TNS Automotive

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

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Green Is In!

Oil prices are soaring and auto markets around the world are starting to decline due to reluctant consumer demand. The US seems to be hardest hit, but we are also hearing disturbing news concerning falling new car sales figures in Europe. So will China’s car market also be affected by the rising oil prices?

Although the Central government is tightly controlling fuel prices, prices at the pump were recently increased by nearly 18%. While this figure represents quite a large increase, it still only puts the cost of one litre of gasoline at just above 6 RMB (equivalent to 60 EUR Cent), which is below prices in the US and far below those in Europe. Fuel prices in China are still “bearable” for consumers and therefore experts do not expect a substantial impact in the short term on new car sales.

We also need to consider that car ownership in the Chinese mainland is more aspirational than in western markets and new car sales are mainly driven by first-time purchasers. For many of these buyers, the acquisition of a car is the fulfilment of a dream and we may safely assume that this aspiration will not be renounced because of the current fuel prices. Consumer spending generally implicates buyer confidence in the future’s outlook, most particularly for large scale investments and in this case, we can certainly observe major difference between the US, Europe, and China markets. This is why, overall speaking, we can continue to expect healthy growth for the Chinese car market in 2008, somewhere around 15%.

But this does not mean that current world market developments will spare China. In fact, the current discussion about the scarcity of fossil energies and the oil price hike is distracting from an even bigger underlying issue, namely: the negative environmental consequences of carbon emissions in which cars and the auto market play a major role. Expected to become the largest automotive market in the world within the next decade, China is destined to be at the forefront of the challenges to reduce pollution.

A key requirement at this point is the commitment of car manufacturers to fasten the pace in developing alternative energy solutions, as well as ensuring they are affordable for consumers. Until now, any attempt by international car makers to move towards alternative energies has been seriously hampered by high sale prices. Today, environment friendliness is reduced to a focus on the fuel economy, which we all know will not be enough over the long term.

Chinese car makers could undoubtedly take this opportunity as a short-cut to reduce the gap that still exists between foreign vehicle manufacturers with regard to “conventional” powertrain technology, and rise at eye level with their international rivals. As numerous concepts at the last Beijing Motorshow suggest, indigenous car makers appear to be quite advanced in offering vehicles powered by alternative energies and China makers have announced the sale of alternative energy vehicles at a lower price.

Chinese car manufacturers will find the local market to be ready for affordable eco-solutions. A recent TNS survey among car owners shows that 8 out of 10 car buyers who are aware of hybrid technology (76% of interviewed consumers) would be ready to purchase a hybrid car at equal price to a regular gasoline powered vehicle. Every second person interviewed would even be willing to pay a 10 percent premium.

Will China take responsibility in terms of the environment, and can Chinese car makers lead the way in alternative technologies?

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

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