TNS Automotive

Three magic letters for China

Volkswagen China recently introduced a locally made Golf GTI in the mainland. When hearing this news I went all smiles, and felt genuine delight which I cannot recall having experienced since I got a toy slot car race track for Christmas at the age of 12.

Readers in Europe I do not have to tell about the Golf GTI. I have not had to mention that since the late 1970s, generations of kids and adolescents in Europe have grown up with these 3 letters symbolizing speed and performance. I do not have to explain that the GTI was (and still is) a power car, a hot hatch, a rocket on four wheels, a wolf in a sheep’s clothing.

Being rather unimpressive at first glance, but providing sheer driving performance and hence, ultimate driving pleasure is precisely the success factor of the Golf GTI. Sure, there were all the real sports cars, the Porsches, Ferraris and the like, but these cars were out of reach for the normal Mr. Everyman. And there were also apparent sports cars, with sleek designs and more dynamic exterior appearances. Their driving performances were rather moderate, though, and driving experience rather deceiving. At the time when the Golf GTI was launched in 1976, Volkswagen had such a sports car in its own stable, the Scirocco: a stylish 3-door coupe-like sports car, with a 1.1 – 1.7 litre engine a little bit underpowered and therefore – excuse the expression – a “lame duck” compared to the Golf GTI which came from day one with a 1.6 litre engine and 110 hp.

For China, the upcoming GTI launch is a noticeable event. The car is supposed to come with a 2.0 litre TSI engine with a 6-speed Direct Shift Gearbox, capable to accelerate from 0 to 100km/h in 7.1 seconds. This means pure driving pleasure and emotion! Not only does Volkswagen honour its currently most important market worldwide with its iconic car model, the mainland’s number one passenger vehicle brand also suggests that the market has already attained a certain level of maturity and that China’s car consumers are ready for such a locally produced sporty version. In fact, many indicators still point to an emerging nature: 8 out of 10 new car buyers who purchase a passenger vehicle for the first time in their life choose the still largely predominant sedan body type – the typical embodiment of a car in emerging markets – whereas car financing, a growth driver in mature markets, is still in its infancy.

On the other hand, we observe a growing number of young consumers entering the market, those born in the 1980s, whose needs and expectations towards cars may be different from the first generation of car buyers. A more traditional mindset among consumers from the 1960s and 1970s suggests that the choice of a car is considerably based on functional requirements and social acceptance, while a more Western-lifestyle oriented mindset among consumers born in the 1980s favours individual pleasure and self-gratification.

Yet, while young consumers seek more individual pleasure, they do not completely abandon their values when buying a new car. Family and friends remain important, and owning a car that is accepted by one’s inner circle is essential. Harmony and decency still have their place, which is why the car design cannot be too exaggerated and distinct. At the same time, adhering to a more trendy and fashionable appearance, and expressing a dynamic personality becomes a driving factor for the new emerging consumer group. It seems to me that the Golf GTI fits well into this mindset.

With an expected price tag below 250K RMB the locally produced GTI will be considerably cheaper than the imported version which costs over 400K RMB. Still, it is quite an amount of money to pay, in particular for the young consumers. This is why we may not expect to see a whole lot of GTI on China’s streets anytime soon.

In the longer term I am sure that the Golf GTI will find its deserved clientele among Chinese car consumers, providing car enthusiasts in the mainland with the same excitement as it has already given more than 1.7 million GTI drivers around the world, and manifest its place as simply one of the greatest cars of all times.

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

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Hummer - Unhappy ending with a bitter taste

In China we have become quite used to good and exciting auto market news: Sound growth potential in the long term, successfully operating vehicle manufacturers, and Chinese domestic car makers that quickly progress to be at eye-level with their international peers by the end of the new decade at the latest.

In this context, the recent failure of Sichuan Tengzhong to purchase General Motors’ Hummer brand appears to be a bit of a setback. Yet, it is self-made, as the Chinese regulatory authorities have rejected the acquisition plan, and Sichuan Tengzhong has withdrawn its purchase offer.

The discussion has begun as to why the deal could not be brought to a successful completion. One reason put forward is the fact that Sichuan Tengzhong does not have enough auto industry experience. It is true that the company has not yet engaged in passenger vehicle production, but makes heavy machinery and special-purpose vehicles, such as dump trucks and concrete mixers. However, this alone cannot be sufficient for rejection. Think about BYD, a Chinese battery manufacturer, which started only a mere five years ago with car production after it had purchased a small automobile company two years earlier. In 2009, it has become the largest Chinese domestic brand in terms of passenger vehicle sales, providing the top-selling F3 model with almost 290,000 newly registered vehicles of this type alone. In addition, as first Chinese vehicle manufacturer it has launched a mass-produced hybrid car (F3 DM) and is about to launch an all electric vehicle in 2010, the e6. Lack of experience does not necessarily mean being short of success.

Another suspicion why the regulatory authorities have not approved the proposed takeover is the gas-guzzling image of the Hummer brand. Its product portfolio entirely consists of vehicles with high fuel consumption while China wants to promote and establish an auto industry based on fuel efficiency and environmental sustainability. There is no doubt that Hummer vehicles are very “thirsty”, however, the high fuel consumption is not really the core of this brand. The Hummer brand idea was developed on the basis of adventure, excitement and freedom, after American Hum-Vees enjoyed extensive TV coverage in the first Iraq war in the early 1990s. Later, an effective promotion by action movie star Arnold Schwarzenegger contributed to its icon status, at a time when nobody cared about fuel consumption. Couldn’t Hummer’s brand personality be further developed by implementing fuel efficiency and even alternative power train technology?

In the end, both of these aspects may have played a role, but is comes down to one point: Sichuan Tengzhong’s proposal for Hummer’s brand acquisition was not good enough, and has not convinced the authorities. But why were not more efforts put in to submitting a striking proposal, given the fact that this brand purchase would have offered a good opportunity to diversify the corporate activities and enter the promising passenger vehicle market at a bargain price?

A doubt appears: Did Sichuan Tengzhong ever seriously consider purchasing the Hummer brand? With all the media attention that it has achieved since a first preliminary agreement with General Motors was announced in June 2009, it has managed to raise its own brand awareness, and made its name well known across the world. This increases its chances to attract potential overseas investors.

All in all, Sichuan Tengzhong has quite benefited from its proposal for this international acquisition, despite its eventual withdrawal. For GM the collapse of the Hummer deal is another failure to sell one of their brands, after attempts to spin off Saturn and Pontiac. The latter were wound down, and the market is now going to witness the death of another iconic brand. Hummer and its employees are the real losers.

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

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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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