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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