TNS Automotive

Anything but a miracle

China has sold 13.6 million new vehicles in 2009 and, quicker than expected, become the largest vehicle market in the world. The mainland claims the top spot with around 1.5 million vehicles short of the more or less 15 million units previously sold every year in the United States, though, which was particularly hard hit by the economic slowdown.

More remarkable than being the number 1 is the fact that the Chinese vehicle market has grown by an astonishing 44% in 2009. The most frequently asked question these days is: what are the reasons for such a steep increase?

As most of the time, there are several reasons that play in advantage for the Chinese market. First of all, the growth is driven by a dynamic passenger vehicle sector, and the circumstances for car purchase are undeniably more favourable in China than in the large mature markets. With close to 600 respectively 800 cars per 1000 inhabitants, the markets in Germany respectively in the US are already highly saturated, while at the same time less than 50 cars per 1000 inhabitants in the mainland signify China’s pent-up demand in terms of car ownership. High vehicle penetration makes the developed countries essentially replacement markets where in times of economic constraints the length of car ownership tends to increase, and consumers are likely to slow down the rhythm of vehicle replacement. On the other hand, more than 80 percent of new car buyers in China purchase a passenger vehicle for the first time in their life, and are keen to enrich their lifestyle by an enhanced mobility and to acquire higher social standing by showing-off their prosperity.

Yet, don’t believe that this makes selling cars automatically an easy task. China was not spared by the downturn, even if we know by now that its negative impact was less dramatic than in many other economies around the globe. Still, we should not forget that the mainland sales of new passenger vehicles were declining by the end of 2008 as consumers were increasingly reluctant to spend a lot of money for big-ticket items amid rather gloomy economic perspectives. But the Chinese Central Government proved to be quick and efficient in launching the Automotive Industry Revitalization Program which, among others, included a consumer stimulus program to spur new car purchase. Essentially, the government support consisted of a purchase tax reduction by 5 percent for small and medium sized cars with a 1.6l engine and below, as well as a trade-in subsidy for the rural population. Both measures in fact translated into a consumer benefit of several thousand RMB, and altogether were able to kick-start the stalling new vehicle purchases at the beginning of 2009. As we could observe throughout the year, the stimulus measures not only benefited car sales in the big Tier 1 and Tier 2 cities and in the major local markets along the coastal belt, but also spurred sales elsewhere. Much of the market growth in 2009 has been triggered by a spending spree in the inland provinces.

Government stimulus measures have not only supported private car purchase. Investments in infrastructure and housing have also enabled the commercial vehicle market to record a solid double-digit growth.

Important in all that, the determined state intervention a year ago has contributed a lot to quickly restore consumer confidence, and thus, set free the inland consumption, even if export activities slowed down. It has added to the general sentiment regarding the government’s ability to improve the economic situation, a factor that we won’t find in the democracies of the Western markets. One of the most compelling indications for this is the fact that by mid 2009 the sales of large cars, not at all benefitting from government subsidies, started to gain momentum. By year end, the sales of upper-medium sized and even luxury cars have increased by a remarkable 25 percent.

This suggests that the Chinese economy has already sufficiently strengthened to be able to sustain without state incentives. Nevertheless, the Chinese government apparently does not take any chances on the future market development as it has decided the continuation of subsidies for vehicle purchase in 2010 – with some amendments. The health of the overall economy significantly depends on the strength of the auto market, whose own growth is expected to exceed the increase of the country’s GDP. The objective therefore is to maintain a double-digit growth in 2010 automotive sales. Most experts forecast the market to develop by more or less 15 percent this year.

Will China be able to break the 15 million mark, and become the true number 1 market in the world?

For any further information or enquiry, please contact Klaus at Klaus.Paur@tns-global.com

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China – A powerhouse of its own kind!

Even a year ago nobody would have thought that China would be able to grab the global top spot in terms of auto sales as soon as 2009; predictions lay somewhere in the middle of the next decade. The publication of half-year figures just a few days ago, indicating sales of around 5 million vehicles in the first half of 2009, has confirmed that China is now the biggest auto market in the world.

This alone, however, doesn’t really give much cause for celebration since China’s ascent to the top position is at the expense of the US market, where vehicle sales have dramatically declined since last year. What gives rise to optimism though, not only for China but for the global auto industry, is the indication of a healthy long-term development of the Chinese car market after the minor slowdown at the end of 2008.

The Chinese government has proven itself capable of efficiently navigating through the difficult times triggered by the global economic downturn. As early as January, when the impact of the slowdown on China’s passenger car market became clear, the State Council adopted the "Automotive Industry Revitalisation Program" along with guiding principles for market development in the short- and long term.

