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All about the brand
on: October 01, 2007 In: Business, ConsumerTags: No Comments
Sung Guobao flies up the Chengdu-Duijiangyan highway in his sporty 2006 Jaguar with a caravan of luxury cars following behind. He sits in the back and lights up a cigar from the Dominican Republic as his car reaches the off-ramp for the city of Dujiangyan.
The Jaguar pulls to a halt, and Sung continues to puff slowly as his right-hand man, Lao Liu, steps into the middle of the road to direct the dozen motorcades – including Honda Acuras, Nissan Infinitis, BMWs, Mercedes-Benzs – trailing behind.
The real estate division of Sung's eclectic electronics, resort development and crematoriums company, Long De Group, is heading to a sprawling resort in the mountains surrounding the city for a business meeting with the mayor of Dujiangyan.
New wealth
Sung, along with his team of executives, are part of China's rising middle class – dripping with new money and dishing out cash for luxury purchases that showcase their status. This affluent group buys an average of 15,000 luxury cars per month. Thanks to them, China's high-end auto segment is growing about twice as fast as the overall car market.
China has become the fastest-growing market for BMW, which sold 23,595 cars last year, up 52.4% year-on-year. Rolls-Royce opened its 80th China showroom this year, while the joint venture between General Motors (GM) and Shanghai Automotive Industry Corp (SAIC) sold 876,747 units last year, the most in the country. Volkswagen, which has tie-ups with First Auto Works (FAW) and SAIC, placed second.
Alongside Dongfeng Motor Company, SAIC and FAW represent China's largest state-owned auto manufacturers. In the 1980s, when Beijing turned to foreign expertise to help rising sedan demands, these were the firms they put forward as joint venture partners. The foreign carmakers provided the capital and expertise, receiving market access in return. The domestic companies contributed labor and it was Beijing's plan that they would both profit and learn from the joint ventures. The long-term plan has always been to create a strong, export focused domestic auto industry.
The cream of America, Europe and Japan's auto markets have all now set up shop in China. For the homegrown brands upon which local manufacturers are supposed to impart the knowledge gained from the joint ventures, life is tough. They make up less than than a third of the market, with most of their sales coming in the low-end segment. Exports are restricted to the developing markets of South America, Africa and the Middle East.
Nevertheless, these local automakers are not giving up. Several have come up with foreign-inspired designs for high-end cars with which they hope to enter the domestic luxury market.
At last year's Beijing Auto Show, homegrown brands accounted for one third of the 572 vehicles on display. Among them was FAW's luxury Red Flag HQ3, priced at US$75,000. It comes equipped with a bulletproof exterior and stretch features. The Red Flag brand has a history of supplying luxury vehicles to top government officials, and FAW wants to use this cachet to appeal to the China's affluent crowd.
But breaking into the high-end segment is likely to be a challenge.
"People buy luxury based on three factors: quality, product performance and image," said Songlin Mei, general manager of China operations for auto consultancy JD Power & Associates. "Homegrown luxury brands have a chance, but it is going to be tough."
China's automakers still lack the innovation and technology of their foreign counterparts, which suggests that they haven't absorbed as much from their joint venture partners as they might have expected. Unsurprising, perhaps, given the secrecy that surrounds foreign intellectual property for key components.
"It is easy to set up assembly lines and copy designs, but having the technology is what is important," Mei added.
Yet local automakers have found another way to get their hands on foreign technology – buying foreign car companies. In 2005, SAIC bought the rights to two models and one engine series from the defunct UK manufacturer Rover. Then, earlier this year, SAIC launched the 2.5 liter Roewe 750 startup luxury sedan priced from US$22,000-40,000.
Katsumi Nakamura, president and CEO of Dongfeng, said attracting first-time buyers to homegrown labels could be as simple as creating the appearance of luxury with wooden panels, leather seats and a sunroof.
Although not a first-time car consumer, it is hoped that the likes of Sung Guobao might be swayed. His Jaguar and two luxury SUVs come fitted out in wood leather, chrome and crystal. But he is also in the hunt for a new car.
"Did you hear about the auto show in Shanghai [in April]? I might have to get me one of those Cadillacs… and give my Jaguar to Zhao Ziqi," Sung said. "You know he might become the vice secretary in Aba prefecture? He will need a good car."
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