Auto industry in about turn

Backed by an increase in sales of lower-end models, local Chinese auto manufacturers have now taken 30 percent of the market.

Traditionally, they focused on models cheaper than 100,000 yuan and did not see notable progress in high-end models. Now there is pressure on the industry to change but it is learning hard lessons as it releases new fleets on to the market.

Chery's high-priced model "the Son of East" 2.4L was released at 167,000 yuan, only to see its weak brand recognition and mediocre quality lead to a monthly sales average of 1,000 units even with a 50 percent discount.

BYD Auto's F6 was sold at around 90,000 to 160,000 yuan, similar to the price of compact models manufactured by foreign-local partnership brands.

One model of local high-end maker Hongqi was sold for 340,000 yuan, nearly half the cost of its release price, and still saw only 2,000 units sold annually. Local brands including Chery and Zeely stepped up to bolster their brand recognition during the 2009 Shanghai Motor Show to mixed results.

Chery announced that it would push towards "brand globalization" of its four major brands and 32 new car models. In Accordance with their characteristics, Chery devised four brands: Chery, for its passenger car; Riich, for its high-end passenger vehicles; Rely, for high-end commercial cars, and Kerry, for its compact models.

The Riich brand consists of four series, G/X/M/Z, and is expected to release six models. Targeting "post-1980s born" consumers, it released the Riich M1, a state-of-the-art compact model, for 40,000 yuan. In the second half of this year, it is expected to release the G6 and G5 at price tags of 150 to 200,000 yuan and 130 to 180,000 yuan, and also go on to release the M5 and X1. With the slogan "engines and drivers", the makers of the Rely brand are determined to boost the image of "high class commercial and business vehicles" by releasing four series models (H/P/V/X).

Geely announced 22 new models from three of its major brands, Gleagle, Emgrand, and Shanghai Englon. Emphasizing an image of fashion, passion, and dreams, eight models were released as Gleagle. Emgrand used phrases such as "luxury", "stability" and "power" for eight mid- and high-end commercial and passenger car models. Under the concepts of "classic" and "nobility", Shanghai Englon released three high-end passenger cars. GE (Geely Excellence), a high-end model otherwise known as the mini Rolls Royce, cost more than one million yuan and resembles the Rolls Royce.

SAIC (Shanghai Automative Industry Corporation) and Roewe, both with reasonable brand recognition, also released top-of-the-line models. Remodeling Ssangyong Auto's Chairman, Roewe's R95L model is a representative luxury sedan.

Why the upgrading?

Pulled down by their brand values, local manufacturers have lower profitability per unit compared with foreign counterparts. With expectations that compact cars should almost match the quality of luxury sedans, the cost of production has risen and profitability has declined. During the first two months of 2009, profitability for China's automobile industry fell 51.6 percent year-on-year.

Compared with low-end models, the profit margins of high-end models are stable and are favorable to long-term prosperity. Unlike Chery's profit margin per unit of 1,000 yuan, Guangzhou Honda boasts a profit margin per unit of 10,000 yuan.

With foreign makers already dominating the high-end market, local rivals need to prepare for all-out competition. In order to increase sales and boost market share, foreign and local joint enterprises have begun manufacturing cheaper models which has brought on fears that the low-end market will no longer be secure for local firms.

To achieve brand innovation, local firms have started to realize the need for long term investment and research and development. To counter the image that local brands are cheap, local manufacturers feel obliged to develop high-priced models.

Looking back at the history of automobile manufacturing, luxury brands all began as mass-market vehicles. The Lexus brand was based on the popularity of Toyota. In 2009, Hyundai Motors released Genesis in the US at a price of $33,000, similar to the price range of the 5-Series BMW. While the rest of the US auto market shrank 40 percent in March 2009, the success of Genesis helped Hyundai Motors to increase sales volume by 4.9 percent year-on-year.

High-price outlook

Local brands still lag behind foreign counterparts in terms of technology, quality, and marketing. China's high-end auto market is categorized into two parts according to positioning. In the large passenger car market, Audi's A6L enjoys an absolute advantage while the Toyota Crown, BMW 5-Series, and Benz E-Class enjoy high market share. In the mid-size passenger car market, the Audi A4 and BMW 3-Series are in stiff competition.

Without competitive advantage factors such as brands and technology, local high-quality vehicles are expected to struggle for some time. It is also worth noting that while local brands have maintained a low-price strategy for a long period, consumers in the mid- and high-priced market take quality and brand recognition into consideration rather than the price of a vehicle. Hongqi, the only local high-end brand, sells 2,000 units annually.

The author is a researcher with Samsung Economic Research Institute (China). The views expressed here are his own.

(China Daily 12/21/2009 page2)