An immediate measure taken to turn around declining sales figures and proven to be extremely effective, was the reduction of purchase tax by 50% for small displacement vehicles. A tax decrease from 10% of the purchase price to 5% for 1.6l engines and smaller succeeded in kick-starting new passenger vehicle sales and helped to achieve a 26% year-on-year market growth by mid- 2009 (including mini vans). Besides creating a tangible incentive for car buyers, this measure has also contributed to restoring consumer confidence by showing the government’s determined commitment and success in dealing with economic challenges. While the market is still leaning towards small and lower medium cars we can see the sales of several larger vehicles taking off - proof that Chinese consumers are getting back to big-ticket spending. This highlights the nature of government incentives as only a kick start for sales and not a tool for sustainable market development. It also points to the fundamental difference between the Chinese and German auto markets, the latter of which is also currently enjoying growing vehicle sales. The scrapping incentive provided by the German government has motivated people to advance their new car purchases, but does not impact consumer confidence. It is therefore reasonable to expect another sales slump after the scheme’s expiration at the end of 2009 whilst new vehicle sales in China are expected to continue increasing even if the purchase tax reduction is phased out.

A longer-term and more strategically motivated initiative by the government is the massive investment in the development and promotion of alternative energy vehicles, in particular hybrid- and electric powertrains. Within the next three years, more than 10 billion RMB will be granted to Chinese domestic car manufacturers for R&D of new energy vehicles and an additional 20 billion RMB will be set aside for subsidising their use (sales incentives, tax reductions, etc.). This measure is based on the clear objective that, by the end of 2011, every domestic car manufacturer benefiting from government support should have at least one alternative energy car in mass production, and 5% of annual new car sales should be composed of new energy vehicles. This could potentially add up to 500,000 units; if the Middle Kingdom can achieve this, it will be a truly major player in the field of alternative energy vehicles, and will have considerably closed the gap with international car manufacturers. All paths to conquering the world markets will be open to Chinese car makers.

Until then, there is still a long way to go. Overall vehicle quality and reliability have to be improved, and strong Chinese car brands have to be built - provisions for these tasks can also be found in the Revitalisation Program. Even if it sounds very ambitious today, who can really doubt the Chinese government’s capability to push its ideas forward?

For any further information or enquiry, please contact Klaus at Klaus.Paur@tns-global.com

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Still room for surprise!

The Shanghai Auto Show 2009 closed just recently, and this year’s exhibition has produced record results - the largest exhibition area ever, more industry participants than any previous year, and the highest number of visitors seen yet. An amazing performance given the current economic context, and the particularly bad shape of the current global auto industry!

As always at the motor shows in Beijing or Shanghai, all attention was turned to the domestic car manufacturers, and this year’s exhibition has indeed shown us how far the Chinese domestic manufacturers have already come since they started to engage in passenger car manufacturing. We have seen new modern and fashionable models but also the establishment of new Chinese car brands, Chery and Geely, who have introduced a multi- brand strategy and launched Riich, Rely and Kerry, and Emgrand, Gleagle, and Shanghai Englon respectively.

With the exhibition theme "Art of Innovation", the organisers put environmentally-friendly technology at the centre of this year’s auto show, and "green" was a consistent colour throughout the various concept and product presentations. There is no doubt that the auto industry’s future lies in the ultimate synthesis of mobility and environmental sustainability, and indeed numerous car makers - international as well as domestic - have showcased concepts along the lines of fuel efficient vehicles, as well as alternative powertrains, to the public.

Despite noteworthy displays of environmentally friendly technologies and Chinese made car brands, the most astonishing presentations were to be seen on the stands of luxury car makers, to a large degree because they were not at all expected at this point. In a period where the recovery of the Chinese car market is widely attributed to the growing attractiveness of small vehicles, luxury brands have contributed considerably to new model launches. Examples include Audi with its new Q7, BMW with its X5 and X6 M-series, Porsche with its Panamera, Ferrari with its California, to name but a few. Luxury car makers have played upon Chinese consumers’ desire for new and high-performing vehicles considerably well. Above all, the display of these models undeniably demonstrates the huge amount of confidence that these car manufacturers have in the growth potential of the Chinese market.

There is widespread agreement that all vehicle segments in China will deliver steady growth over the long term. But luxury car makers’ investment is not only pointed into the far future, but built on confidence in a market recovery in the short term. While the reduction of purchase tax from 10% to 5% for low displacement vehicles (1.6 litres and below) has shown a positive impact for the lower-end of the car market, high-end car makers can expect that the government stimulus package, aimed at boosting the industry, will improve business development and stabilise performance on the stock market - both of which are typical sources of income for consumers of luxury cars.

It appears that luxury car makers are successfully betting on China, and their bold strategies at this year’s Shanghai Auto Show are already bearing fruit: Bentley, Rolls Royce, Maybach, Ferrari and Porsche, etc. all sold cars directly at the exhibition.

Their vehicles are not necessarily the most fuel efficient and environmentally-friendly cars, though. From previous research we understand that premium car owners are in a positive mindset to consider environmental aspects when purchasing a car. When will we see these luxury car manufacturers taking the lead in steering the auto industry as a whole towards environmental sustainability?

