For many manufacturers, cracking the Chinese market is the Holy Grail of global success. But that goal may well prove as elusive as the quest of the Grail itself. China's auto market is increasingly complex, what with its special regulations and restrictions in large cities, its bewildering variety of fiscal incentives and disincentives, and the rising power of local manufacturers. Moreover, though predicted to remain stable this year, the largest car market in the world may well be headed for negative territory come 2018.
The bi-annual Shanghai Motor Show, which opens this week, will offer a glittering showcase not just of the new models and technologies launched for the Chinese market, but also of the Chinese automotive market itself. Few manufacturers need reminding that in the space of a single generation, China went from zero to hero – from a negligible fraction of global car sales to a quarter today.
24.5 million vehicles
Last year, almost 24.5 million vehicles were sold in China, way ahead even of the U.S. market, or the EU one for that matter. China's car market grew by an astonishing 15% last year, a growth fuelled by the fiscally advantageous VAT rates for small-cylinder cars that was instated in 2015.
But, as noted by an opinion piece in the Journal Auto, the glittering prize that is the Chinese automotive market may soon lose a lot of its sheen. In fact, sales have already declined in the first quarter of this year, albeit minimally, after a sharp reduction in the VAT advantage for small-engine car. And even though sales are expected to stabilise for the remainder of the year, the prediction is that they may well fall sharply next year.
Contributing to the (predicted) decline are the fact that the Chinese economy has entered a sluggish phase, with the slowest rate of growth in over a quarter century, and that the country's major cities are now congested and polluted up to the point that these metropolises have started implementing restrictions on new car registrations, which will doubtlessly contribute to the decline.
More hopeful analysts point to the burgeoning middle classes and the urbanisation still gathering pace in the large cities in the middle and west of the country. This in stark contrast to the coastal cities in the east, where the automotive market is already saturated and mature, at levels comparable with Europe.
So the Chinese market will now be driven by urban centres in the less-developed hinterland. A crucial difference with the better-developed coastal region is the spending potential of the local consumers, which is much lower in the Chinese interior. It is these regions that drag the Chinese average for car ownership down to 120 vehicles per 1,000 people, versus around 600 in Europe. The upside of that downside: the potential for expansion remains large. Another silver lining are vehicle fleets linked to new mobility services such as car-sharing and car-pooling, a niche market that keeps growing, also in China.
But even that notwithstanding, the situation remains fraught with complexities for foreign manufacturers in China. And the headwinds are gathering strength: dominant brands like GM, VW, PSA or Ford are seeing their market shares erode in favour of purely Chinese brands such as Geely, Great Wall and Changan, which together now represent 45% of the overall Chinese market. The market share erosion of the foreign brands is due to increasing market complexity, and a growing preference of local consumers for local brands, say analysts. On the one hand, foreign luxury brands like BMW, Mercedes and Audi continue to seduce a large section of the Chinese market. But on the other hand, the originally low-cost Chinese brands are starting to broaden their appeal beyond their initial no-frills offer. Caught in the middle are middle-range foreign manufacturers like Ford and PSA, who are experiencing market share shrinkage.
Clouds are gathering, and the perfect storm could turn out to be a price war – all the more vicious due to the fact that the Chinese consumer is spoilt for choice... and knows it. That consumer savvy explains not only the success of high-end brands, but also of the SUV segment. As it happens, the SUV segment is one in which local manufacturers excel.
Retain or recapture
The Shanghai Motor Show will see western manufacturers launch models designed to retain or recapture the fascination of the Chinese market. Hence Citroën's premiere of the C5 Aircross, an urban 4x4. Or VW's launch of the T-Roc, a small crossover. In the premium segment, Mercedes will offer a redesigned version of its flagship sedan, the S-Class. Another interesting segment to look out for will be the alt-fuel vehicles launched by Chinese and western manufacturers, incentivised by China's generous (but complex) subsidies.
With all that showroom glitter on display, those interested or invested in the Chinese market would do well to remember that not all that glitter is gold – on the Chinese car market as in other fairy tales.
You can find car news about the 2017 Shanghai Motor Show on www.globalfleet.com.
Image: Shanghai Motor Show
| 19/04/2017 | Frank Jacobs