China's auto market has swerved 180 degrees in the past few years. VW is still the No. 1 player but its share has dropped to 14% and aggressive rivals, particularly from South Korea and Japan, dilute the market with dozens of new models every year.
"China's auto industry is now one of the toughest categories there, with a highly competitive nature of the market, a complex regulatory issues imposed by the government and challenges maintaining relationships with local joint venture partners," said Paul DiPaola, Shanghai-based managing partner, Greater China of Bain & Co. consulting company.
At the same time, an emerging middle class has flocked to dealer showrooms. Savoring the freedom and flexibility associated with car ownership for the first time, they have little brand loyalty, a desire to experiment with new models, a strong reliance on word-of-mouth for purchasing decisions and a willingness to hold off buying a car until a promotion or better model turns up, which has driven down prices.
"First-time buyers still account for 70% of sales and consumers are experimenting. That means you're advertising to people that you don't know, which is really dicey," said Michael Dunne, Shanghai-based president, Automotive Resources Asia.
Ford "too American"
"The last year has been the most difficult," said Randy Krieger, VP, marketing, sales & service for Ford Motor Co.'s joint venture in Chongqing, Changan Ford. "The market is getting crowded and competitive very quickly, compared to developed markets that evolved over time. In China, you can bring out a new car and change your fortunes very, very quickly."
In fact, Ford hopes to do just that later this month with the launch of Focus, its third model in China after Fiesta and Mondeo. Neither of the first two models tanked, but neither did they manage to correct Ford's image problem in China.
"Ford's main weakness is its brand. In Chinese people's minds, they think of it as an older, mature car that consumes too much oil. In short, it's too American," noted Mr. DiPaola.
To launch Focus and hopefully rejuvenate Ford's other models in China, the U.S. company opted for a sleek marketing campaign that evokes a European atmosphere.
"It will be more stylish and energetic compared to [ads for] the earlier models," said Edmund Li, JWT's group account director for Changan Ford in Chongqing. "The new model will have a more European and stylish image, to reposition Ford in China and give the other brands a bit more pizzazz."
"Everyone knows North American cars in general are bigger than everywhere else and they have a tradition of being gas-guzzling. We believe that vehicles produced in Europe like Focus are a better fit," added Mr. Krieger.
GM scores with Chevy
Ford isn't the only U.S. car company playing down its heritage in China. General Motors has struggled to get Cadillac off the ground since it launched that luxury model in China last October, selling just 300 Cadillacs a month there.
"To be honest, brand establishment takes time. As you know, Cadillac is an American brand, and it does not yet have a brand perception equal to BMW and Mercedes," its main rivals in China, said Joseph Liu, GM's Shanghai-based executive director, vehicle sales, service & marketing for Greater China. (Player Profile on Joseph Liu)
Also, rich Chinese "buy big cars like the Lexus LS 430, BMW 7 series, the Mercedes S class. With Cadillac right now, we don't have a big [enough] car to meet people's expectations," he added, but the company plans to roll out larger and richly-appointed Cadillac models in the next two years.
Although its Cadillac debut misfired, the success of the company's other two models in China has pushed GM into the No. 2 spot with an 11% market share. Buick has been a popular mid-range car since it debuted in 1999, attracting ambitious entrepreneurs and senior government officials. More recently, GM has exceeded expectations with the launch of locally-made mass-market Chevrolets last March. It sold 30,000 cars in three months, immediately turning China into the third-largest market for Chevy globally after the U.S. and Brazil.
While opportunities remain, particularly for sales of small models produced by aggressive local players like Chery, the biggest threat to Western manufacturers comes from the Japanese and Korean car giants that can churn out products more cheaply than Europeans and Americans.
"The Koreans do well because they have an inexpensive product, they're great value," observed Ford's Mr. Krieger. "The Japanese have great quality, reliability and good designs."
Hyundai, for example, almost doubled its sales in the first seven months of 2005, compared to the same period last year, largely through sales of its mid-size Elantra. And Nissan completely transformed its image in the past year with the rollout of its Teana and Tiida models, which rejuvenated the entire mid-size car segment.
VW fights for No. 1 spot
"As the private car market is becoming a level playing field for all players, longtime market leaders are faced with the challenge from other locally produced brands and they have to work harder to command a leading market share," said Mr. Coquelle.
VW, for example, has slashed prices on many of its models to spur recovery, even knocking 12% off the top-of-the-range Passat.
"VW is under a lot of pressure. its leading share position is in mid- and upper-size cars, but small and mid-size cars is where the market is growing," said Mr. DiPaola. The company is talking about bringing different products into the market from Europe to reinject some energy into their brand, such as Beetles and Skodas.
The German company has also responded to its eroding market share by putting more decision-making power in China rather than Stuttgart. It hired Soh Wei Ming, former head of Beijing Jeep's sales and marketing, as its sales vice president. Mr. Soh promptly bulked up VW's China marketing team, partly by luring a number of execs away from DaimlerChrysler's China operations. Meanwhile, Winfried Vahland, former head of Volkswagen's Skoda brand, became president of VW's China operations last June, after Bernd Leissner, the former president, retired.
"VW is looking at how to consolidate its No. 1 position, which has been challenged [by GM] by looking at new models and the overall positioning of the company," said Hong Kong-based Viveca Chan, chairman-CEO of Grey Global Group, a VW agency in China, "but the industry has been difficult for everyone, because the market faces an over-supply issue."
The mood of China's car market is far gloomier than it was just three years ago. Back then, global car companies had good reason to be bullish about major investments spent on advertising, dealer networks and manufacturing plants. Passenger car sales in China grew 55% in 2002, and rose more than 75% the following year. Those staggering growth rates skidded to just 12% in 2004, a fact the car companies are quick to downplay.
"The common misperception is that the market has slowed down. The market has not slowed down, the growth rate has slowed down, but no one expected the previous staggering growth rate to be sustained," said GM China spokesman Daphne Zheng in Shanghai.
Although sales stabilized after a surprisingly strong summer, analysts predict steady 10% to 15% growth for the next few years and Western and North Asian automakers strongly view China as a "must-win" scenario. It is already the world's third-largest car market after the U.S. and Japan, producing 5.83 million vehicles in 2005, up 15% from last year, according to the Ministry of Commerce.
Mr. Dunne predicts China will overtake Japan as the world's No. 2 car market by 2008, "and there is plenty of room for growth past that. In a good ten years China will be able to equal the U.S. market. Hyundai entered the market just two years ago and has almost a 9% market share. It's not too late, there is plenty of time to come to China and make your mark."
Contributing: Alysha Webb, China Correspondent, Crain Communications' Automotive News
--Private passenger car ownership in China increased from 7% to 15% in 2005.
--Only 12% of recent buyers used bank loans to buy a car, down eight points since 2003. Over 70% of potential buyers claimed they would pay cash.
--Beijing continued to outperform other Chinese cities with car penetration climbing to 22%, up 11 points from the previous year. Guangzhou followed with 14% penetration, a nine-point increase. Shanghai ranked third with 8% of respondents claiming to own a car, up four points from 2004.
--The number of private households owning a passenger car in Guangzhou is increasing, while the Shanghai market seems to be driven by company buyers.