Tesla Model 3: Why it changes everything

Tesla Model 3The Tesla Model 3 has already changed the automobile industry.

Almost a month ago on March 31, Tesla unveiled the much hyped Model 3, an all-electric four-door compact sedan that will slot well below the Model S and X in the manufacturer’s lineup. It will be priced from US$35.000 up with an autonomy of 200 miles and is the first realistically affordable car Tesla is launching, in essence the ‘make or break’ car for Tesla which relies on its mass volume of sales to become a sustainable car company. The pre-order figures it generated surprised all worldwide analysts included myself.Time survey before the unveiling showed that conventional wisdom was on 55.000 pre-orders in the first 72 hours. Instead, the Model 3 reached that figure in a couple of hours, hitting 180.000 pre-orders in 24 hours, 276.000 in 48 hours, 325.000 in 72 hours and over 400.000 by now, representing potential sales of over US$14 billion. (Update: This figure was amended to 373.000 on May 19)

Model 3 orders. Picture courtesy Business InsiderTesla Model 3 pre-orders as of April 2 vs. cumulative Tesla sales to-date.

These pre-orders are US$1.000 refundable deposits, so they don’t equate to fully purchased cars, merely an “expression of interest”. Still, it makes the Model 3 the most pre-ordered vehicle in the history of automobile and the fastest one to reach 400.000, by far. Precedent record-holders would typically peak at 100.000 in the first month with much smaller deposits, such as the Dacia Logan during its launch in Iran a little less than a decade ago. Needless to say this is also a record for an all-electric car. All-time sales of highway capable plug-in electric cars since 1890 stand at 1 million units: the Model 3 has reached almost half this in less than a month. The electric car sales record holder is the Nissan Leaf (200.000) with the Chevrolet Volt in third (106.000). In second place, Tesla has sold roughly 120.000 Model S since launch, so Model 3 orders equate almost four times that.

Tesla-3-interior-image-2Model 3 interior

In order to honour these sales, Tesla will essentially need to become a different car company altogether. Until now a disruptive niche player, it has been valued like a tech company. At roughly US$33 billion, its market capitalisation has nothing to be ashamed of compared to behemoths Ford ($51b) and General Motors ($46b), which each sell in two days what Tesla sell in one year… As for Fiat Chrysler FCA it could actually be absorbed by Tesla, valued at “just” $10 billion. Yet Tesla has never made a profit. Even if Model 3 sales will likely be spread across two to three years, it would put Tesla at a worldwide sales level comparable to Acura (205.000 sales in 2015), Infiniti (215.000) or Porsche (225.000) and looking at American brands, well above Lincoln (120.000) and potentially teasing Cadillac (278.000). In other words, among well established luxury brands.

Tesla Model 3 Picture 2The Model 3 unveiling was streamed live on the Tesla website. 

Tesla will need to drastically ramp up its production but the company’s track record has shown this may be an issue. With initial production and deliveries announced for the end of 2017, such high pre-order figures mean people who ordered their vehicles in the past month could be waiting until 2020 to get it. That’s when refund figures could potentially start to soar. In April Tesla announced they missed their target for first quarter 2016 results at 14.000 sales vs. 16.000 because of “how much technology” they put in the Model X SUV. If Tesla struggled to deliver 16.000 vehicles because of technological hiccups, it’s hard to imagine how they can possibly spit out 400.000 units of an equally highly innovative car. Tesla will need to completely change the way they operate to achieve this, and do it fast.

Tesla Model 3 Picture 3Tesla Model 3

But before any Model 3 is delivered to happy customers, the mere fact that it reached record levels of pre-orders is an extremely significant milestone in the history of automobile and its potential shift towards electric vehicles. Until now, the hot spots for alternative fuel vehicles – the high volumes being mainly hybrids and mainly sold by Toyota – have been locations where their success is almost entirely spurred by government measures that make is advantageous to buy an eco-friendly car: Japan, California and Norway. Until now consumers have not purchased electric or hybrid cars because they wanted to but by and large because they were pushed to. The Model 3 changes this.

Tesla line AustraliaTesla customers line up to pre-order a Model 3 in Sydney, Australia 

Before the Model 3 unveiling on March 31, people were camping outside of Tesla dealerships to earn the right to pre-order it for $1.000 once the booking was open. Some had been lining up two or three days in advance. This is a pent-up demand frenzy that is normally reserved to new Apple products which don’t even compare in price. Also extremely significant is the fact that Tesla doesn’t spend any money on marketing. So Elon Musk has managed to create an incredible amount of desirability for an electric car, something that no manufacturer had managed to achieve before.

Chevrolet BoltChevrolet Bolt

This shows us for the first time in the history of automobile that there is a real demand for a cool electric car. Even if the Model 3 get scrapped for lack of funds (worst case scenario), it will act as a trigger for the largest manufacturers in the world such as Volkswagen, General Motors or even Toyota to start thinking about offering an affordable electric car in their lineup. GM is already on its way with the Bolt, a $30.000 all-electric compact hatch with a 200 mile range that should hit US dealerships before the end of 2016.

Why Volkswagen is losing foot in China (Part 3/3)

Volkswagen China. Picture courtesy ibtimes.comMore stormy weather ahead for the Volkswagen brand in China?

This third section concludes our Strategy coverage of Volkswagen’s current woes in China. In Part 1 we studied how the lack of affordable SUV lineup was penalising the German carmaker, and in Part 2 we analysed how its over-reliance on sedans and a potential slip up in quality as well as market forces moving away from the brand both at the lower-end with first time buyers and the higher-end with replacement buyers was hurting Volkswagen. Now that the scene is set, what next? What plans has Volkswagen put in place to ensure prompt and healthy recovery from a year-on-year evolution that has never been so precarious?

See also:

Why Volkswagen is losing foot in China (Part 1/3)

Why Volkswagen is losing foot in China (Part 2/3)

3. What next

Firstly it is adequate to put the last couple of months into perspective, which is three full decades of ultra-domination of the Volkswagen brand in Chinese sales charts. Then, let’s go through Volkswagen’s plans for the next few years, some of them potentially offering a solution to the SUV and sedan predicaments the brand is currently finding itself in in China.

2012 VW Santana China September 2012Volkswagen has been dominating the Chinese car market since 1984 and the Santana.

Readjustment

Official CAAM sales data, covering locally-assembled vehicles only, shows a 31% year-on-year decline for the Volkswagen brand in July in China at 152.300 sales vs. 219.203 a year ago and a 33% decline of its sedan sales at 133.176 units vs. 197.332. Five of its star nameplates have plunged by more than 40% year-on-year: the Santana, Jetta, Magotan, Passat and Polo. Volkswagen head offices have remained very discreet about the brand’s Chinese July results, preferring to compile year-to-date figures instead. In their worldwide July sales report they state China sales are down 8% so far in 2015 at 1.48 million, which for once doesn’t add up with 2014 figures released by CAAM: Volkswagen implies 210.000 units in July 2014 including imports whereas CAAM says 219.203 excluding imports, and 180.000 units in July 2015 incl. imports. Even if VW imports are stable year-on-year at 28.000 units, the overall July decline would be 28% instead of the 14% implied by VW.

Volkswagen China. Picture courtesy scmp.comVolkswagen may need to fast-track its launch plans for China to return to growth.

These are all frightening figures regardless, but in actual fact part of a logical readjustment. Since its introduction in the country in 1984, Volkswagen was frequently selling more than double the monthly volume of any other brand in China. In July 2014 for example, below VW and its 219.203 sales was Toyota at 81.714 units. This July, Toyota is at 96.359 vs. 152.300 for Volkswagen, arguably a more ‘natural’ gap. In the face of increased competition, a smoothing out of sales differences atop the brands ranking is to be expected and reflects a natural evolution towards more fragmentation, a characteristic of maturing markets.

What is certain is the thawing of Volkswagen’s market share in China – as natural as it can be – has a devastating effect on the Volkswagen AG Group worldwide results. Last week VAG announced its second-quarter profit fell 16% due in large part to weakness in China, the #1 new vehicle market in the world. In my Strategy feature “Where is China headed?”, written 3 months ago, I mention that a record 75 new nameplates have kick-started local production in the past 12 months (only one VW: the Lamando) and new factories are still opening on a monthly basis. This combined with a more shaky growth environment gives the perfect recipe for “blood” and aggressive price wars. We are seeing the start of this bloodbath before our eyes with Volkswagen potentially starting to lose foot in China.

VW Taigun. Picture courtesy betterparts.orgThe Taigun: what Volkswagen really needs for China?

SUV plans

Part 1 of this Strategy series showed in detail how Volkswagen had missed the SUV boat in the past 12 months by keeping its lineup to a lonely and extravagantly expensive two models: the $31.300 Tiguan and imported Touareg. The Volkswagen Group recently unveiled outlandish SUV plans for the next few years, namely 25 new SUV models by 2020. Among them, nine will be VW-branded but surprisingly, these worldwide launch plans seem to ignore China’s pressing needs altogether as far as the Volkswagen brand is concerned (see below).

Volkswagen AG SUV launch plans until 2020:

Model Launch Would help VW in China?
New VW Tiguan 2015 A little
Bentley Bentayga 2015 No
Audi TT Offroad 2016 No
New Porsche Cayenne 2016 No
Seat Compact SUV 2016 No
Skoda Montania 7-seater 2016 No
VW Tiguan XL 2016 A little
VW Cross Blue 2016 A little
New Audi Q5 2017 No
Audi Q8 2017 No
New Skoda Yeti 2017 No – could hurt VW
VW Golf SUV 2017 Yes
VW Cross Coupé 2017 A little/Yes
New VW Touareg 2017 A little
Audi Q1 2018 No – could hurt VW
New Audi Q3 2018 No – could hurt VW
Seat City SUV 2018 No – could hurt VW
VW Polo SUV 2018 Yes
VW Tiguan CC 2018 A little
VW Golf SUV Convertible 2018 No
Porsche Cayenne Coupe 2018 No
Audi Q1 Convertible 2019 No
Skoda Superb X 2019 No
Lamborghini Urus 2019 No
Seat 20V20 2020 No
VW Taigun TBC Yes

VW Golf SUV. Picure courtesy autozeitung.deNot before 2017: the VW Golf SUV.

Last January, President and CEO of VW Group of America Michael Horn told Auto Express UK: “Car companies are producing SUVs like crazy at the moment. We have to get the next Tiguan and mid-size SUV right, but then there is room for derivatives – whether that’s models which are priced upwards or downwards”. A glaring lack of urgency in these words, yet Chinese car buyers want small, affordable SUVs and they want them yesterday. Let’s look at the next Volkswagen-branded SUV launches in detail, assuming they will also occur in China at roughly the same times, which is no guarantee so much so these plans seem to have been drawn with only Europe and the U.S. in mind. How so very 1990.

VW Cross Coupe GTE. Picture courtesy autobild.deMake or break: the VW Cross Coupé could be a surprise blockbuster in China.

The new VW Tiguan will be unveiled at the Frankfurt Auto Show next month, along with an XL seven-seater variant scheduled to be in dealerships in mid-2016. With starting prices well above $30.000, these two models have little chance of significantly impacting VW’s fortune in China: they will mainly help prevent SUV sales from declining in a booming market. It goes the same for the VW Cross Blue (2016), totally suited to the U.S. market but not anymore to the Chinese one – although it was when it was planned – and the new Touareg (2017) – all too big to impact Chinese volume. Profits may welcome these arrivals with arms wide open though, provided they are all assembled locally. The Cross Coupé (2017) has that little bit of sexiness in its lines and size that could make it a surprise blockbuster in China: the jury is still out on this one.

VW Polo SUV Concept. Picture courtesy autoexpress.co.ukThe VW Polo SUV could reach Chinese shores by 2018 at the earliest: 3 years too late.

Not before 2017 do we finally answer the question “Will this SUV help VW in China?” we asked in the table above with a resounding “Yes”: the Golf SUV is scheduled to launch in Europe at that time, but Volkswagen would be smart to try and accelerate the process greatly for China. The year after that should arrive an even better solution for the Chinese market: the VW Polo SUV, based on the T-Roc Concept presented at the 2014 Geneva Auto Show. Keeping in mind the 2nd generation Honda HR-V, Hyundai ix25 and Kia KX3 will be well established by then… The Tiguan CC and Golf SUV Convertible also scheduled for 2018 seem superfluous, and we finish on the big question mark: the Taigun, based on the Up! minicar and unveiled as a concept at the 2012 Sao Paolo Auto Show, seems to us to be the perfect Volkswagen answer to China’s current SUV craze. Don’t keep your hopes too high though: its production is not even confirmed for now.

VW Cross BlueMore suited to the U.S. market: the 2016 VW Cross Blue.

Looking at how fast the Chinese car market evolves – writing this article even 4 months ago would have required drastic copy changes – by 2018 when Volkswagen will have a true SUV lineup, Chinese car buyers will likely have moved on from cheap SUV to something else – bigger, better, cheaper, more efficient – and Volkswagen may have missed the boat again. These launch plans truly have to change to benefit fully from what China has to offer volume-wise and to ensure Volkswagen’s numerous Chinese factories won’t idle out by then.

Renault Duster Colombia 2014. Picture courtesy renault.com.coThe Duster: Renault’s best-seller worldwide and Volkswagen’s worst nightmare.

The low-cost question

Volkswagen has been eyeing the tremendous worldwide success of Renault’s “entry range” – sometimes Dacia-branded – over the past decade and has been mulling a low-cost brand to cover all bases in China and emerging markets for a while now, proof being this December 2012 The Truth About Cars article presenting it as a fait accompli. These hesitations have cost the German manufacturer dearly now that Chinese carmakers are back on track thanks to cut-thorat pricing and easy-to-the-eye urban crossovers. As we have described in Part 2 of this series, even the low-end VW Santana and Jetta don’t look like so much of a bargain anymore in the face of tremendous recent quality improvements of domestic brands such as Geely. It has never been Skoda’s role to attract the Chinese first time car buyer as the Czech brand is strangely positioned much higher in China than it is in Europe, and Volkswagen benefits from such wide appeal and recognition here that launching an entirely new brand in this market seems like an insurmountable task, let alone a foolish one – also the reason why Renault will not launch Dacia in China.

VW Polo Vivo South Africa 2014. Picture courtesy of claremont.co.zaLow-cost inspiration? The South African VW Polo Vivo.

