What Drives China's Car Buyers
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Zhu Lin and Li Lijie are no strangers to the insufferable traffic gridlocks of central Beijing. It is the natural outgrowth of more than a decade of blistering growth and the mainland's increasingly car-crazy culture. The newly married couple is lucky enough to live and work near a Beijing subway station, so owning a car never made much sense to Zhu, a 27-year-old government employee, and his wife, who works for a high-tech company. They aren't interested in joining the road-rage set coping with a hellish commute in the Chinese capital. Yet the lure of the open road outside of Beijing and visions of holiday trips to the country side led both to reconsider.
So lately this twentysomething duo has been making the rounds at emporiums such as the sprawling Asian Games Village Auto Market in northwest Beijing and turning to the Internet for small-engine economy models that would fit their budget. They checked sites such as Chinese portal Sina.com's auto channel and others like autohome.com.cn. "I used their search engines to look for car models around my budget," says Zhu. "I began to read and compare mechanical specifications like engine size, brake performance, acceleration time, and fuel consumption." After seriously considering the Volkswagen Jetta and Chevrolet Lova the couple has set its sights on a Peugeot 206.
It's hardly a revelation these days that China is the world's hottest car market. Manufacturers from across the globe have invested billions in new plants there. Last year the country's passenger car sales jumped 26%, to 3.1 million vehicles, and they roared 60% in the first quarter of 2006. The mainland is now No. 3 in the world in total vehicle sales. Only the U.S. and Japanese markets are larger. Consumers can select from about 25 entry-level compacts such as the Chery qq and Honda Motor's (HMC) Fit. And a further 25 new models -- from subcompacts to SUVs -- are being rolled out this year.
What is surprising to global auto executives and marketing experts is the rapidly growing sophistication and demanding nature of Chinese auto consumers. This is, after all, still largely a nation of first-time car buyers. Some 84% of all car purchases are made by individuals entirely new to the game. They tend to pay in cash, have little in the way of brand awareness, and often rely on the advice of family and friends for one of the biggest purchases of their lives.
Still, Chinese consumers are anything but pushovers when it comes to sizing up models, features, and price. And they are embracing the Net to research their purchases, cut through marketing hype, and zero in on value and functionality. "Over one-half of all car buyers now use the Internet," says John Humphrey, senior vice-president for international operations at J.D. Power & Associates and managing director of the auto consultant's Asia Pacific China operations. "This number is three times the level three years ago, and very close to that of the U.S. and Japan."
Chinese consumers have figured out something else as well -- much to the chagrin of as many as 100 domestic and 10 foreign manufacturers vying for their attention. They absolutely rule in this market. The average price for an entry-level compact in China has fallen by 28% since 2000, while other categories are off by more than 20%, according to data generated by J.D. Power, which like BusinessWeekis a unit of McGraw-Hill (MHP). Five years ago, China was a can't-miss proposition for auto makers and a "very profitable market for everyone," says Yoshimi Inaba, Toyota Motor's (TM) executive vice-president in charge of China. No more.
In this cutthroat environment, Inaba and dozens of other executives at foreign and Chinese auto makers are scrambling to identify the buying habits of mainland consumers. That's crucial because the median age of car buyers in China is 35, vs. 50 in the U.S. And China's rapidly expanding personal wealth -- personal savings hit a record $1.7 trillion at the end of 2005 -- is widening the pool of potential buyers.
An estimated 100 million Chinese families now have savings in excess of $7,500 each, according to China's Union of National Passenger Car Market Information. For a closer look at what Chinese auto consumers want and how they shop, BusinessWeek China has teamed up with J.D. Power to develop a portrait of what makes Chinese auto buyers click. The results are pretty surprising.
With so many first-time buyers, there's almost no brand loyalty. "The brand is less important for them, especially compared with consumers in other parts of the world," says Lawrence Ang, an executive director at Geely Automobile Holdings Ltd. "Our marketing people believe that China's younger consumers have more flexibility to accommodate new brands, so this gives us a very good opportunity." That is potentially good news for Geely and other Chinese players such as First Automotive Works, Beijing Automotive Industry, and others under enormous pressure from the government to ramp up development of their own brands at home and for export abroad.
