Hyper-competition across the China automotive market segments (3)

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 series of articles.

Hyper-competition across the automotive market segments

China’s vehicle market has nearly tripled in size from 4.56 million units (in 2003) to 13.64 million units (in 2009). Global Insight has forecasted that the Asian markets represent the largest growth potential in the global auto industry - with a combined 4.7% compound annual growth rate over the next 10 years (compared with 2.9% in NAFTA). Within Asia, 54% of that growth is expected to come from China. With the promise of tremendous growth, many international firms as well as Chinese firms are encouraged to allocate resources to seize the opportunities presented by the Chinese market.

While many Vehicle Manufacturers have enjoyed strong sales growth, what may not be understood or appreciated among those who are observing the growth in sales is that this is a market where quantity of sales should not be confused with quality of sales. The China market is now experiencing what many companies doing business in globally have come to understand for many years: hyper-competition.

In 2010 we have seen even more intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to capture growth opportunities in China. As this is happening, the local manufacturers will strive to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers.

For the early stages of the development of the China market, the multi-national brands and Chinese brands were for the most part not competing directly with each other. Foreign brands enjoyed a tremendously high share of the passenger vehicle market, with overall share of more than 70% as recently as last year. Until recently, China's automotive market was largely driven by the more affluent Chinese consumers who tended to shop for foreign branded products. However, first-time consumers entering the market have largely driven the recent sales jump. The Chinese local brand manufacturers have typically focused on these first-time buyers.

This is changing quickly. Attracted by the tremendous growth of these segments, many multi-national brands are expanding their product portfolio into smaller segments. Examples include the Ford Focus Hatchback, Chevrolet Cruze, PSA 207 Hatchback, Hyundai i30, VW Polo Sport, Toyota Yaris, smart Fortwo, and Kia Soul.

Attracted by the desire to raise their brand image, and achieve higher margins, the Chinese carmakers are also expanding their product portfolio – into larger segments. Examples include Chery’s Rely V5, Riich G6, Dongfeng’s S30, BYD’s S8 and M6, Geely’s Dihao and Yinglun and the Brilliance Zunchi.

Since China has become the most attractive area to invest for growth, it seems that Chinese consumers will be enjoying even more choices and even more attractive pricing as a result of hyper-competition. Structurally, vehicle manufacturers must adapt to compete profitably in this hyper-competitive market.

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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.