Last June, CEO Martin Winterkorn told Bild am Sonntag a budget-car “family” is coming, with an SUV, saloon and hatchback, but not before 2018. Note the use of the word family and not brand anymore. Volkswagen already has enough factories spread across the country to churn out this family of budget-cars fast. The recent market slowdown could be used to free significant chunks of production and allow the insertion of these new models. But successfully branding, positioning and selling low-cost vehicles is a skill only Renault has managed to master so far, and it took the best part of a decade. You could argue Volkswagen has already been doing low-cost for a while in Brazil with the Gol and in South Africa with the Citi Golf and the Polo Vivo. But China is a different beast that evolves at lightning speed, in comparison Brazil and South Africa are frozen in time.

Baojun 560 China July 2015bA low-cost VW Tiguan? General Motors’ Baojun 560.

General Motors understood this half a decade ago when creating the Baojun brand in collaboration with SAIC. The result: 300.000 units of the 730 MPV are now on Chinese roads less than a year after launching, and it took roughly a month to get 10.000 buyers for the all-new 560 SUV. Sales figures that are keeping Volkswagen’s Chinese head office awake at night. The cherry on the cake: the incredible success of the Baojun brand over the past 12 months is an absolute slap in the face of Volkswagen’s hesitation at launching a similar offer in China: all Baojun models inspire themselves greatly from Volkswagen’s design, in the end looking suspiciously similar to what a low-cost VW Touran and Tiguan could have been…

With all of this taken into account, Volkswagen’s return to Chinese growth could come down to four elements:

1. Make drastic quality improvements and price cuts to the Jetta and Santana.

2. Fast-tracking the launch of the much awaited Chinese budget-car family.

3. Advancing the Chinese launch of both the Polo and Golf SUV and potentially Cross Coupé SUV.

4. Green-lighting the Taigun mini SUV for China-only as a test.

BSCB readers: now it’s your turn to give your opinion. What do you think is the key to Volkswagen’s return to growth in China in the long term? Tell us in the comments section of this article.

See the previous parts of this VW in China series here:

Why Volkswagen is losing foot in China (Part 1/3)

Why Volkswagen is losing foot in China (Part 2/3)

Why Volkswagen is losing foot in China (Part 2/3)

VW Passat China crash test. Picture courtesy auto.sina.com.cnVolkswagen suffers from an over-reliance on its sedan lineup.

See also:

Why Volkswagen is losing foot in China (Part 1/3)

Why Volkswagen is losing foot in China (Part 3/3)

In July the Volkswagen brand dropped 31% year-on-year in China to 152,300 sales (imports excluded). In Part 1 of this Strategy series we studied the first reason behind this fall from grace: the absence in Volkswagen’s lineup of any affordable SUV, a situation that is likely to last until 2018. In Part 2 we look at the second main explanation for this precarious situation.

2. Sedans under attack

In China, the sedan segment describes all passenger cars that are not SUVs or MPVs and therefore also includes hatchbacks, although these are a lot rarer than sedans – three-box-cars – as perceived in Europe. Volkswagen has always excelled in the sedan area. Unfortunately for the German manufacturer, sedans are currently under attack in China and are solely responsible for the unusual market decline this market is experiencing, at -19% year-on-year in July. But if we remove sedans, the Chinese overall sales would be up 19% year-on-year instead of down (see below).

Segment Jul-15 Jul-14 Evo
Sedan 694,069 860,626 -19%
SUV 403,091 286,852 41%
MPV 107,807 117,243 -8%
Microvan 74,300 88,452 -16%
Total SUV/MPV/Microvan 585,198 492,547 19%
Total Passenger Cars 1,279,267 1,353,173 -5%

The imploding of the sedan market is literally unheard of in China, a market that has regularly gained ground year after year for the best part of the past three decades. Right now, an affordable SUV offering is becoming vital for a brand’s sales performance in the #1 market in the world, which is uncharted territory. But as we detailed in Part 1 of this Strategy series, Volkswagen has missed the SUV boat and put all its eggs in the sedan basket with 87% of its sales still happening in the latter segment. If Volkswagen-branded locally assembled cars are down 31% in July, Volkswagen sedans are down an even more depressing 33% year-on-year, going from 197.332 units in July 2014 to just 133.176 last month.

VW Jetta China July 2015Chinese VW Jetta sales are down 43% year-on-year in July.

This is still by far the highest volume for any brand in China in the sedan segment – and overall, but the freefall is real and affects all of Volkswagen’s stars: the Golf (-11%), Lavida (-16%), Sagitar (-36%), Bora (-40%), Santana (-42% despite the arrival of the Gran Santana hatch), Jetta (-43%), Magotan (-44%), Passat, CC (-49%) and Polo (-50%) are all plunging a lot faster than the market. Toyota, Chevrolet and BMW also rely too much on their sedan lineup with up to 85% of their sales still happening in that segment, yet they are not suffering as much as Volkswagen is at the moment. Why are Volkswagen sedans particularly hard-pressed?

Model July sales July evo Price range (yuan) Price range (US$)
Volkswagen models
VW CC 2,101 -49% 252.800-342.800 39.450-53.500
VW Magotan 9,024 -44% 199.800-334.800 31.200-52.200
VW Passat 5,872 -49% 169.800-322.800 26.500-50.400
VW Lamando 6,031 new 145.900-213.900 22.800-33.400
VW Sagitar 17,212 -36% 131.800-225.800 20.600-35.200
VW Golf 12,958 -11% 121.900-238.300 19.000-37.200
VW Lavida 29,425 -16% 112.900-168.900 17.600-26.400
VW Bora 10,489 -40% 107.800-148.300 16.800-23.100
VW Polo 9,528 -50% 85.800-158.900 13.400-24.800
VW Santana 14,840 -42% 84.900-138.900 13.200-21.700
VW Jetta 15,696 -43% 82.800-119.300 12.900-18.600
Chevrolet Sail 9,301 -18% 59.900-73.900 9.300-11.500
Chinese models
Geely GC9 3,200 new 119.800-229.800 18.700-35.900
ChangAn Eado 10,214 -22% 73.900-119.900 11.500-18.700
Geely Emgrand 11,373 107% 69.800-100.800 10.900-15.700
ChangAn V5 2,696 18% 65.900-79.900 10.300-12.500
Brilliance H330 3,025 -35% 65.800-75.800 10.300-11.800
Baojun 630 1,207 -33% 65.800-95.800 10.300-14.900
Great Wall C30 1,096 31% 64.500-83.500 10.100-13.000
Geely Vision 5,921 282% 52.900-65.900 8.250-10.300
BYD F3 6,330 -2% 49.900-70.900 7.800-11.100
ChangAn V3 5,285 26% 43.900-48.900 6.850-7.650
Geely Panda 2,453 98% 37.900-59.900 5.900-9.300

Domestic brands are back

Volkswagen has no offering contained below the symbolic 100.000 yuan price point (US$15.600), when Chevrolet does: the Sail, priced from 59.900 to 73.900 (see above). On the contrary, it is rare to find a Chinese model priced above that same 100.000 yuan barrier. If up until 2014, the price advantage of Chinese manufacturers was justified by poorer quality, reliability and performances, this is becoming less and less true. Sedans are where domestic manufacturers have been lagging behind in recent years, but they are catching up on lost time, and fast.

Geely Vision China 2015. Picture courtesy 91aiche.comVastly improved: the US$ 8.250 Geely Vision.

The most striking example is Geely. As I detailed in my coverage of the 2015 Shanghai Auto Show, Geely models have improved so drastically over the past 12 months than they put Volkswagen fares to shame in some quality aspects. All the while when costing significantly less: the interior quality of the newly revamped Geely Vision (starting price US$ 8.250) has nothing to be ashamed of vs. the much dearer VW Santana (starting price US$13.200)… My words were: “the slow and soft opening of the Geely Vision glovebox is lightyears ahead of a VW Santana glovebox that crashes onto your knee with a flat, hollow and very cheap “clang!”.

Model China starting price US starting price
VW CC US$ 39.450 US$ 33.595
VW Passat US$ 26.500 US$ 20.995
VW Sagitar / Jetta US$ 20.600 US$ 15.695
VW Golf US$ 19.000 US$ 17.995

At the same time, even though all Volkswagen models described in this study are manufactured locally and thus benefit from much lower labour costs as well as the recent devaluation of the Chinese currency, the cars that are also on sale in the U.S. are frankly over-priced in China (see above). In short, Volkswagen has some margin to move down in China when pricing is concerned. In the face of increased competition, miking the Chinese cow will become harder and harder for the German carmaker.

Geely Panda CrossNo foreign competition: the Geely Panda starts at US$ 5.900.

Reliability issues

Has Volkswagen been resting on its laurels in China? Even its low-end Jetta and Santana are priced significantly higher than equivalent Chinese fares, and it looks like they are already truly scraping the bottom of the barrel as far as German quality is concerned. Volkswagen is still the most popular brand for Chinese consumers, one proof being the long queue for VW leaflets at the latest Shanghai Auto Show. But whereas the German brand has sold more than double any other brand each month of the past 30 years it has been present in China, it is not obliterating competition when looking at JD Power Chinese satisfaction surveys (see examples below).

JD Power Sales Satisfaction Index 2015

Both Volkswagen joint-ventures are well below the leaders (#8 and #12) in China’s Sales Satisfaction. Source: J.D. Power Asia Pacific.

JD Power Customer Service Index 2015

Volkswagen also lags behind (#19) in Customer Service Satisfaction… Source: J.D. Power Asia Pacific.

JD Power Initial Quality 2014…but still tops Initial Quality scores (Note: this is not consumer perception). Source: J.D. Power Asia Pacific.

Another element that may have negatively impacted the Chinese customer’s reliability perception of the Volkswagen brand is its recent local recalls. Faced with VW’s reluctance to admit its fault, the Chinese government had to interve – no less. In March 2013, VW recalled over 380.000 vehicles in China, but not after the state television featured complaints about vibrations, loss of power and sudden acceleration in models including the Golf, some of it linked to dual-clutch gearbox flaws. The situation was so serious that it warranted a public apology by the head of VW China Jochem Heizmann at the 2013 Shanghai Auto Show.

In November 2013, 640.000 VW Group vehicles were recalled in China due to issues related to the lubricant replacement in seven-speed dual-clutch gearboxes. In August 2014, China’s General Administration of Quality Supervision, Inspection and Quarantine had to step in and contacted Volkswagen to deal with complaints of broken rear shafts from Sagitar owners, after the German carmaker claimed the problems were isolated incidents and vowed to sue anyone spreading “untrue” information about their products, according to U.S. website The Truth About Cars. In April 2015, Volkswagen announced the creation of a “Special Channels” program to “further enhance customer care and ensure customer satisfaction”, recognising the negative reliability perception it is now facing.

VW SantanaVW Santana in Urumqi, Western China.

Volkswagen: the default foreign choice

One of the first foreign carmakers to manufacture locally along with Citroen, Volkswagen has long been synonymous with the status that is associated with car ownership in China. It is still to this day an extremely aspirational brand, that has managed to remain relatively affordable for the well-off urbanites from the East Coast, as I described in my April 2013 article China: How local brands may finally find their mojo at home. Volkswagen has catered for and evolved with Chinese car buyers needs for the past three decades. This status as the “default brand” in China has enabled the continuation of its sales dominance, but it also means Volkswagen has become the one brand that Chinese buyers put in the balance when hesitating with a Chinese marque.

In a sense, Volkswagen is the safety valve of foreign manufacturers in China: when consumers mull a return to their much-improved domestic carmakers, Volkswagen sales are the first to suffer as a result. The more significant the shift towards domestic carmakers, the more fragile VW sales. A few years ago when domestic carmakers were at their lowest, Chinese consumers would rather pay almost double for the assured reliability and status of a Volkswagen Jetta or Santana. After a couple of years of much-advertised reliability trouble (see above) and constant progress from domestic carmakers, this same choice between Volkswagen and local fares is starting to weigh in favour of brands such as ChangAn and Geely. In short, Volkswagen is taking the brunt of the reconciliation of Chinese buyers with their domestic brands.

BMW 3 Series L China September 2014. Picture courtesy of auto.ifeng.comVolkswagen may be losing replacement sales to more luxurious brands such as BMW.

Is the market moving away from the Volkswagen brand?

Apart from its vulnerability to local brands, Volkswagen’s woes in China may also have to do with timing. Four full years after the government put in place licence plate limitations to curb congestion and pollution in Shanghai and Beijing, a dozen cities have since been added to the list. As a result, the East Coast market is slowly but surely moving towards saturation. Increased wealth in these regions enable consumer tastes to move up the luxury scale and further away from bargain basement options. When faced with the prospect of replacing their 2009 Lavida, well-to-do Beijing car buyers may opt for a BMW 3 Series L or Mercedes GLA instead, as Volkswagen may not offer anymore the status recognition they once enjoyed.

Volkswagen may be losing consumer upwards, but they are getting less consumers in at the bottom of the price range. Thanks to aggressive marketing efforts and dense dealer networks, first time buyers in less developed areas of the country nowadays tend to prefer a cheap domestic SUV such as the JAC Refine S3 to a low-end Volkswagen sedan such as the VW Jetta. Seeing the Chinese market as silo’ed segments is an error that Volkswagen has made in the past: the domestic SUV buyers of today are the foreign sedan buyers of yesterday.

The series continues here: Why Volkswagen is losing foot in China (Part 3/3)

Why Volkswagen is losing foot in China (Part 1/3)

Volkswagen China. Picture courtesy AP Photo/dapd, Nigel Treblin, File via finacnytrh.comChinese sales of Volkswagen-branded cars slumped 31% in July.

See also:

Why Volkswagen is losing foot in China (Part 2/3)

Why Volkswagen is losing foot in China (Part 3/3)

In July the Volkswagen brand dropped 31% year-on-year in China to 152,300 sales (imports excluded), with its year-to-date total down 10% to 1.52 million units. That’s 160.000 less new Volkswagen on Chinese roads after 7 months than in 2014. The German manufacturer’s star models are all falling sharply in July: the Tiguan (-9%), Golf (-11%), Lavida (-16%), Sagitar (-36%), Bora (-40%), Santana (-42% despite the arrival of the Gran Santana hatch), Jetta (-43%), Magotan (-44%), Passat (-49%) and Polo (-50%). Never in the 30 years presence of the brand in China had it displayed such a precarious year-on-year evolution. Why has Volkswagen come to lose its foot in China? Is this the end of the manufacturer’s implacable domination in the country? What solutions have been put in place to ensure prompt and healthy recovery? We give a few pointers to better understand Volkswagen’s current predicament in China. While Audi (-6%) and Skoda (-27%) are also in difficulty this month, we will focus this Strategy Analysis on the Volkswagen brand, not the Volkswagen Group at large.

