What should Chinese automakers do to succeed in the higher end market?

Indeed many Chinese companies have recognized that their low end market position may not sustain a high profitability in the future. Therefore, they have made plans or already acted on plans, to introduce middle to high-end cars to the market. If they are successful, the benefits, aside from higher profitability, will include the lifting of their corporate brand image as they also associate themselves with higher end products. However, it will be very challenging for Chinese companies to gain substantial market share in the mid to high-end segments in the short to medium term.

There are several factors that are necessary for the success of higher-end brands: 1) unquestioned and sustained product quality; 2) recognized brand image with target customer segments; 3) product features and styling to support the targeted brand essence. Of these three, two require considerable time to develop, quality and brand image. The product features can be more readily designed and built-in or purchased.

Quality reputation requires many product cycles to gain the trust of consumers. There are no shortcuts to quality. However, once one has stabilized quality, there are examples of companies who have taken some drastic measures to shortcut the building of consumers'perception of quality. One possible way of doing this is to adopt the method of Hyundai Motors in the U.S. After several disastrous quality problems, Hyundai's reputation in the U.S. was at a low point. Hyundai's leaders adopted the risky strategy of offering a long extended warranty to all consumers to overcome their quality concerns. This had the additional effect of strongly motivating employees by "Burning the bridge" behind Hyundai's product development and manufacturing teams. Once the policy was introduced to the public, they had no option but to meet the quality standards if the company was to stay in business. However, the risk of failure of such a strategy is significant, especially for Chinese companies for whom quality has traditionally come in a distant second place compared with cost concerns.

Building brand image also requires much time and significant marketing investment. The higher end segment consumer marketing and promotion capabilities of Chinese joint venture partners are far more advanced than the purely Chinese companies due to the experience gained working with foreign JV partners. However, there are certainly opportunities to attract such experienced marketing personnel to the purely Chinese companies if there is sufficient recognition of their importance to offer competitive compensation packages.

Through A.T. Kearney's consumer research conducted while working with purely Chinese branded automakers, we have learned that the presence of any element of foreign brand or technology association contributes significantly to the perceived value of a Chinese brand. That is to say, if it is well-known (or well advertised) that a Chinese car has an engine or other core technology that is associated with (licensed or purchased from) a foreign brand name, Chinese consumers will be willing to pay more than they would for a vehicle with completely self-developed technology. SAIC's Roewe is an example of a car that is clearly based on technology from a foreign country (England in this case). Consumers find it easier to accept such a mid to high-end vehicle at this stage than a purely Chinese brand / technology.

About the author: Stephen W. Dyer, Ph.D., Principal of A.T. Kearney (Shanghai) Management Consulting, has over fourteen years of industry and consulting experience in the automotive, aerospace, and process industries. During his time in industry he led research and development efforts and technology strategy for an automotive and industrial technology product company.