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As I detailed in my articles China: return to explosive growth expected and China: How local brands may finally find their mojo at home, sales growth is here to stay in China and will mainly come from the less developed regions of the country located in the hinterland. So I thought it was time to learn a little more about these regions where the bulk of new vehicles will be bought over the next decade. Autonews says China’s light-vehicle market will reach 30 million units in 2020, up from 19.1 million last year and larger than the 2012 US and European markets combined!
Autonews adds that by 2020, western China’s share of total sales is expected to rise to 26%, up from 18% in 2011, according to predictions from IHS Automotive. The coastal region’s market share will drop from 60% to 43%. So we are not looking at a complete shift, but this evolution seems irreversible. And this is where I need to introduce you to the concept of Tier cities. In China, cities of over 1 million inhabitants have been classified into 4 Tiers based on their population and wealth. There are no strict definitions but to simplify, see below IHS Automotive’s definitions:
|Population||Per-capita income range||Examples|
|Tier 1||more than 10 million||$11,300-$14,600||Beijing, Shanghai, Guangzhou|
|Tier 2||4-10 million||$6,500-$13,000||Chengdu, Nanjing, Hangzhou|
|Tier 3||2.5-6 million||$4,900-$11,300||Xian, Wenzhou, Suzhou|
|Tier 4||1-4 million||$1,600-$6,500||Urumqi, Lanzhou, Xining|
|Source: IHS Automotive, Autonews|
The bulk of the Chinese car market has resided up until now in Tier 1 and 2 cities. As a result, in Tier 1 cities there are 128 vehicles per 1,000 residents. This ratio falls to 54 in Tier 3 cities and 28 in Tier 4 cities. The hinterland market is now seen as ripe… “A Tier 3 city today grows into a Tier 2 city tomorrow,” Jeep President Mike Manley told reporters at the Shanghai autoshow. “And real estate becomes increasingly hard to get. So you try to get ahead of the curve.”
Chongqing, a city of 5 million inhabitants located 1,500 km west of Shanghai, is at the convergence of rail lines and highways in central China and Ford has started the construction of both an engine and a transmission plant there, for which the local government literally removed a small mountain from the landscape…
Volkswagen already has an assembly plant in the western city of Chengdu, which also is home to a plant run by Toyota and FAW. This year VW will add a plant in Urumqi, 2,500 km west of Beijing but only 500 km Southwest of Mongolia. Soh Weiming, VW China’s executive vice president of sales and marketing, called Tier 3 and 4 cities the automaker’s “bread and butter.”
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