China auto market to have a 2nd time buying upsurge

Mei Songlin, Ph.D., is General Manager for J.D. Power Asia Pacific China operations. In this capacity, Dr. Mei is responsible for business developments, new study development and operations for China market's automotive market research and product / retail performance improvement. He has held this responsibility since the firm initially entered the China market in 2000.

Dr. Mei received a bachelor's degree in electrical engineering from Jilin University of Technology, a master's degree in systems engineering from Shanghai Jiaotong University, and a Ph.D. in industrial and systems engineering from National University of Singapore. Dr. Mei is an active member if the Academy of Management.

Gasgoo.com: What do you think of Chinese auto vehicles in terms of quality?

Songlin Mei: According to the J.D. Power Initial Quality Study (IQS) – which measures product quality using a metric called "pp100" or "problem per 100 vehicles" – China's industry average pp100 rating standing almost twice the U.S. average. But we can not simply say the Chinese vehicles are 2 times worse than the U.S., considering other factors such as the differences in culture, consumers, and road conditions. And even among domestic Chinese brands, quality problems are almost twice as frequent as locally built international brands.

Gasgoo.com: you mentioned the differences in the Chinese and American market, how will these factors affect the vehicle manufacturing?

Songlin Mei: About 80 percent of the global automotive consumers' expectations are the same, leaving only 20 percent are the different expectations. And the 20 percent is to make things different. Automotive manufacturers have realized that they can not easily succeed in a new market, unless they can identify the 20 percent difference and make adjustments according to the unique expectations in the new market. Every foreign automotive manufacturer in China started from simple assembling, before they can get better development, then, they have to be localized, and design and develop the vehicles in the market and for the market. Last year, Volkswagen AG in Germany and Shanghai Volkswagen announced that they will cooperate to develop a new model for the Chinese and U.S. market. Both markets have been large enough to deserve the investment.

Gasgoo.com: One model for both markets? But as you said, the markets have 20 percent difference. How will Volkswagen balance the 20 percent difference in the two markets?

Songlin Mei: The 20 percent is the difference in consumers' expectations. Actually, the Chinese and U.S. market have much in common. That's why Volkswagen decided to design for China and U.S. market, not China and European market. Many international auto manufacturers in China find that China market has a lot more similarities with the U.S. market than with the other markets. Both China and U.S. market have a big concern on fuel efficiency. Our Initial Quality Study shows that the problem Chinese consumers complain most is on fuel consumption; in the U.S.A, the second biggest problem consumers complain is also on fuel consumption. But Chinese consumers have far more complains on engine, transmission and chassis, than the U.S. consumers. The Chinese auto manufacturers still have a lot to do to improve the technologies in the three most important part of a vehicle. Another interesting thing is, many many Chinese consumers complain about the noises in braking, engine performance, tire, and etc. But the U.S. consumers are not so sensitive on the noises, and they seldom complain about that.

Gasgoo.com: you mentioned that Chinese auto manufacturers still have to improve engine, transmission and chassis technologies. Does that mean the international auto manufacturers' joint ventures in the China market also have much problem in quality?

Songlin Mei: More quality problems than they are in the U.S. market. But the Chinese branded cars has much more quality problems.

Gasgoo.com: Why the JVs also have so many quality problems? After all, they have taken their technologies to China.

Songlin Mei: They have also localized to a certain extent. The U.S. market is the largest, most mature and most competitive auto market, so every one has to put their most recent, state-of-the-art technologies to the U.S. market.

Gasgoo.com: So can we say the more localized, the more quality problems they will have?

Songlin Mei: Sort of, but not absolutely. It depends on how they control their suppliers.
 
Gasgoo.com: The Japanese auto manufacturers have a higher localization degree in the China market than the European and American manufacturers. It seems that they could have much more quality problems. But your study shows that their quality is rather good. Why?

Songlin Mei: The Japanese companies also take their supply system into the China market.

Gasgoo.com: A recent J.D. Power study shows that Hyundai Sonata, Suzuki Swift, Nissan Teana, Tianjin Xia Li rank very high in their segments, but the sales is not very good. What are the main factors than influence Chinese consumers' buying behavior?

Songlin Mei: Safety is always the most important consideration. The other factors are slightly changing. In 2007, the top five factors are safety, price, quality and reliability, brand and engine performance. Price is still in the second place, but its proportion has been declining in the past years. The other three factors' importance is growing, because Chinese consumers are becoming more and more rational in car buying.

Gasgoo.com: Then what're the most important factors in the mature markets?

Songlin Mei: Though price is a very important consideration in every market, brand is the most important consideration in the mature markets. Once a brand image is established among consumers, it's not easy to change. A good brand image can help maintain brand loyalty. Brand loyalty and consumer satisfaction will influence sales deeply.

Gasgoo.com: As brand loyalty is becoming more and more important, what is more important for auto manufacturers in China, to develop new customer or keep the former customer?

Songlin Mei: Most Chinese car buyers are first time buyers. Our SSI result in Aug. 2007 shows that 80% of the buyers are buying their first car. But the result in October shows that only 72% are first time buyers. China entered the world Trade Organization (WTO) in December 2001. From then, China auto market has soared for the first time. A car can be used for about 6 years. So I think from the end of 2007, China auto market will jump again in a second time buying upsurge. It will be very good for the sales of early comers in China market, such as the JVs of Volkswagen, General Motors and Honda. Even only 10% of their customers in 2001-2002 can go back to buy the same brand, it will also be a big number.

Gasgoo.com: In China market, which brand attracts highest loyalty?

Songlin Mei: The truth is Chinese consumers has very low brand loyalty, about only 10%, versus about 70% in mature markets. The reason I think is, first, there are more and more brands competing in the brands, be it international or local brands. Second, because the consumers are mostly first time buyers, they may want to try another brand when they are going to buy their second car. Third, the income of Chinese people are growing, so they may buy a lower level car at the first time, and buy a higher level car as they can afford it now.

Gasgoo.com: Will the 80% to 72% decline in proportion of China's first time buyers affect China auto market's growth rate? How do you foresee China auto market's growth rate in the years to come?

Songlin Mei: I got in a book that China auto market's growth rate in 2007 is 25%. In future, I think the China auto market will continue to grow, China's growing per-capita GDP will be a strong back up for its auto market, although it may not be 25%.

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