VW Tiguan China July 2015. Picture courtesy auto163.comThe Tiguan is still Volkswagen’s cheapest SUV.

1. No affordable SUV

It is Volkswagen’s over-reliance on its sedan range that is penalising it in China. It’s no secret that the SUV segment is currently red-hot in this market and has been so for at least 18 months. In July, sales in this segment were up 41% in a market otherwise down 7%. Most manufacturers, including foreign ones, have scrambled to extend their SUV offer to benefit from the newfound craze of Chinese consumers for this type of vehicles. Not Volkswagen, who has been offering the Tiguan and Touareg for years here. Hyundai with the ix25 and Kia with the KX3 have devised China-only (at first) affordable SUV options, while Honda with its HR-V has split the booty into with the XR-V and Vezel, one for each of their Chinese joint-venture. So Volkswagen is among the few foreign manufacturers to have not reacted fast to the new SUV trend in China.

Brand SUV 2015 SUV mix SUV 2014 SUV mix
Haval 350,063 100% 235,204 100%
Honda 196,564 41% 101,018 23%
ChangAn 196,447 34% 68,907 15%
Volkswagen 149,029 10% 146,659 8%
Ford 130,307 27% 123,380 24%
Hyundai 127,622 23% 142,684 20%
JAC 126,115 69% 18,231 17%
Buick 119,571 24% 47,989 8%
Nissan 112,956 26% 106,084 20%
Beijing Auto 101,738 43% 9,368 7%
Audi 97,062 36% 109,368 33%
Chery 95,847 43% 90,318 33%
DongFeng 92,114 31% 0 0%
BYD 80,729 32% 57,327 22%
Kia 76,167 23% 79,375 20%
Peugeot 66,651 29% 56,661 23%
Zotye 64,595 61% 29,132 34%
Toyota 58,839 11% 75,597 13%
Lifan 55,947 60% 32,477 36%
Mercedes 51,283 40% 24,888 29%
GAC 50,189 67% 43,646 68%
Chevrolet 42,877 12% 37,972 8%
Brilliance 40,863 51% 17,227 18%
Geely 38,288 13% 32,766 14%
BMW 22,441 14% 25,865 14%
MG 18,078 55% 0 0%
Baojun 9,158 4% 0 0%

SUV sales and SUV ratio of locally assembled sales (SUV mix) 7 months 2015 vs. 7 months 2014

Volkswagen’s SUV mix among its locally assembled sales in China stands at 10% so far this year: the lowest of all mass manufacturers. In contrast, Honda’s SUV mix has gone from 23% to 41%, Buick’s from 8% to 24% and Mercedes’ from 29% to 40%. But the real force behind the SUV surge in China is domestic manufacturers: in the space of 18 months, they have reclaimed over half of total SUV sales in their home country. With the SUV market currently standing at 5 annual million units, we are talking about around 2 million SUV sales going to domestic manufacturers virtually overnight.

MG GS China February 2015bLaunched in February, the GS already accounts for over half of MG sales in 2015.

The year-on-year evolution of the SUV sales ratios of Chinese carmakers is telling: ChangAn goes from 15% to 34% thanks to the CS35 and CS75, JAC from 17% to 69% thanks to the Refine S3, Beijing Auto from 7% to 43% thanks to the Huansu S2/S3, Zotye from 34% to 61% thanks to the T600 – itself a copy of the VW Touareg, Lifan from 36% to 60% thanks to the X50 and X60, Dongfeng from nil to 31% thanks mainly to the AX7 and MG from nil to 55% thanks to the GS. And this is only the start: as I detailed in my coverage of Auto Shanghai 2015, each Chinese carmaker mentioned above has at least one additional SUV on the verge of hitting the market. Lifan, for example, unveiled the X40 and X70 there, in effect tripling its SUV range in less than 12 months.

Foreign carmakers Price range (yuan) Price range (US$)
VW Tiguan 199,800-315,800 31,300-49,400
Hyundai ix35 169,800-242,800 26,600-38,000
Skoda Yeti 165,800-241,800 25,900-37,800
Honda Vezel 128,800-189,800 20,100-29,700
Honda XR-V 127,800-162,800 20,000-25,500
Hyundai ix25 119,800-179,800 18,700-28,100
Kia KX3 112,800-186,800 17,600-29,200
Chinese carmakers
MG GS 119,700-179,700 18,700-28,100
Changan CS75 108,800-143,800 17,000-22,500
Haval H6 95,800-141,800 15,000-22,200
Zotye T600 79,800-115,800 12,500-18,100
Changan CS35 78,900-92,900 12,300-14,500
Baojun 560 76,800-89,800 12,000-14,000
JAC Refine S3 65,800-84,800 10,300-13,300
BAIC Huansu S3 61,800-72,800 9,700-11,400

Chinese SUVs are redefining the segment in the price department, and it’s very difficult for foreign manufacturers to really compete with these offerings, unless they create a local, low-cost brand. It’s the direction SAIC-General Motors has taken a few years back when launching the Baojun brand. Taking flight last year with the 730 MPV, Baojun launched its first SUV last month: the 560, starting at US$12,000 and attracting almost 10.000 customers straight from its first month on sale. In comparison, the VW Tiguan starts at US$31,300 and even the Skoda Yeti, Volkswagen’s (not so) low cost offering in Europe, is priced and perceived as an upmarket entry in China: it starts at US$25.900 vs. $20.000 for the Honda XR-V.

Haval H6 China June 2015. Picture courtesy auto.sohu.comHaval H6 Coupe

But the perception that Chinese carmakers are winning in the SUV segment only because of their pricing is erroneous: the best-selling Chinese SUVs in fact compete in the same price range as the cheapest foreign offerings. The Haval H6, uncontested leader of the segment for over two years, can set you back 141.800 yuan for its top-end variant, the Changan CS75 ends at 143.800 yuan and the MG GS at 179.800 yuan while the Kia KX3 – smaller, granted – starts at 112.800 yuan and the Hyundai ix25 at 119.800 yuan.

Volkswagen has missed the SUV boat by not getting a Polo-sized SUV ready for China in 2015 and with no plans to do so in the next two years. While Hyundai, Kia and most impressively Honda have all stricken when the iron is hot, and can see the future with a little more confidence. But even then, all foreigners are extravagantly priced for rural areas that are starting to fall in love with SUVs and fuelling the exponential growth that domestic carmakers are enjoying in the segment. What Volkswagen really needs in China is a low-cost SUV. It’s coming, but not before 2018: “We will bring a budget-car family to market in 2018, with an SUV, saloon and hatchback,” Martin Winterkorn told Bild am Sonntag last June. Volkswagen has been mulling a low-cost brand in China for years and already has the production capacity to churn it out. Waiting until 2018 to bring it to market is not viable in a Chinese market environment where trends make a u-turn every year.

The series continues here: Why Volkswagen is losing foot in China (Part 2/3)

STRATEGY: Renault champion of “fake” registrations

Renault Kadjar France May 2015. Picture courtesy largus.fr29% of Renault sales in Belgium are de-registered within 30 days.

What constitute “real” new car sales registrations? The first instinct would dictate to say these are sales to private buyers. If the answer is not so clearcut, it is critical to keep in mind that only half of European new car sales are actually private sales. Only taking into account private sales would completely (but rightly?) disfigure the European new car market, notably halving its size overnight. A bitter pill to swallow, and something most manufacturers prefer you don’t know. Just as an example, only 35.5% of new cars in Germany are bought by private buyers, and this figure is 53% in France in July, the first time in a while that private sales are back above 1 in 2 there. Specific tax legislation also has an impact on this figure, for example in Hungary where a huge 75% of cars are bought by companies, whereas these are in actual fact private sales that buyers have purchased through their company to avoid paying more tax.

Only taking into account private purchases would make Europe go back to a sales level equivalent to that of 40 years ago, and the most popular models and brands would also be very different, hurting domestic manufacturers at home, another reason to prevent them from advertising this “real” market too much. For example, the Dacia Sandero, 7th overall in France in July, is in fact the best-selling nameplate there with private buyers above the Peugeot 208, while the Renault Clio #2 overall is down to #4 and the Peugeot 308 #3 is down to #8. In Germany, whereas it is extremely difficult for a foreign model that sells outside Volkswagen dealerships (Seat, Skoda) to enter the monthly Top 20, these are frequent when looking at the private sales ranking, once again led by Dacia, along with Hyundai.

Dacia Sandero France July 2015. Picture courtesy of largus.frThe Dacia Sandero is #1 in France in July when only taking into account private buyers.

Non-private sales include sales to companies, less in touch with the reality of the market but nevertheless corresponding to a certain demand, even if dictated by different needs: those of businesses. Where things get more complicated is when more and more private consumers opt for the leasing option when they want to purchase a new car. This is categorised as a long-term rental and doesn’t fall into the private sales area, which is a contradiction. But until the way sales are reported is amended, this is what we data people have at our disposal to dissect.

Manufacturers have a lot more “leverage” (read capability to manipulate sales figures) when it comes to dealer and demo sales, as well as short-term rental sales. And this is where we start to encroach on a much more “fake” sales territory. Dealer and demo sales are widely used by manufacturers to boost their monthly results, but in a market such as France, they still represent just 13% of the market, limiting its potential leverage.

As for short-term rentals, they are a clear signal that a carmaker is trying to artificially boost their figures. Renault made a big deal a few years back to reduce their short-term rental sales. Why? Because by putting loads of cars on the used market that were not wanted by private consumers in the first place, it brings about devastating depreciation for the corresponding models. A poster child for this practice, Fiat holds 18% of the short-term rental sale market in France, whereas its market share with private buyers is just 1.3%! The same goes for Opel, a favourite of fleet buyers at home in Germany but disdained by private consumers and therefore struggling significantly with their brand image.

Ford Fiesta Czech Republic January 2015100% of the Ford Fiesta sold in the Czech Republic are re-exported.

What, then, is a “fake” registration? We can argue a car that is sold in one country but never sees its roads is one. The re-export phenomenon is particularly rife in Eastern Europe. For Bulgaria, where a rumoured 30% of new car sales are re-exported, we at BSCB always publish sales figures with a grain of salt. Latvia and Lithuania are other examples where re-exports completely bias the market. Since the start of 2015, for Czech Republic we now report official sales along ‘real’ ones, removing the vehicles that are de-registered within 90 days – in the case of this country this means they are re-exported and most likely ever see Czech roads in their lifetime. See also: Czech Republic January 2015: New figures unveil re-export culprits. Ford, with 61% of its sales re-exported at January 2015, Seat (53%) and Volkswagen (26%) are the most aggressive at “faking” their sales in the Czech Republic, with some models such as the Ford Fiesta, Seat Ibiza, Audi Q3, Audi A1 and Fiat 500L 100% re-exported (July figures).

lecho.be deregistrationsRegistrations (left) and de-registrations (right) in Belgium 2015 vs. 2014. Source: lecho.be

The last category of sales, which are not truly fake because legal, is when manufacturers register to meet sales targets and cash bonuses, then de-register these same vehicles within a very short period of time (on average less than 30 days) and sell them as used either in the same country or abroad. This practice is extremely common in Belgium, and the champion at this little sport is Renault, owned at 20% by the French state. According to Febiac and the news site lecho.be, out of 28.240 passenger car sales Renault sold over the first semester of 2015 in Belgium, no less than 8.226 were de-registered within 30 days – that’s 29% of its sales without an actual buyer. From #1 with 9.8% share, Renault drops to #4 with 7.5% in Belgium when these de-registrations are taken into account. We are now getting dangerously close to misleading practices that mask true results to please the stock market or, for that matter, sites like BSCB.

Fiat 500 France July 2015. Picture courtesy largus.frFiat is giving up de-registrations in Belgium.

The most recent example was Renault’s score at home in France in June, shooting up to 23.7% share only to tumble down to 14.7% in July, showing clear signs of “sales anticipation” (the politically correct way of putting it) that boosted its first semester results at home. In fact, on a monthly scale, Renault always back-loads its sales month after month, something visible in the intermediate weekly rankings we publish (see France 1-7 July 2015). While it became an automatic way of reading weekly sales at BSCB, this practice doesn’t match the reality of buyers purchasing cars at any given time in the month.

It is very difficult for a manufacturer to disengage from the de-registration practice as it will show frankly disappointing result the entire time it readjust to a normal reporting of salses. It is however possible: in Belgium, Fiat has decided in 2015 to give up de-registrations, going from 26% of its total sales to just 7%. Its 2015 results are showing the impact: the company is down significantly on 2014, but come 2016 its sales will return to normal.

See the Belgian article on Lecho.be: “La technique de fausses immatriculations are encore de beaux jours devant elle“. Many thanks to BSCB reader Guy for pointing this article out.

STRATEGY: What future for new car sales in Iran?

Shiraz Mosque Iran. Picture courtesy 500px.comNasir Al-Mulk mosque in Shiraz, Iran

With Iran agreeing to curb its nuclear program in return for the end of economic sanctions, carmakers are scrambling to the starting blocks in order to best benefit from the opening of a high-potential market to competition. If you are a regular BSCB reader, you will know that the best-selling cars in Iran are for the most part decades-old designs assembled locally as the lack of true competition in the market has stifled innovation. The domestic best-sellers revolve around just a handful of ageing staples: the Saipa Pride – in essence a 1986 Kia Pride, the Peugeot 405/Pars – a mere facelift of the original Peugeot 405 launched in 1987, the Peugeot 206, Iran Khodro Samand and the new leader: the Saipa Tiba.

Tehran Iran. Picture courtesy sibf.orgTehran, Iran

We are therefore potentially on the cusp of a complete reshuffle of the Iranian car market. Freer trade with foreign countries will undoubtedly boost imports and manufacturers will make plans to build new factories in order to bypass import taxes and sell cars at more competitive prices. The prospects are looking very bright indeed for Iran. But just how much potential does the Iranian new car market hold? Car registrations ipeaked at 1.6 million in 2011 before collapsing as economic sanctions were strengthened. Domestic production also fell, by almost 1 million vehicles over the next two years – from 1.65 million in 2011 to 744.000 in 2013 – destroying more than 100,000 jobs. Since, as sanctions were partially relaxed in 2013, the market has recovered to a projected 1.2 million sales for 2015 according to IHS Automotive.