But for the moment, foreign auto makers such as Volkswagen, General Motors (GM), Toyota, and Nissan (NSANY) enjoy a dominating 80% of the domestic market. They have more compacts, sedans, and luxury nameplates in Chinese showrooms and plenty of marketing muscle. And foreign cars still enjoy a perceived edge in quality over local brands, all things considered. After consulting friends, browsing Net channels, and plowing through Chinese car magazines, Beijing resident and father Bai Hongwei, 30, decided to buy either a Ford (F) Focus or Buick Excelle over domestic brands. "We want American cars because they are safer," he says.
Yet Chinese brands such as Geely and Chery are making huge strides in quality, and with so many new consumers coming on stream, this is very much a market up for grabs. At this stage, woe to the carmaker that gets a reputation for shoddy service and maintenance problems. After all, middle-class Chinese often spend more than a year's income for even a low-end car, and 89% pay in cash, J.D. Power data show. That means driving a dud isn't just disappointing, but a huge hit to a family budget if expensive repairs are required. "This is really big money for a family to spend," says Yasuaki Hashimoto, who oversees Nissan's sales in China. Nissan, whose dealers in China ranked No. 1 in a J.D. Power customer service survey for 2005, has dispatched retired executives from Japan to help improve showroom cleanliness, interaction with customers, and after-sales service.
About half of all Chinese buyers rely the opinions of family and friends when making this critical purchase, but the growing gaggle of Net auto channels and car blogs is widening the loop. Consumers are more likely to value intelligence picked up directly from auto owners than reviews in the car buff books and mainstream media, where big advertisers have an uncanny knack for receiving fawning coverage, or directly from the companies. "I trust the content contributed by fellow Netizens," says Bei, the Beijing company manager. And he is far from alone as car-focused search engines on the mainland have upped their game. Sina.com's auto channel is pulling in about 20 million page views per day, says Shao Jingning, editor-in-chief of the car site. "Users can search car models according to their preferences on price range, brand, [vehicle] category" and so on, he says.
For auto makers, all this is triggering a rethink about how best to reach the mainland's legion of first-time and Net-savvy buyers. GM, which last year overtook VW as the top-selling manufacturer on the mainland, has pulled out all the stops on the promotional front to reach the youthful consumers. For instance, it displayed its Chevy Epica sedan at last year's MTV music awards show in China, and MTV has lined up local pop stars for GM promotions. But online advertising is now becoming a key focus, says Chevrolet brand director Dale Sullivan. It has sponsored brand naming contests on the Internet and is text-messaging information about promotional test drives for its Aveo sedan by mobile phone.
Chinese brands are also proving shrewd marketers, jumping in with their own gimmicks. Geely Automobile encourages its dealers to hold social events to build up long-term brand loyalty. Last year a pair of company engineers joined Geely drivers on a 300-mile journey from Beijing to Inner Mongolia to teach the owners how to handle their cars in rough conditions. "For most Chinese consumers, buying a car is usually one of the biggest investments they ever make," explains Geely executive director Ang. "The most effective marketing is to treat your existing customers very well."
One particularly tricky question for both domestic and foreign companies will be how to balance consumer demand for big and powerful engine performance vs. the government's desire to cope with China's world-class air pollution in major urban centers. One-third of Chinese consumers canvassed by J.D. Power rate engine and transmission performance as their biggest priority, compared with 19% in the U.S. and 11% in India. However, the Chinese government is tightening emissions standards and recently announced plans to levy higher taxes on cars with bigger than 2-liter engines. Toyota's Inaba thinks the mainland industry has no choice but to "think about smaller engines with better fuel economy and that are less expensive."
That said there is no denying that Chinese consumers have the upper hand. The world's biggest and most high-quality auto makers continue to pump a vast array of nameplates into the mainland market and are knocking themselves over to win their loyalty. Prices continue to tumble. And the Internet is giving first-time buyers in China a treasure trove of digital information to download and consider. Make no mistake: The car-buying frenzy that has captured the imagination of China's masses is just getting under way.