the auto sales in China's central and western areas have grown by 24%, much higher than the national average.

China's auto sales in its tier-1 market, or big cities, began to see slowdown in 2005. Currently, the market share of auto share in tier-1 cities has dropped to 14.6% from 19.1% of three years ago, while that of the tier-3 cities has risen to 41.5% from 34.8%.

"Second-tier and third-tier cities have become the new growth points of Chinese auto sales," a sales executive of Chery Auto. The independent Chinese carmaker is pushing forward its project of building sales networks in the tier-2 and ter-3 markets by covering more than 100 affluent small cities at first. Now the coverage rate has reached 85% or more.

Beijing Hyundai, a joint venture between Beijing Auto and Hyundai Motor, has felt the allure of tier-2 and tier-3 cities. In October this year, Beijing Hyundai set up many 4S stores in these cities, and the company has decided to build another 50 dealerships and outlets to fill the "blank gaps" of the tier-3 market.

"We will control the dealership expansion speed in the first-tier cities to focus on the second- and third-tier markets," said a top executive of Dongfeng Peugeot Citroen Auto (DPCA) in a recent interview. He revealed that the joint venture's network expansion will shift to tier-2 and tier-3 cities, which have huge growth potential for auto sales while the tier-1 market is on the slippery slope amid the financial crisis.

GAC Honda (Guangzhou Honda) believes that the conventional 4S store pattern of many auto brands will undergo a brave new revolution and an alternative dealership more suitable for the tier-2 and tier-3 markets will emerge as a mainstream sales platform.

Purchasing power of smaller cities can be further built up as parts of the central government's 4 trillion yuan ($586 billion) stimulus package will enhance infrastructure in these areas, industry observers noted.