Big Drop In Sales Is Good For China's Local Car Makers

Domestic Automakers Finally Drop Loser Brands and Focus On Vehicles Buyers Want

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While global automakers have maintained double-digit sales growth this year, several major Chinese carmakers -- Geely, Jianghuai Automobile Co., Great Wall and Chery Automobile -- have suffered steep sales declines.

Geely Panda
Geely Panda

Does this mean these companies are in deep trouble? No, it doesn't. Instead, it indicates the companies are shedding uncompetitive assets and focusing resources on core products.

In the first six months, Geely's sales tumbled 29%, while JAC's plunged 11% and Great Wall's dropped 6%.Chery's sales in the first five months plunged 15%; the company has yet to disclose June sales.

These are poor results. But it's worth noting that these companies are not passively enduring their sales slumps. The companies deliberately triggered the sales declines by dumping unprofitable models and brands. It's the first step to sharpen their competitive edge.

About five years ago, the companies underestimated market competition and set out to expand on multiple fronts. Geely and Chery each created three brands and quickly expanded their model lineups. Similar mistakes were made by Great Wall, which produces SUVs and pickups, and JAC, which makes commercial vehicles. Both companies, eager to grow their business, invested hugely to produce passenger sedans. With weak brands and limited technology, these four Chinese automakers relied on low product prices to compete in small cities and rural areas -- markets that foreign automakers had not yet penetrated.

But reckless expansion stretched their resources thin, which in turn hurt product quality. Moreover, they have found it increasingly difficult to market their products after global giants such as General Motors and Volkswagen successfully penetrated their home turf with inexpensive models. As price competition intensified, Chinese automakers were unable to raise product prices to offset rising labor and raw material costs.

Fortunately, it didn't take long for them to reverse their misguided strategies. Last year, Chery ditched its multiple-brand strategy and cut its product lineup 50%. Geely followed suit this year, when it announced plans to phase out its three brands and sell its new models under the single Geely brand. Unable to build a profitable sedan business, Great Wall and JAC moved quickly this year to reduce their sedan lineups.

These measures significantly hurt company sales. But no pain, no gain. By eliminating brands and scaling back unprofitable business, the four major Chinese automakers now can invest more money to improve key products.

This new strategy already has started to produce results. After incurring losses for several years, Chery says its vehicle sales are generating a profit. Likewise, Geely's sales are starting to stabilize. Although June sales were 10% lower than the year-ago period, they were 2% higher than in May. In the first six months, JAC's sedan sales tumbled 56%, but its Multi-Purpose Vehicle sales surged 47%.

And Great Wall again has focused on SUVs. While its sedan deliveries plunged 48% in the first half of the year, its SUV sales jumped 21%, and new models are planned.

Despite grim sales, China's automakers are not going to collapse. Having learned their lesson, they are on track for a rebound.

--Automotive News China--

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