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Original-brand Cars Struggle to Cope With Consumption Upgrade

01-01 11:45 Caijing
As consumers now prefer mid- and high-end brand vehicles, the low price/low quality path is no longer available for domestic car companies with proprietary brands.

By staff reporters Song Wei, Shi Zhiliang

The Chinese automobile market has undergone drastic changes in the past few years, portending a looming life-or-death moment for domestic car companies with proprietary brands.

The domestic automobile market, which once enjoyed seven consecutive years of double-digit growth starting in 1999 and hit a high of 37 percent, has now entered a period of more modest expansion. The growth rate tumbled to 6.7 percent in 2008, before soaring to a record high of 46.2 percent the following year. The year 2010 also saw a 32.4 percent increase. Therefore, when the growth rate plummeted to 2.45 percent in 2011, there was considerable controversy within the industry as to whether an inflection point had been reached. The 2012 figures mitigated the disputes. In the first 11 months of 2012, the growth rate increased slightly to a meager 4 percent, which is typical of modest expansion.

Low-end cars are also now losing out to mid- and high-end vehicles, which have become the mainstay of the market in the midst of a consumption upgrade.

Mid- and high-end vehicles were well-received in 2012. Compared with the same period of 2011, 372,900 more sports utility vehicles (SUVs) were sold, which makes up 40.2 percent of the increase in the sales volume for passenger cars with no more than nine seats in the first 11 months of 2012, signifying a second consumption upgrade after low-end vehicles were eliminated from the mainstream market around 2007.

The slowdown in the domestic market and the consumption upgrade pose severe challenges to domestic car companies with proprietary brands by undermining their strengths and aggravating their weaknesses.

Low prices are the biggest advantage of original-brand cars, whether they are developed by state-owned or private companies. In the high-growth era, many entry-level car buyers simply wanted a means of transport. For them, price mattered most. However, in the era featuring meager growth, car buyers wanted comfort, safety, and a status symbol in addition to a means of transport. The low price/low quality path is no longer feasible as consumers now prefer brand vehicles; while brand power is exactly what domestic car companies lack most.

As a result, the market share for original-brand passenger cars with no more than nine seats dropped 1 percentage point to 41.3 percent from Jan. to Nov. 2012. The figure was 45.6 percent two years ago.

Original-brand passenger cars with no more than five seats saw bigger declines (1.3 percentage points) in market share, from 29.05 percent to 27.75 percent. For years, these cars have held one-third of the domestic automobile market; now they only occupy a quarter.

Currently, domestic car companies overall have a capacity utilization rate of less than 60 percent, under the historical average of global automobile manufacturers. Many domestic car companies are operating below the break-even point; others rely on government subsidies or capital injections from their parent companies to make profits. Experts have noted that administrative methods such as subsidies do not help enterprises build up core competitiveness. If the situation persists, domestic car companies may have difficulty staying afloat, let alone catching up with and surpassing their foreign counterparts.

Of course, large state-owned groups such as First Automobile Works, Dongfeng Motor Corporation, and SAIC Motor Corporation Limited do not have to worry about survival, because their joint ventures are highly profitable. But if their proprietary brands fail, they will always be at the mercy of their foreign partners.

Have domestic car companies come to terms with the challenges? How will they respond to new market conditions, and what is the outlook for these companies? To answer the questions, Caijing conducted a study of four leading private car companies, namely Chery, Geely, Great Wall Motors, which focuses on the niche market of SUVs and pick-up trucks, and BYD, which has made a name by building electric cars.

The study found the four companies are rising to the challenges by building up brand power, pursuing technological advantages, shifting to mid- and high-end products, and exploring overseas markets.

Full article in Chinese: http://magazine.caijing.com.cn/2012-12-30/112401352.html

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