Iran Auto Production. Picture courtesy WikipediaIranian auto production (click to enlarge)

Iran’s population stands at 78.5 million – similar to Turkey or Germany – and a few indicators point to great pent-up demand in the market. The median age of vehicles on the road in Iran is over 20 years, and 55% of the population is under 30, but most haven’t had the opportunity to drive yet. With 200 vehicles per 1.000 inhabitants in 2011, Iran is, granted, well above China (113), at the same level as Thailand (206), but below other countries in the region such as Turkey (233), Saudi Arabia (336), Israel (358) or Lebanon (434). The potential is there, not just for car renewal but for new cars on the road as well. The end of the sanctions will see the market shoot up to 1.6 million sales in 2016, and we at BSCB see Iran evolve at 2 million annual registrations before the end of the decade, roughly equivalent in size to a market like France. Speaking of which, for once French manufacturers are the best placed to reap the benefit of a revival of the Iranian car market. What are the forces in place and who is most likely to win the race to Iranian market share?

Peugeot Pars Iran 2015The Peugeot 405/Pars is currently the brand’s best-seller in Iran.

Peugeot

Within hours of the announcement of the nuclear deal between Iran and Western powers, PSA Peugeot-Citroen had outlined its plan for new Iranian production to reclaim and defend the leading market position it held before sanctions were tightened four years ago – and kept unofficially since. In 2012 when General Motors took a 7% stake in PSA, Peugeot was forced to stop supplying CKD kits (complete knockdown) to Iranian factories for the Peugeot 405, Pars, 206 and 207. Overall, European and U.S. carmakers had to stop doing business in Iran during that time as economic sanctions were extended to the auto industry. However as we described in a recent Iran study (see Iran April 2015: Peugeot more than doubles production year-on-year), Peugeot’s original partner Iran Khodro managed to shift their spare parts supply to local companies and in effect sustained the production and sale of Peugeot models in Iran.

Peugeot 301 Iran 2015. Picture courtesy of Beirutnightlife.comPeugeot is planning to start producing the 301 in Iran shortly.

This way, Peugeot’s share of the Iranian market has remained extremely strong: just under 40% which is actually above its pre-2012 sanctions level. Peugeot insists the 350.000 cars produced in Iran in 2014 and sold mainly domestically are not booked in their accounts. Now, given the PSA-GM alliance has been dissolved and economic sanctions against Iran are in the process of being removed, Peugeot announced on 1 March 2015 it agreed to resume (“official”) local production of cars with Iran Khodro. Then last week PSA declared its intention to invest in full Iranian production of new models using its latest architectures and engines, for domestic sales first, then adding exports towards the near region later. Peugeot’s intentions are to use a different business model from before the sanctions: the group now wants 50:50 joint ventures and is willing to invest in new factories and hand over technology to partners in return for a greater share of the upside, says Automotive News.

This means PSA is hitting the ground running in Iran, controlling close to half of the market and benefitting from decades of presence in the country, the undeniable familiarity of the brand and sky-high consumer trust that other manufacturers will have a hard time eroding – whether French foreign minister Laurent Fabius likes it or not (see further down the Renault section). The only missing link has been the outdated technologies still on sale in Iran up until now. With plans to produce locally the 208 and 301 – which seems to have been engineered with Iran in mind, this has the potential to change fast. According to Automotive News, in the longer term Peugeot is even looking to turn Iran into a production base, exporting cars to the rest of the Middle East and Africa. Currently, Iran Khodro supplies Peugeot vehicles to Azerbaijan, Iraq, Armenia, Uzbekistan, Turkmenistan, Syria and Afghanistan, according to a report by Iranian news network Press TV.

Saipa Tiba Iran June 2015. Picture courtesy diariomotor.comThe Saipa Tiba is Iran’s new best-seller.

Domestic manufacturers

Iranian carmakers Saipa and Iran Khodro are at a crossroads in 2015. The opening of their domestic market to the competition they dread but that consumers have been aching for could either kill them or make them stronger. Their respective limited ranges are based on dated Peugeot platforms, and much of their success will be dependent on how they manage to keep these existing ties with Peugeot, putting the French carmaker in an even stronger position that we argued above. With PSA-Peugeot Citroen engaged in long-term links with both Saipa and Iran Khodro, the latter two will need to work very hard to ensure at least a partial transfer of technology to remain competitive.

Most produced cars in Iran – past 3 years (Persian year 1393 = April 2014 to March 2015):

Pos Model 1393 /92 1392 /91 1391
1 Saipa Pride 250,088 29% 194,414 -30% 276,992
2 Peugeot Pars 147,742 47% 100,419 40% 71,506
3 Peugeot 405 117,403 72% 68,123 -35% 104,314
4 Peugeot 206 104,150 160% 40,102 44% 27,819
5 Iran Khodro Samand 100,643 53% 65,775 -40% 110,479
6 Saipa Tiba 85,359 112% 40,195 83% 21,991
7 Iran Khodro Runna 25,852 -4% 27,022 71% 15,798
8 Renault Tondar 90 25,852 26% 20,454 -74% 77,416

Up until last May, the best-selling model in Iran was the Saipa Pride, a 1986 Kia Pride sedan with only slight improvements added over the past three decades. Saipa currently holds 35% of its domestic car market with just two nameplates (the Pride and Tiba) while Iran Khodro has 14% with three (Samand, Runna and Dena). However Iran Khodro is a lot stronger in the pickup segment, where it may have played its best card yet with the launch a few months back of the Peugeot 405-based Arisun. The Arisun replaces the antediluvian Bardo, a pickup variant of the 1967 Iran Khodro Paykan which itself stayed in production in Iran for almost four decades, up until 2005.

Iran Khodro Arisun. Picture courtesy clipo.irIran Khodro Arisun & Bardo. Picture courtesy oglobo.globo.comThe Peugeot 405-based IKCO Arisun finally replaces the 1967 Bardo…

A no-frills and relatively moderm 2WD pickup reminiscent of the Dacia Logan pickup still on sale in South Africa as the Nissan NP200 may be just what Iranian small businesses need and it will be interesting to see whether any other manufacturer takes the hint once the Arisun floods Iranian roads. The attachment and fondness of the Iranian population for their beloved domestic brands will be what Saipa and Iran Khodro will rely upon, and this will give them perhaps a five to seven year-respite, but if drastic improvements to their limited range are not implemented by then, look to Russia and the dwindling down market share of domestic behemoth Lada as an indication of what awaits Iranian carmakers at home.

Hyundai Santa Fe Iran 2015. Picture courtesy of motortrend.comThe Hyundai Santa Fe is the best-selling import into Iran so far in 2015.

Hyundai – Kia

Exclusive imports data published yesterday on BSCB indicate that the two Korean carmakers account for a whopping 59% of all new vehicle imports in the country over the First Quarter of 2015. The largest import player by far is Hyundai at 43% and Kia follows at 16%. Kia for its part has been assembling the Cerato locally albeit at just a couple of thousands of units annually. The Middle-Eastern region has no secrets for Hyundai, often teasing Toyota for overall domination in markets such as Saudi Arabia or the United Arab Emirates. In Lebanon, Kia (#1) and Hyundai (#3) sandwich Toyota (#2) whereas in Syria, Hyundai (52.5%) and Kia (45.4%) obliterate the market, as it is also the case in Jordan where Hyundai leads at 39.9% share above Kia at 21.5%. Even better news: Iranian consumers are fond of larger, more profitable models such as the Santa Fe (#1 import), Elantra (#2), ix35 (#3) and Kia Sportage (#4) whereas the Picanto and i10 are less popular so far. Given their success in an extremely unfavourable context, Hyundai and Kia are welcomed in Iran with arms wide open, and we should expect some large scale announcement such as the construction of an assembly plant rather soon. That, or a further strengthening of business ties between Iran and the Gulf Cooperation Council where Hyundais Kias are partucularly successful as well.

Toyota Corolla IranIranian Toyota Corolla advertisement

Toyota

Toyota is already a volume importer in Iran, ranking third brand below the two Korean manufacturers mentioned above with 4.409 units and 13.4% share over the First Quarter of 2015. For now, the new generation Corolla and the RAV4 SUV are the best-sellers. Toyota has a stranglehold on the Middle-eastern car market thanks to its strength in the SUV segment and a tried-and-tested, reliable and reasonably-priced offering. Although Iran does not have as strong a pickup culture as most neighbouring countries, the Hilux seems like a no brainer here. There is no reason why the Japanese manufacturer should find it difficult to replicate in Iran the success that has helped the group hold the #1 spot in the Gulf Cooperation Council for the best part of the last two decades. The distribution network it has carefully built in Saudi Arabia and the GCC region is a perfect model to replicate in Iran. Granted, it will need to be implemented from the ground up, as opposed to companies already having a footprint in Iran such as Peugeot or the two main domestic manufacturers. But the considerable flow of Toyota models into the ports of the region is a very solid starting point for Iranian success. Like Hyundai, Toyota will need to work the very close business ties existing between the UAE and Iran to replicate fully its popularity fully into Iran.

Renault Kwid Iran 2015. Picture courtesy lefigaro.frThe Renault Kwid has already triggered interest in Iran.

Renault

Today Laurent Fabius, the first French foreign minister to visit Iran in 12 years, announced that “PSA Peugeot-Citroen, previously the market leader in Iran, could find it more difficult to return to the country than fellow French car group Renault”. Wait did the French government not increase its participation in Renault in the past few months, in effect installing Mr Fabius in a glorified PR role with Renault? Nice try Mr Fabius, but we at BSCB disagree. Fabius’ justification for this statement is that “Iranian leaders criticise Peugeot for leaving a few years ago in a way they dispute”. The fact is Renault did leave as well, and hasn’t showed any concrete signs yet of its return whereas PSA-Peugeot Citroen is already in advanced joint-venture talks with Iran Khodro as we mentioned above. Renault was a small player in Iran even before the sanctions: it held a 5.9% market share in 2012.

Renault Tondar 90. Picture courtesy WikipediaRenault Tondar 90

The main Renault production in Iran is currently the Tondar 90, a rebadged first generation Dacia Logan launched in 2007 here. In the first month of production, a spectacular 100.000 orders were received but this never materialised into sales with the Tondar 90 peaking at 77,416 during the Persian year 1391 (April 2012-March 2013). If Iran Khodro found it vital to try by all means to maintain production of Peugeot models post-2012 sanctions, it wasn’t the case for Renault Pars, a joint-venture held at 51% by Renault and 49% by Iran’s Industrial Development and Renovation Organisation, IKCO and Saipa, manufacturer of the Tondar 90 which saw its production implode to 20.000 annual units after the sanctions. Renault will need to rework its alliances with local manufacturers and update the models it wants to produce in Iran, starting with the new generation Logan and the Kwid, originally destined to India but which apparently triggered interest in Iran as well.

Lifan X60 Iran 2015. Picture courtesy of zr.ruThe Lifan X60 is assembled locally in Iran.

Chinese manufacturers

Unbeknownst to you if you aren’t a regular BSCB reader, Chinese manufacturers have stepped up their presence in Iran just as economic sanctions forced Western manufacturers to leave. Chery, Lifan, JAC, ZX Auto, Great Wall, Brilliance, FAW, Haima and Dongfeng (!) already assemble locally through partnership with domestic manufacturers such as Saipa and Pars Khodro, albeit at limited volumes. Geely was the #2 imported brand in the country in 2013 and Changan, BAIC and MG all rank within the Top 10 importers so far in 2015. These are not negligible details. No less than 9 Chinese manufacturers already have experience assembling locally, which put them at a clear advantage over import-only (for now) Toyota or Hyundai for example.

However despite this advantage, they may not the best placed to compete in Iran yet, as reliability issues have already plagued their recent implant in the country. As is often the case where Chinese manufacturers export, their presence is very fragmented across numerous brands, each handled by different distributors and assembled through various alliances with domestic manufacturers. Brilliance however has displayed strong optimism when opening their assembly lines in cooperation with Saipa last May, announcing a production of 30.000 units in the first year and 100,000 units of annual capacity. See above Brilliance promotion video for Iran (in Persian). Among Chinese importers, Geely and Changan seem to have the best chances at long-term success in Iran, but they may need to establish local assembly hubs to pretend at a significant share of the Iranian market.

Zamyad Padra Iran. Picture courtesy persiankhodro.comThe Zamyad Padra is a rebadged Tianqi Meiya TM1020F assembled locally.

Chinese manufacturers may have their best card to play with their no-frills pickups, an obvious choice for a large part of the population that won’t be able to afford even the lower-spec Toyota Hilux or Nissan Navara just yet… Up until this year, the best-selling pickup in Iran was derived from the 1967 Hillman Hunter, such designs as the 1970 Nissan Junior and 1977 Mazda B-Series are still in production and the latest domestic launch (April 2015) is essentially a pickup variant of the 1987 Peugeot 405. The ZX Auto Grand Tiger, Great Wall Wingle and Dongfeng Rich are already assembled locally and they should be joined by a flurry of new entrants in the coming years, potentially unlocking the holy grail for China.

BMW X4 Iran 2015Roughly 100 BMW X4 get imported into Iran each month.

The rest

The German manufacturers with the best immediate prospects in Iran are BMW and Mercedes, currently among the Top 10 importers in the country. For example, roughly one hundred BMW X4 already arrive in Iran each month… There is a huge untapped potential for luxury SUVs and these two manufacturers keep launching new ones, so their sales in Iran should sky-rocket in the coming years.

Paradoxically, just as the Volkswagen Group outsold Toyota to become the #1 car manufacturer in the world, not only is its absence in Iran surprising but also the fact it has no plans to enter this market in the near future. Volkswagen previously built the Gol hatchback with Iranian partner Kerman Khodro and we see the Brazilian Up fitting the busy Tehran streets best. Before the economic sanctions were implemented, Germany was Iran’s #1 business partner, so Volkswagen’s absence shouldn’t last too long.

For their part, General Motors and Ford will have to wait longer to navigate a deeper layer of American sanctions that will continue to bar Americans and their banks from Iran trade in the foreseeable future. According to Automotive News, GM declined to comment on Tuesday’s historic deal announcing the end of economic sanctions.

STRATEGY: Is Africa the new China?

Smile Nigeria. Picture by Devesh Uba via FlickrThe future car buyers of Nigeria. Picture © Devesh Uba, all rights reserved.

