Adaptive brand innovation to extend product reach and grow share (4)

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.

Adaptive brand innovation to extend product reach and grow share

An interesting fact is that a great majority of international firms have effectively defended their market positions against local brands. Compared with five years ago, international brands have lost about 5% share of the rapidly expanding passenger car market. Through July, they are still comfortably leading the Chinese market with a total share of 70%. Year-to-date sales growth for most multi-national corporations (MNCs) is up 20% from last year.

While some of this success is a result of an expanded product portfolio, it appears that MNCs have maintained their sales success without a dramatic increase in new product launches. One of the most innovative approaches we have discovered is what we would call “adaptive brand innovation”. This approach involves delivering market-specific adaptations and modifications, extending the range of segment participation to new price-points and product categories, and creation of new brands and products. Many of these approaches are often taken together with local Chinese partners.

As early as 2005, MNCs began with different levels of modification ranging from exterior facelifts, powertrain upgrades, restyling of vehicles, and wheelbase extensions. These efforts were taken to meet the unique and diversified taste of Chinese consumers, instead of simply localizing the global vehicle “as-is”. Typical examples are the extended wheelbase Audi A4 and A6, BMW 5 and MB E-class in the luxury segment, as well as the upcoming long wheelbase VW Magotan for chauffer driven buyers. Adaptation of smaller engines to new vehicles is also a way to increase interest in the product, such as new generation VW 1.4TSI Polo GTI and Golf 6 that dropped the 1.6L and 1.8T engines used by last generation platform.

Small and compact car segments with engine displacement of 1.6 liters and below are traditionally dominated by low-priced Chinese local brands. However, represented by Hyundai, Toyota and GM, MNCs are increasingly down-pricing their volume models to close the price gap with Chinese brands. Such competitively priced products appeal to Chinese consumers because of their brand equity. These pricing strategies have resulted in a number of best sellers in small and compact segments, such as Hyundai Elantra, Buick Excelle, Chevrolet Spark, and others.

Many MNCs are also creating new brands and products together with their Chinese partners. While initially in response to government regulations on new joint ventures, MNCs are increasingly pursuing this as a means for capturing the volume opportunities in the lower priced segments. This approach can include co-developing a new product under an international brand, or creating a new mid-market brand within the context of a JV, or supporting the Chinese partner’s local brand development. Several international OEMs are already moving forward in those directions, such as Lavida developed by SAIC and VW, a new JV brand created by Honda and GAIC, a new generation small car platform developed by SAIC and GM.

Driven by the same incentive as above, MNCs are also offering their technical assistance to supply high performance powertrains to support the extension of the local partner’s products into higher priced segments. For instance, the recent co-development agreement between SAIC and GM for a next-generation fuel efficient global engine platform, Beiqi Foton and Daimler truck’s JV agreement which provides Daimler’s diesel engine’s local production and supply to the local partner’s heavy duty trucks.

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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.