But the party is over. With incentives gone, Chinese brands have lost market share this year, dragged down by their poor brand image and stagnant demand for microvans. Since neither of the issues can be resolved any time soon, the domestics likely will bleed market share awhile longer.
Domestic Chinese brands are known for small cars. Those brands benefited most when the central government cut its sales tax on small cars by 50% in 2009 and 25% in 2010. The domestic brands are also the only automakers that make microvans -- versatile vehicles favored by China's small-business owners and farmers.
In 2009, Beijing introduced a scrappage incentive ranging from 5,000 to 18,000 yuan ($775 to $2,800) to induce farmers to trade in their old microvans.
Thanks to these incentives, domestic Chinese brands grew their share of passenger car sales -- which include microvans -- from 40% in 2008 to nearly 46% in 2010, according to the China Association of Automobile Manufacturers.
But the domestic Chinese brands lost momentum after the government ended those sales incentives on Dec. 31. In the first six months of 2011, sales of domestic brands fell 0.8% from a year earlier, even though industry sales rose 5.8%. As a result, the domestic brands' market share decreased to 44%.
Can Chinese brands regain market share later this year? It will be difficult because the factors that hurt the domestics' sales will persist.
Consider the situation of Chery Automobile Co., China's top-selling domestic producer of passenger vehicles.
This year, Chery has suffered a double blow of poor brand image and weak microvan sales. The company had made its name by producing the QQ small car, widely considered a low-priced knockoff of the Daewoo Matiz.
The QQ, which sells for only 30,000 yuan ($4,637), is China's top-selling minicar this year, according to J.D. Power and Associates. But there's a downside: The QQ reinforces Chery's image as a maker of cheap cars. The company tried to solve this problem two years ago when it created the Riich brand for sedans and the Rely brand for SUVs.
By launching new brands with higher prices, Chery hoped to go upscale.
But consumers failed to view the new brands as premium badges. In the first five months of 2011, sales of the four Riich models plunged 37% to 10,502 units, according to J.D. Power. Likewise, sales of the Rely SUV dropped 16% to 3,886 units.
Chery hasn't had much luck with microvans, either. When Chery entered this segment in 2009, it seemed to offer the company a good opportunity to diversify.
But other domestic automakers also crowded into that segment. And now the microvan market has cooled, leaving a glut of unsold vehicles. In the first five months of the year, Chery's microvan sales plunged 38% to 22 ,258 units.
Chery's troubles are not unique. Some Chinese automakers, such as BYD, are saddled with weak brands. Others, such as Changan Auto, suffer from weak microvan sales. And some, for example Southeast Motor, are burdened with both.
These problems aren't going to solve themselves. Brand-building is never easy, and it may take years for the market to digest the glut of microvans.
Unless the Chinese government renews its incentives for small vehicles, the market-share gains achieved by domestic Chinese brands over the past two years will be wiped out.
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