Shifting preferences for increasingly savvy Chinese consumers (2)

In our introduction, we introduced six Emerging Trends Driving the 2010 China Auto Industry:

• Sustainable demand growth fueled by urban economic development
• Shifting preferences for increasingly savvy consumers

• Hyper-competition across the automotive market segments
• Adaptive brand innovation to extend product reach and grow share
• Increasing focus on the automotive aftermarket
• Accelerated drive to globalization

We will cover each of these trends in depth in this and subsequent articles.

Shifting preferences for increasingly savvy consumers

As income levels continue to rise, demand may begin to shift towards vehicles and segments offering more appealing content and features, which may create opportunities for manufacturers to improve their product mix. Early-movers in the China market such as Volkswagen and General Motors have enjoyed significant profit margins by occupying mid-size sedan, full-size sedan and MPV segments without a great deal of competition. In such a market environment, strong profits could be made on products such as the VW Santana and the Buick GL8 minivan – older technologies that dominated their segments with good margins. However, today’s China market no longer offers such an easy road to profitability. Virtually every major vehicle manufacturer is now present in the China market. A recent J.D. Power & Associates study has reported that many of the cars sold in 2009 were in low-end segments that are eligible for tax incentives and that many of these cars earn the manufacturers as little as $100 each.

Coming into 2010, Chinese consumers are increasingly seeking more innovative design for their first cars. Emerging buyers, particularly females and those under 30 are aspiring to a more recreational lifestyle and seeking more individualistic choices. For these consumers, coupe and crossover concept vehicles of stylish design are a better fit to their values. To meet the emerging Chinese preference for fashion and sportiness, both multi-national corporations (MNCs) and Chinese vehicle makers are shifting focus of their new launches to more dynamic and stylish products.

As shown in the Beijing International Motor Show in April 2010, many examples of such coupe, CUV and crossover vehicles were shown. These included vehicles such as Audi’s A3 and A5 Sportback, Honda’s Crosstour, Hyundai’s new SUV ix35, Infiniti IX35, BYD's S6, Mitsubishi's RVR, and Chang’An H30 Cross. These new styles have generated a good traffic to the booth and the dealer showroom. The sales figures of such crossover concept vehicles have this year risen to 1.84million so far, an increase of over 29%.

The future outlook is that local brands and international brands will install more capacity in China, placing even more pressure on pricing in the battle to gain market share. Weak brands and older models will become the first casualties as market and competitive forces squeeze them out. The competitive battle can only be won with strong brands and contemporary models that can be delivered profitably to savvy Chinese consumers with choices that demand a competitive price.

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About the authors:

Bill Russo, Gasgoo.com's columnist, is a Senior Advisor with Booz & Company as well as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.

Jeffrey Zhao, is an Advisor with Synergistics Limited. He lives in Fairfax, Virginia and has more than 10 years of experience in the automotive industry, most recently serving as Senior Manager for New Business Development for Chrysler's business in North East Asia.