Short term joy, what comes the next?

After several months of declining auto sales all around the world, the global economic downturn continues to captivating our attention. China could not avoid a slowdown, but luckily enough got off lightly thanks to an economy that is still growing, vehicle ownership penetration that is still relatively low, and Chinese consumers who are still much less tied in credit systems and finance schemes than their peers in mature markets. And without any doubt the stimulus plan of the Chinese government, especially those aspects directly focused on consumers, contributes its part to fuel vehicle sales.

In particular, the recent cut of sales tax for low displacement vehicles is by many hailed as the measure to solve a multitude of problems: It appears to boost the sales of small vehicles, helps to bring Chinese car manufacturers back on track, and along the way, tackles environmental concerns through fuel economy provided by low displacement vehicles.

It is probably too early to evaluate the enduring effect of the sales cut tax. As vehicle purchase behaviour is cyclic during the year the evidence of effectiveness has to be submitted in the next low months. But even if sales of small cars remain high, there is little interest to overemphasize the low end of the market. Small sized vehicles cannot fulfill all the needs in the market, and therefore we should not deny the importance of bigger cars for a sound market structure. Not to speak of the fact that the little-to-zero profitability of these low priced vehicles is supposed to become a problem over time. 'Fair balance' is the magic word, a quality well anchored in the Chinese tradition, by the way.

Indeed, the preferential treatment of low displacement cars eyes to protect the Chinese car manufacturers. But does it really? Foreign JV brands have quite some time ago already started to successfully sell cars in the small car segment. With safe and reliable technology, sensible quality and workmanship, comfortable interior as well as an affordable price, they have undermined the position of Chinese branded cars. Chinese consumers choose these cars because they simply offer a better proposition to their needs than domestic vehicles do.

At the same time, the sales of small displacement vehicles do not automatically translate into fuel economy and environmental friendliness as numerous Chinese domestic models do not yet provide the level emission standards that foreign cars do offer. On the other hand, international car makers have refined the conventional technology that allows them to reduce emissions of larger cars, too. This does not dilute the need for alternative energies, though.

As serious as this economic downturn appears to be, it risks to distracting us from the more underlying problems that the Chinese auto industry is suffering from. Its domestic car manufacturers have not yet managed to occupy a sufficiently competitive position in the market, are stuck in the low end market segment, and under-perform in terms of product quality (reliability, workmanship, etc.) compared with vehicles from international JV-manufacturers - even by standards of the small car segment.

In addition, brand building of Chinese car makes is still weak. In a modern environment with basically exchangeable product offers from a technological point of view - and China is quickly growing into this type of market - consumers find in the brand the gratifying trigger for choice. Even in the small car segment the brand has already become an expression of personality and lifestyle, beside its assurance of quality and its representative ability.

This is why the Chinese market needs much more than an impulse of sales volumes of small vehicles to overcome the slowdown. Beside an industry consolidation at the production side it needs a restructuring that puts domestic car manufacturers at eye level with international players in terms of market offers. For that, Chinese manufacturers will have to look much closer to consumer needs and expectations, and develop a consistent brand promise, from vehicle conception to the point of sales, and even beyond.

It is now high time to reinforce these efforts, and gain credibility as serious market contenders in China. As history shows, home markets have to be conquered first before succeeding abroad. A precipitous turn to export markets in order to escape slow domestic sales will not help to fix the problem. And this negligence risks to hit particularly hard when international vehicle manufacturers will rise again to full power in the 'post-crisis' era.