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