For any further information or enquiry, please contact Klaus at Klaus.Paur@tns-global.com

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Big remains beautiful!

After the fuel price hike last summer and the subsequent rise in consumption tax for large displacement vehicles, there were speculations that China may develop into a small car market. Since then, the economic downturn has hit the mainland but the debate remains unresolved.

Many people hail the recent sales tax cut for low displacement vehicles from 10% to 5%, introduced by the Chinese government to boost the sales of small cars, as a measure that will solve a multitude of problems. Indeed, January figures have shown a substantial increase in small car sales. However, the general elation about this alleged success distracts from the debate surrounding underlying, more structural challenges that will endanger the Chinese auto industry in the long term.

As vehicle purchase behaviour is cyclical throughout the year, the effectiveness of the sales tax cut has yet to be proven but should emerge over the next few months. However, even if small car sales remain high, there is little point in overemphasising the low end of the market. The small or zero profitability of these low-priced vehicles is likely to become problematic over time. Further to this, as small sized vehicles alone cannot fulfil the needs in the market, we cannot deny the importance of a sound and balanced market structure to deliver on existing expectations in the market, especially as it is widely believed that China will develop into the world’s number one vehicle market within the next decade.

As Chinese domestic car manufacturers are losing ground, the preferential treatment of low displacement cars is helping Chinese vehicle manufacturers to boost the sales capabilities of their products – which mainly fall into the small car category. But does this really help them to maintain their competitiveness? Foreign JV brands have already been successfully selling cars in the small car segment for quite some time. With safe and reliable technology, sensible quality and workmanship, comfortable interiors as well as affordable prices, they have undermined the position of Chinese brands. Chinese consumers choose these cars over domestic manufacturers simply because they offer much more in terms of the Chinese consumers’ needs.

Similarly, domestic small displacement vehicles do not automatically translate into fuel economy and environmental friendliness as many of the Chinese models do not yet provide the level of emission standards that foreign cars offer. Additionally, international car makers have refined conventional technology enabling them to reduce emissions in larger cars as well.

All this means that Chinese domestic car manufacturers have to commit to the importance of medium and large cars in their product portfolio. Once this has been done, they can take a closer look at their target consumers’ needs and expectations, and develop a consistent brand promise, from vehicle conception to sale, and even beyond.

There are already two Chinese players in the higher segments – Roewe and FAW – but their products are still underperforming and their brand building is weak compared with international JV brands. Have they already developed to their full potential? And when can we expect them to become a credible and serious contender in the Chinese car market?

For any further information or enquiry, please contact Klaus at Klaus.Paur@tns-global.com

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Big is beautiful!

After several measures taken by the Chinese government to limit the use of large engine displacement cars, such as the increase of fuel prices in June or the raise of consumption tax for large displacement vehicles in September, there is widespread speculation about how China’s auto market will evolve in the future. Prompted by a slowdown of new car sales over the last couple of months, many observers wonder whether China will develop towards small sized cars now. The answer to this question is a determined no.

In the near future, substantial sales volumes will still be generated in the medium and premium car segment, and even luxury cars will continue to enjoy sound development. The reason for this is simple: safety, elegance and comfort are the major product benefits Chinese consumers seek when purchasing a car, while gaining self-confidence and demonstrating success are the main purchase motivations. All these motivations require larger rather than smaller cars, and combined with quickly rising household incomes plus the Chinese preference for Da Qi (grandeur), it becomes evident as to why car sales move up-market. An increase in cost of ownership through higher fuel prices or taxes may have some short term influences, but are unlikely to restructure the Chinese car market over the long term.

Yet, we have recently observed intensified efforts from foreign Joint Venture manufacturers to enter the small car segment. At this point, virtually all mainstream car makers from the US, Europe and Japan have already launched or are about to bring an entry-level model into the China market, and thanks to intense competition Chinese consumers are able to find more and more attractive market offers below the 100K RMB purchase price mark. Car makers don’t bank too much on “down-graders”, though, i.e. consumers who choose a small car to save costs. They prefer to target the young and little affluent consumer group with modern taste and trendy style (this is why the majority of these cars are conceived with hatchback designs). In this sense, small vehicles play a vital role for establishing the brand-/consumer relationship at a very early stage within the consumer lifecycle, and setting the basis for future upgrading.

In fact, the growing popularity of small cars by itself can be seen as an upward market trend. Consumers at the low end of the market, in the process of becoming more mature, have shifted away from their demand for cheap cars – a traditional domain of Chinese auto makers – to vehicles that offer more value for money.

Where does all this leave the Chinese auto makers? In a pretty critical position! They continue to lose ground in their own (small car) stronghold and are not yet able to challenge foreign JV car makers in offering appealing mid-sized or even premium automobiles. Are Chinese car manufacturers going to be on the fringes?

For any further information or enquiry, please contact Klaus at Klaus.Paur@tns-global.com

www.tnsglobal.com

www.tnsglobal.com/automotive