Africa is progressively shedding its image of a continent embroiled in poverty, corruption and never-ending wars. Yet the dramatic Ebola outbreak in Western Africa is a harsh reminder that the road to development is a long and tortuous one. Three years ago, I created the Africa Project to jump start the collection of new car sales data in a region still very secretive. From only a couple of countries in 2012, official sales data for Africa on BSCB now covers 23 nations, and its scope is expanding every month. New car sales on the continent are still for the most part in their infancy, making Africa the last frontier in terms of automotive development. If the economic growth we have witnessed in the past decade continues at the same rate, could Africa become the new China and replace it as the world automotive sales engine of growth? As is often the case in such generalist questions, the answer is multi-faceted, and some carmakers are already in a much better place to benefit from future African development.

Street scene in Djenne, Mali. Picture © Leonid Plotkin, all rights reserved. 

1. Economic and demographic background

In 2014, roughly 1.9 million new vehicles were registered in Africa for 1.1 billion inhabitants, that’s only 1.67 new vehicle per thousand inhabitants (NVPT), to be compared to 2.56 in India and 18.16 in China. Geographically, the market distribution is however very uneven: 8 out of 10 new cars are sold in just four nations (South Africa, Algeria, Egypt and Morocco), the remaining 50 countries adding up to less than 400.000 registrations, equivalent to the number of vehicles sold in China in… 6 days. Among the 30 African markets with available total market data, the NVPT rates vary greatly: from 30.63 in Reunion and 17.19 in Botswana to just 0.04 in Ethiopia and Burundi. So we are still very, very far from even the notion of emerging market as far as Africa bar a handful of countries is concerned, but by 2030 its importance will have improved drastically.

Top 20 largest African new car markets in volume – Full Year 2014:

Pos Market 2014 /13 Pos Market 2014 /13
1 South Africa 644,504 -1% 11 Namibia 21,952 n/a
2 Algeria 390,000 -8% 12 Kenya 13,500 4%
3 Egypt 349,100 18% 13 Ghana 13,000 -4%
4 Morocco 122,060 1% 14 Mauritius 10,600 4%
5 Tunisia 81,400 8% 15 Senegal 6,800 13%
6 Nigeria 53,900 8% 16 Ivory Coast 6,400 7%
7 Libya 45,000 0% 17 Zambia 6,100 49%
8 Angola 35,700 23% 18 Mozambique 6,000 n/a
9 Botswana 34,800 -10% 19 Tanzania 5,800 -13%
10 Reunion 25,757 6% 20 Gabon 4,900 -11%

Source: OICA

Africa is now regular around 5% annual GDP growth rate, and despite a predicted oil-related 2015 slowdown to 4% in sub-saharan Africa, countries like Nigeria, Ethiopia, Ghana, Ivory Coast, Kenya, Tanzania, Mozambique, Uganda and Zambia are slated to post average annual GDP growth of between 6% and 8% over the next decade. According to an Emerging Markets Private Equity Survey published by Coface in 2014, sub-saharan Africa is now the most attractive investment destination in the world ahead of South East Asia and Latin America ex-Brazil, whereas it lagged in 8th place only 3 years earlier. The last piece of the puzzle is demographic: the African population will grow from 1.1 billion today to 2.4 billion in 2050, compared to 1.66 billion in India and 1.3 billion in China by then. This will include over 400 million souls in Nigeria alone (almost as much as in the U.S.) and 278 million in Ethiopia (90 today), and an urbanisation rate doubling from 26% today (290m) to 50% in 2050 (1.2bn).

Strong and regular economic growth + more wealth + four times the population in cities mean we can serenely expect an explosion in new vehicle sales. In this context more and more voices in the business world have started to pose the question of Africa as the future engine of growth of the world economy, including in the automotive sector.

Morocco. Picture courtesy thedailybeast.comChefchaouen, Morocco. Northern Africa currently accounts for half of African new auto sales.

2. Which African regions will act as locomotives?

As opposed to the single entities that are China and India, Africa’s main handicap is its fragmentation into a multitude of countries with immense development disparities and the near-absence of flowing trade inside the continent. The key to its economic and automotive growth as a whole is the creation of internal exchanges through free-trade zones, grouping countries with similar development levels that can then act as pulling forces for the remaining nations. African countries need to develop their transport infrastructures and energy networks in collaboration with each other and start matching their laws and currencies so business and wealth can bloom. We can see some of this sprouting out already: 8 countries in Western Africa and 6 in Central Africa now use a single currency (the CFA Franc) and the South African Development Economical Community is developing. In this context, which African regions can we start to draw upon as future African engines of automotive growth?

Eastern Africa

Kenya and Eastern Africa

This region of Africa is the closest to taking off, partly because three relatively well connected countries (Kenya, Ethiopia and Tanzania) are reaching GDP per capita levels that have been statistically known to unlock motorisation: US$ 2.500. It is also home to the African equivalent to San Fransisco’s Silicon Valley, dubbed the Silicon Savannah in Nairobi – Kenya. There, according to the Economist it is easier to pay a taxi fare by mobile phone than it is in New York as over half the Kenyan population already uses the M-Pesa mobile payments system. As Mail & Guardian Africa notes, if “Nigeria and South Africa have for a long time been the economic giants of Africa due mainly to their natural resources, Kenya has future-proofed itself by focusing on financial services and telecommunications” and will become one of Africa’s most dynamic new car markets in the next couple of decades.

One of the proofs that this region is about to get fast-tracked to automotive development is the creation of Mobius Motors, a car designed by Kenyans for Kenyans that we will be studying in more detail further down. The big unknown at the moment is the exact path entry-level car buyers will take in the region. As opposed to China where the culture is reticent to used cars, in the whole of Africa the obvious entry-level choice so far has been used imports from either Europe or Japan – however these sometimes reach the price of a locally-assembled new car due to high import duties. The new car market may take longer to set in but once unlocked, Kenya, Ethiopia and Tanzania should display explosive new car sales annual growth rates, lifting the first two to above 300.000 annual new units and the latter to above 200.000 by 2030.

Western Africa

Nigeria and Western Africa

This is the African region with the both biggest untapped potential at the moment, and the highest level of uncertainty about future development. Nigeria is the most populated country in Africa with 183 million inhabitants, however its new car market currently stands at an insignificant 53.900 annual units. A local automotive manufacture industry has failed to manage a successful transplant so far, something the Nigerian government is trying to change with its “new automotive policy” offering significant tax breaks for car manufacturers establishing a factory in the country. This won’t be enough, and illegal tariff practices by government bodies inside the country will need to be abolished for an auto industry to start flourishing.

If and once on its way this region could become one of the fastest-growing new car markets in the world. Boosted by Nigeria, Ghana, Cote d’Ivoire, Senegal and Cameroon will then act as relays of growth towards nations bridled until now by war and disease, such as Liberia, Sierra Leone and Guinea Bissau. By 2030, Nigeria alone will count 274 million inhabitants and the region close to 500 million. All planets aligning, 1.3 million annual new cars should get registered in Western Africa by then, vs. less than 100.000 today. Nigeria will continue to dominate with almost 600.000 annual new sales with Ghana coming second at 233.800 and Cote d’Ivoire, Senegal and Cameroon all approaching 200.000 annual units.

Southern Africa revised

Southern Africa

Today, South Africa represents two-thirds of all light vehicles produced in Africa and one-third of all new light vehicles sold on the continent. Its market structure is approaching maturity, with over 50 brands present in the country, a strong prevalence for pickup trucks and a very interesting fondness for low-cost cars originally designed for India, such as the Toyota Etios, Datsun Go and Ford Ecosport. Through direct exports and fluid business routes, South Africa has already lifted neighbouring markets such as Botswana and Namibia, however their limited population (just 2 million inhabitants each) will prevent them from having a true impact on the overall African totals of tomorrow. Instead, and with the help of a carefully managed free trade zone, South Africa will extend its area of influence further north to pull Angola, Zambia and Mozambique in its wake – Zimbabwe unfortunately staying out of the picture for now due to its unpredictable political situation. As a result, while South Africa should still tower at 1.1 million annual new vehicle sales, by 2030 Angola should be able to approach 300.000, with Zambia around 150.000 and Mozambique at roughly 75.000.

Northern Africa

Northern Africa

Home to 52% of all African new car sales in 2014 at just under 1 million units, Northern Africa is traditionally separated from the rest of the continent, both geographically by the Sahara desert but also statistically, as it is usually fused with the Middle-East when the rest of the continent is dubbed Sub-Saharan Africa. With their sights firmly set on Europe, Algeria and Morocco are fast becoming auto assembly and export heavyweights, notably through the settling of the Renault Group (Dacia and Renault factories) and PSA Peugeot-Citroen who recently announced they would build a new factory in Morocco by 2018. Tunisia follows in their wake development-wise, although remaining an all-importing country for now which will logically change within less than a decade.

Egypt for its part has had an auto manufacturing activity for decades and due to its population, set to reach 133 million by 2030, has the biggest sales potential, but also the most unpredictable in the region given its frequently unstable political situation and proximity to highly sensitive Israel. New car sales growth in the area won’t be as explosive as it could be in other regions because it is starting from a much higher base, but Egypt (1.2m), Algeria (almost 850.000) and Morocco (450.000) should remain within the Top 5 largest African new auto markets by 2030, with Tunisia and Libya a notch below. The development path in this region will spread inside each country from the coastal, more developed areas into the interior, also potentially spreading into Libya that remains very secretive about its auto market but will be the richest country in the region by 2030.

Top 10 largest African new auto markets by volume – 2030 forecast:

Pos Market 2030 sales forecast NVPT 2030 GDP per capita Annual sales growth Annual GDP growth
1 Egypt 1,173,800 8.80 $15,614 8% 5.07%
2 South Africa 1,113,700 19.34 $22,328 3% 3.83%
3 Algeria 843,200 18.14 $22,967 5% 4.21%
4 Nigeria 585,300 2.13 $10,334 16% 6.42%
5 Morocco 450,100 11.34 $14,231 8% 5.16%
6 Ethiopia 325,000 2.29 $2,987 33% 6.97%
7 Kenya 323,800 4.59 $4,767 22% 6.00%
8 Angola 287,200 7.88 $11,482 14% 5.57%
9 Ghana 233,800 5.85 $7,186 20% 6.29%
10 Tunisia 220,300 17.39 $20,864 6% 4.83%

NVPT: New Vehicles Per Thousand inhabitants sold annually. This forecast was calculated by BSCB based on official 2030 GDP forecasts by the International Monetary Fund, World Bank, KPMG and African Development Bank Group, official 2030 population forecasts by the United Nations Population Division and internal BSCB methodologies linking GDP per capita and car purchase tipping points.

Dacia Logan Taxi Morocco 2014. Picture courtesy FlickrPicture © redahida. Low-cost brands such as Dacia have a bright future in Africa.

3. Which manufacturers are best placed for an African takeoff?

Carmakers who have a solid experience in low-cost manufacturing are better placed to benefit from African new car sales taking off because of two distinct cultural traits: a decades-long habit of importing used cars en masse and a tendency of the population to purchase less ostentatious vehicles than they can afford so as not to attract the attention of taxation offices. Africa’s fondness of used cars contrasts with psychologies visible in China, Japan and to a lesser extend India and means that pending lower import tariffs, car ownership will be among the most affordable in the world, with 20 to 40 year-old used European and Japanese vehicles readily available to purchase. As Ben Longman from African trend analysis firm Trendtype points out, distrust of government taxation offices and their arbitrary and illegal practices has made African consumers very coy about displaying ostentatious signs of wealth that could make them an obvious target for tax. They tend to choose cars in the lower-end spectrum even if they can afford more expensive vehicles. In that manner, Africa is the total opposite of India where consumers tend to bypass lower-end vehicles that wouldn’t appropriately enhance their status.

These two cultural traits are a fertile ground for new low and ultra-low cost cars, offering an affordable alternative to untrustworthy used cars and fitting right into the discretion African car buyers cherish. Enter the notions of frugal engineering and bottom up innovation I explained in my April 2014 article “STRATEGY: Understanding the Indian market”. These skills, perfected by manufacturers in India to no avail so far, certainly won’t be lost on the African car buyer and Indian experience will turn out to be capital for African success. Bottom up innovation has enabled the appearance of $150 laptops or $10 smartphones in Africa and applying these principles to car making will enable ultra-low cost offerings that, although originally designed for an Indian audience in the case of the Tata Nano, Datsun GO and Renault Kwid for example, will fit right into African tastes.

Toyota South Africa by Greg TeeA straight road ahead for Toyota in Africa?

Toyota and Japanese manufacturers

Toyota is currently #1 in Africa at roughly 15% market share, with an estimated 39 African nations having a Toyota as their best-seller – mainly the Hilux, #1 in 30 countries – and that’s not even taking into account the blanket of used Toyota Corollas of all generations going back to the early eighties that is currently covering the continent. However brand loyalty is low in Africa and carmakers are among the least trusted brand categories according to Trendtype, so this is no guarantee for future domination. In fact, Korean manufacturer Hyundai is already outselling Toyota in four major African markets: Algeria, EgyptMorocco and Angola. To sustain and further enhance its domination, Toyota will need to move towards simpler technologies as illustrated in Libya where Chinese ZX Auto pickups replaced the mighty Hilux during the Arab Spring.

Toyota has already been trying its hand at selling low-cost in southern Africa with the Etios, reaching its highest world rankings in South Africa (#4 in 2013), Namibia (#3 in 2014) and Lesotho (#2 in 2014) as well as the Corolla Quest, a previous generation Corolla ranking #4 passenger car in Namibia in 2014, #5 in Lesotho and #6 in Botswana. A future Toyota factory assembling previous generation, simpler Toyota Hiluxes in Africa for Africa would make a lot of sense and capture a large swath of any future growth in the region.

Datsun Go South Africa October 2014The low-cost Datsun GO has launched successfully in South Africa.

Building on the low-cost observation has Datsun as the next Japanese manufacturer set to enjoy potentially outstanding sales in the region. A complete failure so far in India due to its lack of status, the GO has started a very satisfying career in South Africa and there is no reason why this could not be replicated in future African markets. Suzuki through their Indian subsidiary Maruti is already able to offer ultra-low cost models and as a result is #1 in Angola. The rest of the Japanese have been rather discrete as they mainly count on their pickup offerings such as Mitsubishi with the L20 and Nissan with the Hardbody.

Hyundai Verna Egypt March 2012Hyundai sells a 2003 Verna as new in Egypt, to great success.

