Auto Sales Race in China Gets Tougher

BEIJING, Nov 18, 2006; Chang-Ran Kim, writing for Reuters reported that China may still be the promised land for global auto makers but competition is set to reach new heights in coming years as consumers start buying cars for a second or third time and are more swayed by brand loyalty.

About four out of five new cars are sold to first-time buyers in China today, making the country a uniquely level playing ground for the 30-plus brands vying for a slice of the world's second-biggest auto market.

With passenger car sales expected to jump 18 percent this year to 4.7 million units and to 7 million by 2010, China offers some of the most promising growth opportunities for auto makers.

Game Console Wars The video game industry's own clash of the titans reboots this week with the midnight launch of Sony's PlayStation 3 and Sunday's debut of Nintendo's Wii.

Full coverage But industry executives and experts say the true test will come soon, as car makers face the task of wooing the same customers back to their showrooms and building brand loyalty to secure future success.

"In three years' time you'll see the honeymoon period in China ending," said Michael Dunne, vice president of China operations at J.D. Power. "And then competition led by consumer power will begin."

Ending up in the winners' camp will be critical for most.

Volkswagen AG (VOWG.DE: Quote, Profile, Research), until last year the country's top foreign brand, sells more cars in China than it does at home in Germany. For many others, China is their single most important market as demand tapers off in the mature markets of the West.

Some brands could already be in the danger zone. Keen to chase market share or scrambling to fill underused factory space after excessive expansion, companies such as Volkswagen, Hyundai Motor Co. (005380.KS: Quote, Profile, Research) and General Motors Corp. (GM.N: Quote, Profile, Research) have at some point relied more than others on lower price tags to move the metal, industry insiders say.

Pressure to reduce prices has also come from local Chinese brands such as Chery Automobile and Geely Automobile Holdings (0175.HK: Quote, Profile, Research), which have undercut their foreign rivals significantly, albeit at lower technological and quality levels.

Global car makers say they compete in a separate segment of the market from local brands, which have so far offered mainly no-frills bargains.

But that's also changing as some homegrown brands -- notably Chery, Geely and Brilliance Automotive-- step up their game by adopting European designs and technologies.

Game Console Wars The video game industry's own clash of the titans reboots this week with the midnight launch of Sony's PlayStation 3 and Sunday's debut of Nintendo's Wii.

Full coverage Even state-owned companies with foreign partners such as FAW Car Co. and SAIC Motor Corp. have begun offering cars under their own brands -- in FAW's case a car based on Mazda Motor Corp.'s Mazda6 sedan, but 20 percent cheaper.

"Given that they have a good understanding of local consumers' tastes and preferences, and that they are used to sacrificing margin to boost market share, the local producers would pose a major competitive threat to the multinational players in China," JP Morgan auto analyst Frank Li wrote in a recent report.

"Their impact should not be underestimated."

BRAND POWER Auto makers and experts say that means brand power will be increasingly crucial. That message was evident at the Beijing auto show preview on Saturday, as car makers spent generously to drive home their brand's allure to the Chinese audience.

"One of our biggest priorities (in Asia) is to keep growing and developing our brand," Ford Group Vice President John Parker told Reuters. "To be honest, our brand needs to be worked at because in Asia, Ford is not well understood."

Some will have an easier time.

Toyota Motor Corp., the world's most profitable car maker, and Honda Motor Co., for instance, have been able to maintain stable product prices in North America despite an arguably more ferocious discount environment there.

Game Console Wars The video game industry's own clash of the titans reboots this week with the midnight launch of Sony's PlayStation 3 and Sunday's debut of Nintendo's Wii.

Full coverage GM, Ford and Chrysler, meanwhile, have steadily lost market share despite slapping thousands of dollars in sales incentives on every vehicle.

"Overtime, as brand image, loyalty and status aspects become more important, price cuts alone will just result in negative image," said Ashvin Chotai, director of Asian automotive research at Global Insight.

Among luxury marques, established players such as BMW, Mercedes-Benz and Audi will be safe, J.D. Power's Dunne said. Still to prove themselves are Acura, Infiniti and Cadillac, he added, referring to the premium brands of Honda, Nissan and GM.

With a diverse and huge market like China's, many say there will be enough demand to go around.

"We believe the market is big enough for all of us to compete in," said Kevin Wale, president of GM China.

Global Insight's Chotai agreed.

"European, U.S, Japanese and Korean products are all competing more or less on equal terms, as no company can claim to have a home-turf advantage," he said.

"I don't think anybody will dominate this market -- not even Toyota. There are going to be lots of twists and turns."