Strategy: How can Chinese brands unlock their home market? (Part 1)

Shanghai Englon SC7 in Ürürmqi, Xinjiang Uyghur – April 2014

This is Part 1 of my special Strategy series on Chinese manufacturers at home. You can also check out Part 2 (Medium & Large Buses, Small Buses and Light Trucks), Part 3 (Pick-ups, Mini Trucks and Minivans) and Part 4 (Commercial Vehicles summary and MPVs).

It’s not a secret that Chinese carmakers have a relatively weak market share in their home market, sliding downwards for the 8th consecutive month to 37.1% in April, compared to 39.6% one year earlier. My recent trip to China, visiting Beijing, Chongqing, Ürümqi and a large part of the rural Xinjiang Uyghur province in the West of the country, has clarified a lot of elements participating into this trend, but also unveiled a list of keys that Chinese brands could utilise to unlock their home market. So I will start with 3 observations:

1. It’s not that bad

Let’s not forget we are talking about 37% of the world’s biggest car market by far, forecast to hit 30 million annual units by 2020, so even if the local brands’ share stays around 35 to 40% by then, that’s still 10 to 12 million annual units, way more than the 7 million units American brands sold in the US in 2013 for example.

The Wuling Hongguang justified its #1 spot nationally by a very strong presence in the countryside (here in Kashgar, Xinjiang Uyghur).

2. Geographical imbalance and potential

Travelling across cities at various levels of development during my trip, it became clear that the more remote the town, the more Chinese the car landscape became. From 10 to 15% in Beijing, to 33% in Chongqing, 40% in Ürümqi and reaching levels up to 90 to 100% Chinese penetration in some parts of the Karakoram Highway in the extreme South West of the country. My observations concerned a limited area of the country and can in no way be generalised to the whole of China.

However, if we take this step and assume this is the way the market is segmented, then the question becomes: will car buyers in the developing regions of China choose local brands when they purchase their first car or will they behave like their East Coast counterparts and fall for the charms of German, French, American, Japanese or Korean cars. The widespread assumption in the industry is that they will be more enclined to choose Chinese brands. I am not convinced and to me the jury is still out on this. I will conduct more in depth research over the coming months to try and answer this capital question.

The Dongfeng Fengguang, particularly popular in Kuqa, is helping building the Chinese MPV segment.

3. Segment disparities

A meticulous study of the Chinese market segment by segment shows huge disparities, with some segments actually under near monopoly from Chinese carmakers, potentially making it simpler to concentrate on the ones where local brands are under-performing. One of my most interesting observations in China was witnessing the creation from almost the ground up of new segments by Chinese carmakers themselves, unlocking huge potential for the future. So this series will focus on the study of the Chinese car market by segment, exploring each segment’s evolution and potential for Chinese brands. In short: how can Chinese carmakers unlock their home market, segment by segment?

We’ll start big, and finish small.

Dongfeng holds 23% of the Medium & Heavy Truck market in China

MEDIUM & HEAVY TRUCKS

This is a segment we rarely mention on BSCB for lack of available sales figures, however today I am in a position to share with you Production figures for Medium & Heavy Trucks in China in 2013. You basically need to consider China as a giant construction site, with roads and buildings constantly being built and upgraded. Just when I was there, the Karakoram Highway was in the process of having its width tripled and construction workers were hard at work for hundreds of kilometres along the way. During my entire time in the country I did not see one single foreign medium or heavy truck, an observation that was already true in Mongolia last year.

Production figures confirm this, with only the SAIC-Iveco joint venture (2.6% share) and Hino (0.4%) not Chinese. The rest of the medium/heavy trucks production in China in 2013, a whopping 97% of the market, is Chinese. Dongfeng logically dominates the segment with over 240,000 units produced last year or a 23% market share, ahead of FAW (17.3% share), China National Heavy Duty Truck (13.6%), Beiqi Foton (12.3%) and Shaanxi (9.7%), the only other manufacturers above 100,000 units. The total medium/heavy truck production in China in 2013 was just over 1 million – 1,044,619 units to be precise, keeping in mind some of it gets exported. Needless to say imports are minimal here so there we have it: a near-monopoly for Chinese carmakers in the first segment we observe.

Full Year 2013 Top 20 China Heavy & Medium Truck brands below.