Korean and Indian manufacturers

Hyundai already outsells Toyota in four major African markets: AlgeriaEgyptMorocco and Angola, and will credibly challenge the Japanese manufacturer everywhere in Africa once it produces a no frills pickup – there are none on the horizon at the moment but trust Hyundai to react very quickly once it decides the time is right. The Korean manufacturer is already selling the Indian-made Grand i10 successfully in some African nations like Angola, but more interestingly in Egypt, it is offering a 2003 Verna as part of its new car lineup to great success as this is the best-selling passenger car overall in that market. Hyundai should and will replicate this concept as it expands into more sub-saharan countries. Indian auto makers Mahindra and Tata are also making significant inroads in southern and central Africa, and pending their survival at home they should not be discarded, Africa fast becoming one of the few regions where they still have a chance to establish a solid export presence.

Dacia Sandero in Marrakech. Picture © Elmar

French and European manufacturers

Cultural and economic ties make most of Africa the perfect playground for French manufacturers: the worldwide Francophone population will rise to 700 million by 2050, 80% of which in Africa. However, even though there is a decades-long heritage of French cars on most Francophone African roads and all French manufacturers still enjoy a solid brand image here, they have failed to fully capitalise on it so far. They are only dominant in northern Africa: since last year Renault manufactures in Algeria where it ranks #1 ahead of Peugeot, Renault-owned Dacia manufactures in Morocco where it leads the market with 27% share and Citroen is #1 in Tunisia with Peugeot at #3 and Renault at #4. Apart from these, Africa has for the most part returned to being terra icognita for French carmakers, an elephant-sized missed opportunity for them.

The Dacia lineup and its only-as-needed equipment philosophy seem like a perfect match for sub-saharan African consumers, in particular the recently unveiled Kwid small car for booming African cities already cramped with traffic. And Renault/Dacia can now count on a full decade of experience selling low-cost cars at every corner of the globe, an invaluable advantage over all other manufacturers when it comes to Africa as we’ve seen above. It took a while, but French manufacturers are now fully conscious of the low hanging fruit that is Africa, with Peugeot joining the ranks of Moroccan manufacturers in the coming years. The French will be a force to be reckoned with over the next couple of decades, as opposed to the quasi majority of other European manufacturers except perhaps Volkswagen, currently weak outside of southern Africa and in dire need of low-cost models such as the Polo Vivo it sells there if it wants a chance at a slice of future African growth.

Foton Tunland Kenya 2013. Picture courtesy of themotorreport.com.auFoton opened an assembly plant in Kenya in 2014 with a 3.000 annual unit-capacity.

Chinese manufacturers

Unbeknown to most, some Chinese carmakers already have a decade of assembling experience in Africa under their belt, with Chery starting in Egypt back in 2004 for example. As I studied in detail in my April 2014 article STRATEGY: How Chinese carmakers are setting themselves up for success, they have been working extra-hard under the radar to secure less developed markets that will form the bulk of the global car sales growth over the next couple of decades, namely South America and Africa. As a result, Chinese carmakers currently hold an astounding 20% market share in Kenya, Senegal and Ivory Coast, 15% in Egypt and 12% in Nigeria. Geely, Brilliance and Chery (with the Speranza brand) are strong in Egypt while Great Wall is making significant inroads in most of Africa, like in Namibia for example where the Wingle pickup ranks #10 overall in 2014. A wide coverage that goes against current perceptions of Chinese weakness in export markets.

But what makes the Chinese implantation in Africa unique is their government’s deep involvement in the infrastructure building of the continent for the past two decades, in essence since the fall of the Berlin wall and the loosening of Russia’s influence over the continent. Along with assembling cars, the Chinese are also building roads, rail tracks and airports (along with, oddly, soccer stadiums), prepping Africa to use their automotive products to their full extent. Chinese manufacturers lack the heritage that brands like Toyota, Peugeot or even Hyundai enjoy in Africa, however car manufacturers as a whole suffer from an extremely low level of consumer trust according to African trends analysis firm Trendtype, so it’s a blank page for everyone so to speak, which evens out the chances the Chinese have at carving themselves a significant slice of the African growth cake. Chinese carmakers are certainly the keenest to succeed here, and will account for one third of sales in a substantial list of African countries by 2030.

Ford Ecosport Italy June 2014. Picture courtesy of autoexpress.co.ukThe Indian-made Ford Ecosport is well suited to booming African cities.

American manufacturers

Linking low cost expertise to the carmakers best placed for future African growth does not currently favour American auto makers. Ford manufactures in South Africa and is faring well both in southern and northern Africa (#3 in Morocco) thanks notably to its Ranger pickup, #1 in South Africa so far in 2015. The Indian-made Ecosport has true potential in booming African cities, and is seemingly already a success in Ethiopia’s Addis Ababa. Further learnings from India will help Ford spread its success towards less developed African countries while it is mulling the opening of a Nigerian factory. Chevrolet also has a relatively strong presence on the continent, but it is mainly due to relatively fragile ties it has kept with Japanese pickup maker Isuzu, ties that have been severed in Australia for example. Chevy leads the Egyptian market outright mainly thanks to the TFR pickup, the best-seller overall which is in fact an Isuzu D-Max. In southern Africa, Chevrolet concentrates on passenger cars and uses the Isuzu brand for commercial vehicles with the D-Max (called KB) market leader in Zimbabwe and Swaziland. Chevrolet will need to prepare a no frills pickup back-up to the Isuzu option and import low-cost expertise from South America and China where it sells the Sail sedan at very competitive prices to count on a bright future in Africa.

Mobius II KenyaMobius II: the first car designed by Kenyans for Kenyans.

The big unknown: African manufacturers

In China, most domestic actors in the automotive industry didn’t exist 20 years ago and Wuling, founded in 2002, now sells almost 1.5 million annual units domestically. It isn’t therefore unreasonable to expect mid-size African carmakers to enter the local automotive scene in the course of the next 15 years. At the moment, most new African car brands popping up here and there are in fact just assembling a range of rebadged Chinese models, such as Mozambique’s Matchedje Motor, Ghana’s Kantanka Cars, and Ethiopia’s Holland Car, a short-lived joint venture with Lifan.

One exception: Kenya’s Mobius Motors, symbolic of the country’s entrepreneurial spirit. Mobius Motors aims at empowering entrepreneurs with the Mobius II, an off-road vehicle priced similarly to a 7 year old sedan. On paper, it indeed offers a solution to a two-pronged issue that is currently locking out entry-level car buyers and particularly entrepreneurs in need of a cost-efficient vehicle: the degradation of rural and peri-urban sub-saharan roads and the inadequacy of most used cars imported into the region from more developed countries (think a 1995 Toyota Corolla sedan), still relatively expensive to buy due to high import duties, but also expensive to maintain because they are old and not designed to an African environment. On paper only, as it will take a lot of convincing to entice Kenyan buyers to trust an unknown brand, even if it is a local one.

2013 Ford Fusion Energi

The joker: Hybrid and electric technology

An option not to be discarded, hybrid and electric cars will enjoy tremendous progress and see their price drop drastically over the coming 15 years, making it a potentially viable option for the growing African middle-class. With Africa’s transport, energy and communication infrastructures sometimes lagging 50 years behind that of developed or even developing countries, we have already witnessed a phenomenon called leapfrogging that could well apply to the hybrid and electric car technologies in the not so distant future. A lot of sub-saharan countries have leapfrogged the construction of a landline telephone network to directly install a mobile network, and as a result Africa will hit 1 billion mobile subscribers this year for a 1.1 billion population! (see How Africa’s mobile revolution is disrupting the continent) There will be a time where the cost of establishing a network of petrol stations that facilitates fast car ownership growth will have to be balanced with a potentially cheaper network of solar-powered charging stations.

It seems far-fetched now, but may not be in ten years time when the vast majority of sub-saharan countries still far from taking off, thus unable to finance large infrastructure projects. Couple this with potential low-cost electric car offerings by some manufacturers and the equation becomes a lot simpler to resolve. As of today the Japanese are best placed in this segment, but this may also change quite fast and all auto makers, notably the Chinese pushed by their government, will have perfected these technologies by the time Africa really takes off after 2030. As for many areas in this report, this is a completely open book and once again the carmakers that will be able to produce low- or ultra low-cost hybrid or electric cars by 2030 will be best placed to succeed, were this segment to leapfrog petrol cars in Africa.

The future car buyers of Senegal. Picture © Anthony Kurz 

In summary

Africa is growing and it’s doing it fast, but its new car market is still a long way off having a real impact on the worldwide automotive scene. I forecast 7 million annual units in Africa by 2030, that’s an additional 5 million annual units compared to today’s 1.9 million which is far from negligible. In the same timeframe, China (predicted 40 million) should add 15 million annual units, India (predicted 7 million) should add 4 whereas both the U.S. (18.5 million) and Europe (16.8 million) will essentially add nothing. The new China: perhaps not, but Africa is the last frontier in terms of development and therefore automotive sales, and will progressively become one of the world’s largest engines of growth in the next two decades. Car manufacturers neglecting the establishment of a dense sales network and production hubs in Africa will miss out on a huge chunk of sales and bear the consequences in the long term.

– – –

Where is the Chinese market headed?

Prepare for bloodPrepare for blood…

Discover the Top 8 trends currently affecting the Chinese market below.

China’s new vehicle market growth is smoothing out. The perception out there is that the entire market is slowing down, whereas only its growth is for now – a big difference. Some analysts say this is the beginning of the end, I say the Chinese new vehicle market remains the most dynamic and the fastest evolving in the world and will continue to be so for many years to come. Even if its growth did stop forever, we would still be left with a 25 million annual units Chinese market in our hands vs. 17 million for the U.S. and 15 million for Europe currently – including commercials.

But the growth hasn’t stopped and Chinese sales trends are evolving faster than ever, with segments like microvans rapidly losing ground while others like MPVs and SUVs outperforming the market 6-fold… A record 75 new nameplates have kick-started local production in the past year and new factories are opening on a monthly basis. General Motors for example is investing $14 billion to add 5 million annual units of production capacity by 2018 through five additional assembly plants here. A more timid growth with ever more competitors in the market: prepare for blood and aggressive price wars. Where is China headed in the next 15 years? We will explore the Top 8 trends currently at play in the Chinese new vehicle market in order to decipher its mid-term evolution.

Kashgari farmer Jonway UFO A380Kashgar, Western China: the region has the greatest sales potential.

1. All eyes on the lower Tier cities prize

China grew 14% in 2013 to 22 million units, becoming the first ever new vehicle market above 20m annual units, another 7% in 2014 to 23.5 million and should improve by 5% in 2015 to just under 25 million deliveries. Analysts diverge in their view of the mid-term future for China. I remain highly optimistic, and it would appear Renault-Nissan CEO Carlos Ghosn agrees: “From time to time we have slowdowns, but fundamentally I’m still very optimistic on the fact that the long-term trend in China is up and carmakers should be prepared for that,” he said recently, pointing to the country’s low car ownership level compared with other major markets. If the big eastern cities along the coast like Beijing, Shanghai and Guangzhou are starting to peak out due to saturated ownership and stringent new registration restrictions put in place to curb pollution, there is still an enormous reservoir of growth lying in lower Tier cities.

Total vehicle sales – Big 3:

2000 2015 (p) 2030 (e)
China 1.8m 24.7m 40.2m
U.S. 17.8m 16.9m 18.5m
Europe 18.5m 15.8m 16.8m

(p): projection (e): BSCB estimate

Before we go into any further regional detail, it’s worth establishing where the long term potential for Chinese sales stands. Last year, American car buyers bought 52 new vehicles per 1.000 residents in a saturated market. It seems difficult for any mature market to significantly outpace that rate in the short to mid-term. China stood at 17 new vehicles per thousand in 2014, and were it to reach the same buying rate as the U.S., it would push its total new vehicle market to a mind-blowing 70 million annual units. A level it will probably never hit, but progressively lifting the buying rate to 30 new vehicles per thousand in the next 15 years is a totally reasonable if a little conservative prospect. That would place China just over 40 million annual new vehicle sales by 2030, way above the U.S. and European markets combined – themselves for the most part stagnating over the period.

Geely Vision China 2015. Picture courtesy 91aiche.comThe Geely Vision is a hit in lower Tier cities.

As I detailed in my article STRATEGY: China light-vehicle market to reach 30 million units by 2020, a large part of China’s future growth will come from both the less developed regions of the country located in the hinterland and lower Tier cities that are now starting to benefit from denser dealership networks. By 2020, Western China’s share of total sales is expected to rise to 26%, up from 18% in 2011. In the meantime, the coastal region’s market share will drop from 60% to 43%, according to predictions from IHS Automotive. Up until now, the bulk of the Chinese car market has resided up until now in Tier 1 and 2 cities – the largest and most developed ones. As a result, there are now 128 vehicles per 1,000 residents in Tier 1 cities. This ratio falls to 54 in Tier 3 cities and 28 in Tier 4 cities, and these cities are now starting to have a significant impact on national auto sales as we will detail in the SUV section of this article. Note these Tier 3 and 4 cities are not all located in the hinterland, they are sometimes very close to Tier 1 and 2 cities, so the growth regions are not completely geographical but mostly demographic.

In less populated areas, car buyers tastes are skewed more strongly towards Chinese manufacturers. If last year the prospects for domestic carmakers seemed cloudy, they have managed a complete turnaround thanks to a flurry of new affordable SUVs, and whereas it seemed like hinterland Chinese buyers would inexorably follow their eastern counterparts’ taste shift towards foreign brands, this is now less certain. The race for the lower-Tier cities first time car buyers is now wide open and competition will gradually intensify over the next two decades to woo rural populations getting a new access to car ownership. There are an estimated 100+ Chinese vehicle brands in activity today, when including truck and new energy manufacturers serving only limited parts of the country. This number will plunge rapidly to reach about 25 to 30 by 2030, and we will witness numerous price wars that will progressively shed the industry of the less-efficient manufacturers.

In this context, who will trigger and benefit from future Chinese growth?

24. Brilliance V3Brilliance V3 at Auto Shanghai 2015

2. Domestic brands on the brink of breakthrough

After a tough five years that saw their share market at home recede to roughly one-third of overall sales, Chinese manufacturers have seen their importance in their domestic market take a turn for the better in the past 12 months, rising to 43.1% of Chinese sales over the first 3 months of 2015, up 4.2 percentage points from a year earlier. As evidenced by my coverage of domestic carmakers at Auto Shanghai 2015, Chinese carmakers are constantly reinventing themselves with various degrees of dynamism, making the Chinese market the fastest-evolving in the world. However their progress is taking a different route than the one the government was hoping for two decades ago.

