After a year of unprecedented sales growth, car sales in China dropped in 2004. Official figures show the 75% increase in 2003 plummeted to only 15% growth in 2004. The 2004 numbers disappointed many auto manufacturers who had been ramping up production and expanding distribution to ride the crest of what appeared to be a giant swell of demand for autos.
Of course, growth rates are simply numbers; they must be viewed in the context of manufacturers' expectations. China's sales increase, even at a scaled-down 15%, is impressive considering U.S. car sales grew only 1% in 2004. The problem is that, in anticipation of enormously escalating growth, automakers in China have been expanding their production at a rate considerably above that 15% growth figure. More cars are available, and more manufacturers have entered the market, eager for their piece of the pie.
The problem isn't that Chinese consumers don't want to own a car, but rather that the price of a car is often well beyond their reach. In order to address the obvious purchase price hurdle, major automakers have been slashing their new car prices by 10% to 15%, and some analysts forecast that car prices in China will be cut in half within the next four years.
Car Demand in China
The new Gallup Poll of China reveals that while auto ownership is currently limited (only 2% of Chinese consumers currently own a private car), there are significant pockets of higher-potential consumers that help explain why auto manufacturers will continue to invest in the country. Overall, about 1 in 20 Chinese (5%) indicate that they plan to buy a car within the next few years. That percentage is appreciably higher, however, among the young, the urban, and the affluent.
Some auto manufacturers have successfully established an appreciable degree of brand preference in their efforts to market to these pockets of high potential. Twenty-two percent of Chinese consumers feel one car brand stands apart from all the rest (up from 17% in 1999) -- although they obviously don't agree on which brand. This percentage is even higher among the more affluent and urban-dwelling Chinese. However, somewhere between two-thirds and three-fourths of key car buyer prospects are not (yet) convinced that only one auto brand will meet their needs. Thus, the stage has been set for today's price wars and the continuation of intense manufacturer competition.
Brand Awareness
Because of the marketing investments that have been taking place in China, awareness of many auto brands has increased considerably -- almost doubling in some cases over the past five years. Awareness of BMW in China jumped from 35% to 69%, awareness of Volkswagen rose from 42% to 71%, and awareness of Buick leaped from 13% to 57%.
The challenge facing these competing automakers is reflected in the brand awareness levels among key buyer prospects. Among consumers who are most likely to be able to afford a car (those with annual household incomes of 30,000 RMB or more), most are aware not just of one or two brands, but of every brand on a list of 15 vehicle makers. Clearly, awareness alone will not determine consumer choice in China -- even though the awareness leader (Santana), by virtue of its established and pervasive presence in the country, is also currently China's market share leader.
Bottom Line
Having already established high degrees of brand awareness, Chinese auto marketers must begin to move beyond this basic marketing requirement. They now need to establish and support preferences and brand relationships strong enough to overcome the promotional deals and price-based appeals of their competitors. This is hardly a simple task given the clutter of competition and the pervasiveness of price offers, but it's exactly what will be required for a company to achieve sustained success in China. Cutting prices is only a short-term precondition for competing in what will no doubt be an auto-marketing marathon. It's not clear who the winners will be, but it is apparent that the race will be a highly competitive one.
