China's Car Industry Slows, With More Speed Bumps Ahead

Chinese Government Says Cars Are No Longer a Favored Investment Sector

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Car sales in China, the world's largest auto market, have hit the brakes, and foreign automakers say more speed bumps are ahead.

Based on a report issued this week by the China Association of Automobile Manufacturers, total sales rose just 2.5% in 2011, to 18.51 million units, compared with an increase of over 32% in 2010. The country is unlikely to repeat the explosive growth of the past decade, according to auto industry experts speaking this week on "Thoughtful China," an online marketing-affairs talk show produced in Shanghai.

China's total car market will grow about 6% in 2012, predicted Nigel Harris, Ford Motor Co.'s VP, China distribution operations. "It's still growth, but not massive -- a gradual reduction."

The market "is reaching a saturation level," said Tim Schlick, head of strategic planning, Greater China at DDB Group. "We're not going to see the growth that we've seen before."

The Chinese government eliminated tax incentives last year for small cars, and local authorities in key cities have launched initiatives aimed at easing worsening traffic congestion and air pollution. Beijing, for instance, has raised vehicle eligibility requirements for fuel-saving subsidies.

More ominously, the government recently announced that it would no longer encourage multinationals to invest in China's auto industry, in the interest of limiting overcapacity and strengthening domestic automakers.

Car marketers increasingly depend on digital media in China. The internet plays an important role, especially for buyers in China's lower-tier cities, in providing product information and insights from online communities. Few Chinese adults had much experience with driving when they were growing up, so most buyers are first-timers who parents don't drive. Some even buy a car before they have a driver's license.

Like many other car companies, Ford has turned to digital media to avoid the high inflation built into prices for TV airtime. Five years ago, internet spending accounted for about 10% of Ford 's marketing budget in China, Mr. Harris said. Last year, he added, "it was 25%, and it's probably going to grow in the future. It's really cost-effective ... targeted at the people we want to talk to with specific cars and specific customers."

Increasingly, those customers are in smaller cities, where consumers behave differently, said Cynthia Zhu, head of planning at Leo Burnett , Shanghai, which handles advertising for Volkswagen 's Skoda brand in China. They can be "more naive" and less swayed by mass media like TV and films.

"In the lower-tier cities, the main influencers can be neighbors," Ms. Zhu said.

But China is also seeing a surge in people buying a second car who are more sophisticated shoppers, said Klaus Paur, managing director-automotive at Synovate Motoresearch in Greater China and Korea.

"In 2012 we will see new models, new body types, new versions of automobiles. The market will continue to develop very quickly," Mr. Paur said.

Normandy Madden is senior VP-content development, Asia/Pacific at Thoughtful China, and Ad Age 's former Asia Editor. See earlier episodes of Thoughtful China at www.thoughtfulchina.com.

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