Starting in the eighties with Volkswagen, the barrier to entry for foreign carmakers in the Chinese market is a requirement to form joint-ventures with local partners in order to gain the right to manufacture locally, in essence the right to ‘unlock China’. By doing this, the Chinese government was hoping for a technology transfer towards local brands. It didn’t happen. In fact, the domestic brands faring the best at the moment are ones that are for the most part privately owned and not embroiled in partnerships with foreign carmakers.

Geely GC9 China April 2015Geely GC9

Thanks to a new focus on strong branding and streamlined lineups, a few domestic actors are now enjoying surging sales at home. Great Wall spun off the Haval SUV brand to tremendous success in July 2013 and has seen its SUV lineup sales soar 71% year-on-year in April to 63.921 units. The Haval H6 is now among the three overall best-selling vehicles in the country. In January 2014 Geely got rid of the Emgrand, Gleagle and Englon brands to market its vehicles exclusively under its namesake brand and, going hand-in-hand with an extremely impressive quality overhaul that is finally showing the benefits of its 2010 purchase of Swedish manufacturer Volvo, has managed to push domestic sales 45% in April to 38.648. The EC7 sedan remains the best-seller of its kind among domestic nameplates with 75.189 deliveries so far in 2015.

Another example is Chery, deleting the Rely and Riich brands in September 2012 to concentrate on its namesake brand for passenger cars and Karry for commercial vehicles. However they have disappointingly spawned two sub-brands – Tiggo and Arrizo – since. Baby steps, as habits die hard in China. Even though it is evolving at dangerously breakneck speed, ChangAn is another success story, placing three models among the 10 best-selling domestic vehicles so far this year: the Eado sedan (70.231), CS35 SUV (62.110) and CS75 SUV (56.116). Led by Great Wall’s Haval, Geely and BYD, all relatively unscathed by joint-ventures with foreign actors and – most significantly – all privately owned, Chinese manufacturers have never been as close to world standards as now. And their improvements are set to continue at the same rate, shaping into a true threat for carmakers the world around by 2020.

4. VW Santana Karakul LakeVW Santana on the Karakoram Highway, Western China.

3. Foreign manufacturers caught in a race to luxury

In a context where some domestic carmakers are finally finding their way to profitable sales volumes, clearer brand identities and ever-improving quality coupled with aggressive pricing, foreign manufacturers may see their time under the sun reduce drastically over the next decade. Their capacity to compete with domestic actors relies on almost instant reactivity to fast-moving trends, as demonstrated in their sales behaviour in 2015. The SUV explosion has caught both Volkswagen and Toyota by surprise, resulting in significant market share loss this year. Hyundai and Kia are safe with their ix25 and KX3 tapping right into the small SUV craze and becoming instant blockbusters. Nissan is following at a distance.

If this article had been published 6 months ago, Volkswagen would have been best positioned to benefit from the future growth expected in China’s less developed areas. However their failure to launch a small SUV lineup is worrying, at a time where Tier 3 and 4 cities are lapping up bargain-priced JAC, ChangAn and Zotye fares. Granted, Volkswagen is still and by far the most popular/aspirational brand in China. During the first half of 2014 when sedan sales growth was still around 15%, the market share lost by Chinese manufacturers in the compact segment was almost exactly matched by market share gains at Volkswagen while Japanese, U.S. and Korean makers were flat. So Volkswagen is the best armed to compete with domestic brands in the sedan segment, but also the most vulnerable when and if Chinese carmakers reclaim lost ground in that area.

Hyundai Mistra China 2014. Picture courtesy of auto.sohu.comHyundai Mistra

Two years ago, Volkswagen launched its New Santana with a starting price of 84.900 yuan ($13.700), only slightly more than the Geely EC7’s 69.800 yuan. Automotive News China quotes Zhang Lei, a 35-year-old office worker in Beijing who bought a New Santana last year: “People say German cars are of good quality, so why not buy a German car if it’s not expensive?” However since then Geely launched the new Vision at 52.900 yuan ($8.500), cutting the Santana by almost 40% and displaying some interior elements of a higher quality than a Santana. As a result, Volkswagen has launched a price war in recent months to keep its lower-end lineup competitive in the face of vastly improved domestic entries, at the risk of significantly eroding its profits in the region. Volkswagen is now caught between lowering their prices to better compete with domestic carmakers and maintaining its premium reputation.

Brand loyalty is low in China and more than 90 million car owners will replace their first vehicle in the next few years. Cut-throat competition is a new element in the market and Korean Hyundai and Kia could see a much larger increase of their Chinese sales than Toyota and Volkswagen over the next decade. Not just because of a better reactivity to changing trends: Toyota and Volkswagen with undoubtedly launch affordable small SUVs to keep a foot in the market – albeit a couple of years late. Two more political and attitudinal elements may come into play. Firstly, Nippon manufacturers aren’t immune to future bursts of anti-Japanese sentiment, like the one that severely handicapped them a couple of years ago. 2015 marks the 70th anniversary of the end of WW2 and the rest of the year will be another sensitive period for them. Secondly, having launched in China less than a decade ago, Korean carmakers Hyundai and Kia are free of any poor quality perceptions dating from the nineties that are still plaguing them in some other countries and can grow unabated in the next decade.

Mercedes GLA China April 2015. Picture courtesy wolfexp.netMercedes started local GLA production and is best placed for explosive growth in China.

The Chinese luxury segment has already become the largest in the world and its influence will further increase over the next two decades, lifting Audi, BMW and Mercedes-Benz to a likely continuous string of worldwide sales records. The Top 3 German luxury carmakers, already ultra-dominant in the Chinese luxury aisle, are poised to continue improving their Chinese sales drastically, with Mercedes displaying the highest potential for explosive growth. In 2014, Audi sold 579.000 cars in China (+18%), with BMW at 456.000 (+17%) and Mercedes at 282.000 (+29%). Growth was cut in 2015 but should resume in the coming years. It is a realistic prospect to see Mercedes leapfrog both Audi and BMW to become China’s #1 luxury brand by 2025, simply because the Stuttgart manufacturer has completely refocused its attention onto the Chinese market, now front and centre in its worldwide operations as its impressive display at Auto Shanghai hinted at. Our forecast for 2015: Audi at 606.000 sales (+5%), BMW at 478.000 (+5%) and Mercedes at 335.000 (+18%).

Audi started manufacturing cars in China as early as 1991 while both BMW and Mercedes have been doing so for just a decade, earning the 3 German carmakers a credibility in the luxury segment that will be near-impossible to erode in the next decade or so. At this stage only Infiniti, Volvo and Cadillac are also manufacturing locally to avoid China’s 25% import tariff, but their sales remain modest: Volvo sold under 80.000 vehicles in 2014 (47% locally produced) while Cadillac delivered under 70.000 (57%) and Infiniti just 30.000 (8%). Acura recently announced it will start building locally soon, leaving the odd one out, Lexus, with no plans for local manufacturing despite a decade-long presence in the country and 75.000 sales in 2014. Lincoln for its part is enjoying a fast and furious all-imported start with 3 of its Top 10 dealers globally by sales now located in China only 12 months after landing in the country.

Haval-H1-China-November-2014.-Picture-courtesy-of-auto.qq_.com_The Haval H1 is one of dozens of new Chinese SUVs launched in the past 12 months.

4. The entire market is now ditching sedans for SUVs…

Disposable income is on a steep rise for the majority of Chinese and their car purchase patterns are changing accordingly, with urban and rural buyers each displaying widely different tastes than they were just two years ago. Last October, sedan sales dropped 1% from a year earlier for the first time in 7 years, marking the start of a shaky period for this once-thriving segment in China. In urban areas, more than one-third of buyers now opt for an SUV when the time comes to replace their first vehicle vs. 25% for China overall. After soaring by 36% in 2014 to 4.1 million units, SUV sales are accelerating further this year with a 49% year-on-year surge over the first 4 months of 2015 to 1.79 million units, hinting at an annual rate of over 6 million sales…

China – Top 10 SUVs and sedans 2015 year-to-date:

Pos SUV model 2015 /14 Sedan model 2015 /14
1 Haval H6 118,516 26% VW Lavida 170,168 -12%
2 VW Tiguan 88,609 1% VW Santana 114,479 7%
3 JAC Refine S3 66,295 new VW Jetta 107,680 7%
4 ChangAn CS35 62,110 71% Ford Focus 99,675 -26%
5 ChangAn CS75 56,116 new Hyundai Elantra 96,713 30%
6 Haval H2 56,074 new VW Sagitar 96,173 -6%
7 BAIC Huansu S3 49,738 new Nissan Sylphy 89,995 -8%
8 Ford Kuga 42,593 -3% Hyundai Verna 84,821 14%
9 Nissan X-Trail 41,942 182% VW Passat 84,275 -15%
10 Zotye T600 39,307 302% Chevrolet Cruze 80,170 -6%

Seven of the Top 10 best-selling SUVs in China so far in 2015 are Chinese, four are all-new and only one (the Ford Kuga) sees its sales decline year-on-year. Reversely, the Top 10 best-selling sedans in the country are all foreign but 6 out of 10 are in decline, including the #1 seller – the VW Lavida (-12%) – with the Ford Focus losing the most ground at -26%. In what may be the most interesting reversal of fortunes in the past few years, thanks to a flurry of affordable models all launched in the past 24 months, domestic manufacturers are now dominating the SUV segment with a record 56% share, evolving at double the sales level compared to a year ago.

ChangAn CS75 China July 2014. Picture courtesy of auto.sohu.comThe ChangAn CS75 has found 109.000 buyers since launching exactly a year ago.

According to LMC Automotive, SUV buyers are mostly residents of Tier 3 and Tier 4 cities, traditionally more fond of Chinese car brands because of more affordable prices and less dense foreign manufacturers dealer networks. When their sedan sales got bogged down by higher-status Volkswagen, Chevrolet and Kia, domestic carmakers found salvation in designing attractive-looking SUVs with prices contained below 100.000 yuan (US$16.000). These Chinese vehicles only are Sports Utility Vehicles by name, in no way true four-wheel drives capable of stepping out of urban areas, but they are high enough on the road for Chinese customers in Tier 3 and Tier 4 cities. Mission accomplished.

Wuling Hongguang China September 2014. Picture courtesy of cheshi.com2The Wuling Hongguang has transformed the Chinese car market forever.

5. … while rural buyers switch from microvans to MPVs

If urban dwellers are abandoning their entry-level sedans to lap up an increasing variety of Chinese-branded SUVs, their newly prosperous rural counterparts are also moving upwards, ditching microvans for low-cost MPVs. In 2014, the MPV segment was the fastest-growing in the country with sales surging 47% to 1.91 million units just as microvan were losing 17% to 1.33 million deliveries. In 2015, MPVs are up by a further 28% so far and should end the year just under 2.5 million units. The good news for Chinese manufacturers is that 85% of all MPVs sales go to domestic brands, being a segment mostly popular in rural areas.

Price comparison – Wuling MPVs and microvans:

Model Cat April sales Price range (yuan) Price range (US$)
Wuling Journey MPV 4,011 66.000 – 77.000 10.600 – 12.400
Wuling Hongguang MPV 53,086 44.800 – 69.800 7.200 – 11.250
Wuling Hongguang V Micro 25,506 42.800 – 51.800 6.900 – 8.300
Wuling Rongguang Micro 17,475 41.800 – 46.800 6.700 – 7.500
Wuling Sunshine Micro 21,005 29.800 – 46.000 4.800 – 7.400

Wuling Sunshine microvan – Hongguang MPV sales comparison:

Model 2009 2010 2011 2012 2013 2014 2015(e)
Wuling Sunshine 699,037 754,961 731,749 523,841 455,718 308,668 269,000
Wuling Hongguang 0 5,000 177,000 316,217 530,050 750,019 660,000

(e): BSCB estimate

The sole instigator of this momentous sales trend is the Wuling Hongguang, originally introduced in September 2010 and at first classified as a light commercial vehicle – it was then considered as a larger microvan. The Hongguang didn’t appear inside the Top 5 LCV best-sellers until February 2012 (24.694 sales – see China LCV February 2012: Wuling Hongguang’s entrance) but topped the overall Chinese charts for the first time in January 2013 and the following month was selling almost 30.000 more units than any other nameplate in the country. It went on to be the best-selling vehicle in the country in both 2013 and 2014, with its monthly sales record standing at an out-of-this-world 81.153 units in January 2014.

Baojun 730 China September 2014. Picture courtesy of auto.sina.com.cn230.000 Baojun 730 have hit Chinese roads in just 9 months.

As I detailed in my article China April 2015: Wuling Hongguang V takes control, the leap from microvan to MPV is very significant, representing a 50% price hike even though the rates remain minuscule by Western standards: the Hongguang starts at 42.800 yuan (US$7.200) vs. 29.800 ($4.800) for the Wuling Sunshine, the all-categories best-seller in China until 2012. Who purchases microvans? Traditionally, families, small companies and taxi operators in rural areas and small towns to carry goods and/or passengers. While both the Sunshine and the Hongguang can carry five to eight people, with per capita disposable income in rural China leaping 12% to 8.900 yuan last year, rural buyers are snapping up Hongguangs like hot dumplings simply because they can now afford to.

What the Chinese market is experiencing right now with the Wuling Hongguang is similar to European car buyers suddenly switching from purchasing 600.000 annual VW Golf to as many annual VW Passat in a matter of three years, or American consumers completely ditching the Toyota Camry to replace it with 450.000 annual Toyota 4 Runner.

It took a lot longer for other domestic manufacturers to cotton on to the Hongguang success and what it meant for the microvan category (death) than it did for them to understand the SUV craze. In fact, SAIC-GM-Wuling is reinventing the category once again with the launch of the slightly more upmarket and extraordinarily successful Baojun 730, clocking an incredible 230.000 deliveries in its first 9 months on sale. Sales of Hongguang clones (Chana Honor, Dongfeng Fengguang and BAIC Weiwang M20), although dynamic, are still far below. The future of the MPV segment may be further upmarket: Wuling launched the much larger Journey a few months ago, and Brilliance unveiled the Huasong MPV-exclusive brand at Auto Shanghai 2015 to compete with Buick’s GL8. Expect Wuling to regularly revive the category to maintain its supremacy.

Dongfeng Rich 2015. Picture courtesy chinaautoweb.com2015 Dongfeng Rich

6. Pickup trucks: the largest untapped segment

Now that the SUV and MPV segments are truly taking off, mimicking many light vehicle markets around the world, the last frontier is the pick-up sector, currently plagued by outdated legislations but home of the greatest sales potential of all in China. Pending a legislative adjustment, we foresee Chinese pickup sales will reach 10% of overall sales by 2030 – or 4 million annual vehicles vs. just 1.9% and 200.000 now. Pickups are where Chinese manufacturers perform their best on the world stage, as demonstrated by their relative success in export markets. So what isn’t working at the moment?

In 2003, the Chinese government introduced the Road Traffic Safety Law which was giving free rein to city administrations on allowing pickups to drive on their streets. Most cities chose to classify pickups as commercial vehicles and banned them from entering. Yes you have read that right. Pickup trucks are not allowed within most Chinese cities, including Beijing and Shanghai. But it doesn’t stop there: Automotive News China reports that to ease congestion during holidays, Chinese traffic regulators let sedan drivers use highways toll free whereas pickup drivers must pay. This may have made sense a decade ago when pickup trucks were the only vehicles of such size on the road along with medium and heavy trucks. But it is no longer true now that large SUVs have invaded China’s four corners. Besides, under existing regulations, microvans – also used in rural and suburban areas to carry people and goods – are considered passenger vehicles, and therefore allowed into cities…

GAC Gonow GP150GAC Gonow GP 150 at Auto Shanghai 2015

This restrictive legislation has had a devastating effect on the Chinese pickup market. Roughly 435.000 new pickups were sold in China in 2014, or just 1.9% of the total vehicle market and with sales down 4% year-on-year their market share is also decreasing. Yet market leader Great Wall still sells 10,000 pickups each month in China on average. It is still a very dynamic segment despite the restrictions, with at least 16 Chinese manufacturers currently offering a pickup lineup. I spotted the all-new 2015 Dongfeng Rich in Mohe in far north China, while GAC Gonow unveiled a rather good-looking GP150 pickup at Auto Shanghai and Great Wall launched a new variant of its Wingle pickup late last year.

Paradoxically given the gagging they suffer at home, pickups are the one single segment where Chinese manufacturers can already compete with foreign automakers in mature export markets such as Italy, the UK, South Africa and Australia where the Great Wall Wingle ranked among the Top 50 best-selling nameplates in 2012. The same cannot be said yet about sedans, SUVs and MPVs. Understandably given the current restrictions, global automakers haven’t bothered venturing into the Chinese pickup market just yet. Only Isuzu and Nissan currently sell quickly facelifted versions of antediluvian models, but the potential for pickup sales in China is enormous, both for commercial and private uses.

Ford F-150 Raptor Kashgar ChinaFord F-150 Raptor in Kashgar, Western China

With Chinese car buyers progressively americanising their tastes, it is no real surprise to see at least one Ford F-150 Raptor and Toyota Tundra in each northern Chinese city I visited this year, big or small. Despite astronomical prices and driving restrictions, Chinese customers are still privately importing these monsters. The demand for pickup trucks is almost screaming at you when visiting the country. It is apparent in the commercial segment where a recent transfer from microvans to mini pickups can be seen – keep in mind the latter are considered passenger vehicles and therefore are able to grow sales freely. Result: the Wuling Mini Truck has topped the LCV sales charts a couple of times in the past 6 months.

But part of the SUVsation of the world car market also means a large part of pickup trucks are now purchased and used in the same way as SUVs, not just for commercial hauling. As Automotive News China points out, if municipal restrictions on pickups are abolished, farmers could drive their pickups to go shopping in cities, a much more chest-beating experience than in a microvan or low-cost MPV. Likewise, well-off inhabitants of coastal cities could tow boats or stow surfboards with their pickups. We believe it’s a matter of when rather than if, and once pickups can be driven freely across the country, expect a gold rush in the same vein as the one we are currently witnessing for SUVs and MPVs. Pickup sales are bound to grow exponentially from that moment on.

Used car market in China. Picture courtesy of 51auto.comThe notion of used car is a new concept in China.

7. Prepare for a used car explosion

Last March, China’s largest search engine Baidu – dominating a market where Google is banned – joined a U.S. private equity firm and hedge fund to invest $170 million in China’s largest used car auction website Uxin. It is the latest round of funding raised by Uxin to expand a new trading platform designed to allow auto retailers to sell used cars directly to individuals. Last year, China’s used car market generated $58 billion, a 26% growth from a year earlier while volumes are up 16% at 6.05 million units vs. +7% for the new vehicle market. Up until very recently, the very concept of a used car was a rather alien notion in China given how recent the uptake of cars in the country is. Moreover, in China there is a strong cultural preference for new items, rather than those tarnished by previous ownership. Without regulations, skepticism over the quality of used vehicles could be justified, reports Autotalk NZ. But this is all changing as the Chinese used car market matures.

China – New and used vehicle sales evolution:

2000 2015 2030 (e)
New vehicles 1.8m 24.7m 40.2m
Used vehicles 0.2m 7.0m 41.5m

(e): BSCB estimate

At the moment, one used vehicle is sold for every four new ones in China, a diametrically opposite situation as the one observed in mature markets such as the U.S. and Europe (three to four used cars for every new one). But at the current rate, the number of used cars changing hands annually in China will even up with new ones by 2030. Sedans still account for the majority of used cars currently sold in the country (57%) above buses (16%), trucks (14%), light commercials (9%) and SUV (3%), reflecting the dominant structure of the market during the past decade. This too will change, when SUVs and MPVs currently sold as new will start hitting the used car market in five years time.

Nowadays, used car sales are still a largely unregulated area, with a whopping 95% of used car transactions made privately and escaping sales taxes. Large manufacturers are however slowly looking to enter the used market by reselling their own products second-hand complete with quality guarantees: Peugeot already has 700 certification centres around the country while Nissan, Audi and Volvo are following. Stringent new anti-pollution laws limiting the number of new registrations in the main big cities have also helped fuel increasing used car sales: they already are licensed and therefore unrestricted – a clear oversight by governments as these used cars typically pollute more than new ones and should instead be replaced, the way Europe has done with numerous scrappage schemes.

DENZA wird in einem deutsch-chinesischen Gemeinschaftsunternehmen von Daimler und BYD in Shenzhen gefertigt. / DENZA is manufactured by a Sino-German joint venture of Daimler and BYD in Shenzhen.Denza EV

8. The electric vehicle question mark

I have said it and will say it again, the current success – or lack thereof – of new energy vehicles has nothing to do with consumers’ increased environmental consciousness and everything to do with government policies. Cue Japan, California and Norway, offering the most generous incentives for new energy vehicles and consequently displaying the highest hybrid and EV sales ratios in the world. China has a well-documented tradition of imposing stringent government mandates onto the car market (joint-ventures with local partners, pollution-curbing new registration limitations…) and could lead the world in terms of electric vehicle adoption, if it decides to. With significant air pollution problems plaguing most large cities and limited oil resources, the Chinese government considers the uptake of electric cars a priority. But is it doing enough to encourage new energy vehicle sales? Carlos Ghosn said “not really” at this year’s Shanghai Auto Show.

Chinese EV sales are quadrupling so far in 2015 compared to last year but at 26.581 units in 3 months they still only represent a minuscule 0.4% of the overall market. The BYD Qin hybrid sedan has been the best-selling new energy vehicle in China ever since its launch in December 2013, totalling 2.625 sales in April. This is to be compared with an estimated 200-300 monthly sales average for the Tesla Model S in China and roughly 1.500 in the U.S. Still, the question mark remains as to whether EVs will truly have an impact on the overall Chinese market in the short to mid-term. It all depends on the Chinese government. Chinese punters will buy electric if they are mandated to: a recent visit to Kashgar in Western China showed all scooters in circulation in town to be electric.

Tesla Model S ChinaTesla has been struggling in China so far.

Among the various Chinese government mandates in place to encourage sales of new energy vehicles:

– All EVs are excluded from the new registration plate quota applied in China’s eight largest cities.

– Subsidies of up to 55,000 yuan (about $9,000) per EV vehicle, elimination of a 10% sales tax on some EVs.

– Subsidies for the construction of battery charging stations in various cities proportioned to the EV and plug-in hybrid sales in these cities. The aim is to install 140.000 charging stations this year vs. just 20.000 in place last year. The government’s plan calls for covering 16,000 kilometers (10,000 miles) of highways with fast-charger stations every 50 kilometers (31 miles) by 2020.

– All manufacturers selling in China need to display a fleetwide average consumption of 5L/100km (47 mpg) by 2020.

– Foreign automakers are required to develop EVs with their Chinese joint venture partners. This has prompted Toyota, traditionally EV-weary, to launch one EV vehicle with each Chinese partner later this year. Toyota however conceded to Automotive News that these are purely compliance vehicles and their focus will remain on hybrid technology.

Most manufacturers had at least one EV model to show at Auto Shanghai, but these looked more like compliance vehicles than genuine best-sellers. Elmar Degenhart, CEO of supplier giant Continental AG told Automotive News China “We are convinced that China will turn into the biggest market for electrification technologies. With the support of the government and regulation, the speed in that direction is developing quite rapidly.” The ball is in your camp President Xi Jinping.

– – –

STRATEGY: The growing power of Hispanic buyers in U.S. sales

hispanic-ad

Lindsay Chappell this week published a fascinating article on Automotive News USA about the growing power of Hispanic buyers in the U.S. market. I summarise it below, you can read the full article here: “Sales to Hispanics outpacing the market”

What’s the weight of Hispanic buyers in the U.S. market?

  • 54 million Hispanics are now living in the United States or 17% of the total population, predicted to grow to 130 million by 2060 or 30% of the total population.
  • Hispanic car buyers in the U.S. are driving overall market growth and could well be the auto industry’s leading growth engine for the next 20 to 30 years. In 2014 retail sales to Hispanic consumers rose 15% vs. 6% for the overall market (Source IHS).
  • Hispanic growth is now increasingly happening in the Midwest, not just traditional powerhouses California, Texas and Florida. The states with the fastest-growing Hispanic populations in the last decade were Alabama, Kentucky, South Carolina and Tennessee. U.S. cities of more than 200,000 people with the fastest-growing Hispanic populations were Charlotte NC and Raleigh NC.

Toyota Corolla USA January 2015. Picture courtesy of motortrend.comToyota has ranked as the top-selling brand among Hispanic consumers for the past decade.

Which brands are winning with Hispanic buyers?

  • The “Big Three” brands of Hispanic-market sales are Toyota, Nissan and Honda. Chevrolet, Ford and Kia follow.
  • Toyota has ranked as the top-selling brand among Hispanic consumers for the past 10 years and has created a dedicated corporate department to this population: the Hispanic Business Strategy Group. Hispanics purchased one of every 4 Corollas sold in the U.S. in 2014 one out of every 5 Lexus IS sold.
  • Nissan brought 3 of its successful Mexico dealership groups to the U.S. to operate stores in Los Angeles, San Francisco and Houston and improve the brand’s ties to Hispanic consumers. Nissan is market leader in Mexico with 26.2% market share, and hopes that retailers from there will strike a chord of familiarity and trust among U.S. residents who moved here from Mexico in recent years.
  • Honda is the No. 1 brand among Hispanic buyers in New York City and Los Angeles.
  • Among Hispanic buyers, the Chevrolet Silverado outsells America’s biggest-selling pickup, the Ford F series.

Hispanic market data

The challenges that come with the growing power of Hispanic car buyers

  • Many Hispanics need – or prefer – to speak Spanish. Many perceive themselves as Hispanic or Latino even after several generations of U.S. heritage, and they look for products and services that specifically address their Hispanic identity. This means additional language and cultural training for salespeople is required for regions not used to a strong Hispanic presence.
  • Last year, 21% of Hispanic vehicle purchases were for a “first vehicle.” For the U.S. as a whole, the figure was just 5%. This means brands get more chances to make first impressions, but dealers must woo uncommitted new buyers.
  • The average age of Hispanics today is 30, compared with 42 for non-Hispanic Americans, meaning a different approach is required to close the sale.
  • The perception of Hispanic consumers seeking entry-level vehicles is becoming out of date. Last year, 24% of Hispanic U.S. households earned more than $75,000, up from 14% in 2000.

STRATEGY: Will self-driving cars trigger the doom of automobile?

Mercedes Self Driving CarThe self-driving car as imagined by Mercedes-Benz

Recently Barclays’ auto analyst Brian Johnson forecast in “Disruptive Mobility” that self-driving cars will eliminate most multicar households, reduce the number of cars on American roads from 250 million to below 100 million and cut U.S. annual auto sales by 40% to just 9.5 million units over the next 25 years. That’s almost one million less than the rock-bottom 10.4 million hit in the midst of the Global Recession in 2009. According to the Detroit Free Press, in these predictions Brian Johnson is in agreement with researchers Brandon Schoettle and Michael Sivak at the University of Michigan Transportation Research Institute (UMTRI).

These findings don’t mean the end of private ownership, but rely on the fact that families with 3 or more vehicles in the household rarely use more than one at a time. According to UMTRI, 84% of households have no trips that overlap or conflict on a typical day. In only 2% of those households were there enough overlapping trips to require three or more vehicles. Johnson says self-driving cars will travel many more miles than personally owned vehicles because they will be used throughout the day for multiple trips.

And this is where I disagree.

Traffic jam. Picture courtesy fastcompany.netCar sharing? What car sharing?

If nowadays families feel the need to own 3 or more vehicles while almost never using more than one at a time, that’s because most car owners cherish the notion of being able, if need be, to go anywhere, at anytime, with whoever we choose. That this option may be unsused and waiting in the garage isn’t the point. It’s there for us to grab, and that’s what we want. It is the very core of private vehicle ownership. Nothing proves that this comfort-habit will change with the arrival of self-driving cars. The fact that the car can drive itself home and be used by someone else while we are busy at work will not mean we will be happy to give it up for the day. What if we suddenly need it? What if all ‘public’ self-driving cars are unavailable at the time because it’s rush hour – like trying to find a free taxi on a rainy day. It’s this anxiety that we are refusing by owning a private vehicle and having it at our disposal, not anyone else. Selfish? Yep. Aren’t well all?

To me, it’s a little similar to saying back in the 1960s that people would lose their private car ownership desire once petrol becomes too expensive. We have not. Granted, ownership rates are falling with millenials that put more emphasis on usage rather than ownership. But let’s pause for a moment to spare a thought for car sharing. In Europe it is starting to show *relative* success, but in the U.S. – the subject of this forecast – no way. We want to go anywhere anytime and not depend on anyone doing so.