Adapting to Local Preferences: The industry leaders have adapted their products and marketing strategy to local tastes and preferences. Buyers want cars with stylish designs and colour as well as which are durable and performance oriented. Chinese buyers tend to tilt towards the exclusivity- the more unique their car, the higher their social standing. The companies have in response introduced their limited editions in the country. Another interesting trend is that almost 30 per cent of buyers are female which influences marketing strategy as well as line up of models.
Current trends and characteristics – Chinese automotive market
- Acquisition of foreign assets by Chinese companies
Chinese companies are yet to match the world class standards of the mature automotive markets such as US, Germany, etc. As a result, they are grabbing every opportunity to acquire foreign companies or their divisions. Owing to aftermath of recession, the Chinese companies are acquiring these assets for a fraction of the original cost. For instance, in March 2010 Geely Holding group took over Volvo from Ford.
- Consolidation of Chinese vehicle manufacturers
As with any industry in its early stage of development, the Chinese automotive industry is a fragmented one with over 150 registered vehicle manufacturers. This environment cannot provide for a stable development for the domestic players. Hence, the government has decided to go ahead with a proposal to consolidate the industry into 2 distinct tiers. Tier 1 would have companies with more than 2 million units of annual capacity while tier 2 companies would have the same at 1 million units.
- Hyper-competition in Chinese automotive market
With the luxury cars market in China growing by 10 per cent per year, most global car manufacturers have set up manufacturing facilities in China itself to counter the high duties on imported cars. Through reduced manufacturing cost and high margins on luxury cars, no manufacturer is willing to let go of this attractive opportunity. As a result, the competition in China’s luxury cars market has risen very fast.
- Capital investment by non-Chinese companies
After recession, the global automotive industry went on a drive to reallocate its assets to a higher growth market such as China. With a forecast of 4.6% compound annual growth rate in Asia-Pacific region with China accounting for 54% of it, the capital investment and regional allocation in China has seen a sharp increase.
- Investment in new energy vehicles
With rapid growth in China’s automotive market, pollution levels have significantly risen. To encourage the use of more fuel efficient and less polluting vehicles, the central government’s 2009 stimulus plan included objectives for increasing the proportion of smaller vehicles in the China market. It also includes a 50% reduction in the sales tax for under 1.6-liter vehicles, additional taxes on larger vehicles, and a relaxation of restrictions on small cars. Top market players such as Mercedes, BMW, and Audi have announced plans to launch their Hybrid models in China.
- Global expansion of China’s automotive market
With China becoming the largest car market in the world, all the ingredients are there for it to expand to the global markets. Because a significant percentage of the total cost of a car is in the manufactured components, there has already been a significant movement of the production of supplied parts to China. This is purely driven by the efficiencies gained from sourcing in China.
- Chinese government’s push to Build Brand Equity for local manufacturers
With an eye on the growth of local brands, the Chinese government in 2009 reduced tax rates by 5% on the purchase of vehicles below 1.6L engine displacement, as well as fiscal subsidies to rural customers for vehicle replacement. Local brand manufacturers who tend to build small, compact cars with smaller engine displacements clearly would benefit from these subsidies.
- Growing demand in China’s lower tier cities
As a result of the economic development, China has experienced the emergence of a multi-tiered city structure. This has resulted in huge prosperity for people across all tiers and has contributed immensely to the growth in the automotive industry. A significant percentage of China’s population is migrating to these new cities from rural areas and is moving from poverty to prosperity.
The below PESTEL analysis summarizes the current trends and characteristics of the Chinese automotive market.
Hurdles and Obstacles
The Automotive Sector in China is the second largest Contributor to GDP. The industry is dominated by foreign car manufacturers. In addition, the domestic auto manufacturers are highly fragmented. China is fast becoming the largest market for most of the luxury car manufacturers including BMW, Rolls Royce, and Mercedes etc.
In 2011, for Jaguar-Land Rover, China became the third largest market for its cars. Although a lucrative market, it has up till now been mainly exporting cars to China. In order to make use of this opportunity it makes sense for the company to manufacture in the country. Their intent is also clear in that respect. However manufacturing and selling in china also throws challenges.
- Form of Investment
Chinese Government insists on any foreign car manufacturer to own only up to 50% of the company. This limits the flexibility of the firm to make independent decisions. It also leads to sharing of technology which most companies are afraid to. A lot of knock offs are already being sold in China. Sharing of technology may lead to increase in competitors in the future.
A disadvantage of this form of FDI is protecting their patented technology under the current technology transfer requirements to local partners that China has. For instance, in the 90's, Audi’s partner launched the Red Flag sedan, which was similar to the Audi 5000.
- Local Component Requirement
There are more than 1000 component manufacturers in China. They lack in technology and efficiency due to their smaller scale. On the other hand the government encourages local component use by imposing favorable tariffs for use of local components. Although the government has plans to consolidate the industry and improve efficiency, it may pose a challenge to Land Rover if it needs to source components locally. The 11th 5 Year Plan intends to reduce the no. of component manufacturers by 70%. Consolidation in the Auto components industry would increase the buying power of these suppliers.
Due to higher costs it does make sense to source components locally. However that would mean lower quality which the premium car makers cannot afford.
- Late Entrant
Volkswagen and GM hold the top 2 spots in terms of auto- sales in China. They have been manufacturing in China since over a decade. Audi recently sold its 1Mnth car in China and projects to sell another million in the next 3 years. They have already begun production in China and have built considerable learning’s from the operations of its other sections.
For Jaguar- Land Rover they may take time to build from scratch. Although they have local networks in terms of sales offices, they will need to build great networks to compete with other luxury car manufacturers.
- Localization of Products
Manufacturers such as BMW have modified their products to the local needs of China. Land Rover will need to rapidly adapt to these idiosyncrasies and localize their products.
An example of this is that BMW noted that users in China were mainly young executives who hired chauffeurs to drive them around. Thus BMW modified their cars to allow more legroom at the back with better ability to control the electronics such as audio systems.
- Counterfeits
Many suits have been filed by Mercedes, Honda, Smart Car etc. wherein lookalikes of the car models of these manufacturers have been sold under different names. It is difficult to tackle this problem for any manufacturer.
- Logistics
Although improving logistical issues have affected the Auto manufacturers. “In the spring of 2004, Volkswagen, Audi, DaimlerChrysler and BMW chose to take matters into their own hands. Recognizing that these problems were too massive to tackle individually, the companies formed a joint logistics partnership called Coreteam to deal with logistics and supply chain issues”. However infrastructure remains clogged due to high economic activity. The sector is fragmented which leads to multiple handling points. This affects the seamless flow of goods.
Currently JLR sends 4 containers on a daily basis to China from the United Kingdom which is also a logistical nightmare. However logistics of manufacturing within China and selling throughout the vast nation may be an added obstacle.
Strategy
China has become Jaguar Land Rover's (JLR) third biggest market after the US and North America, with the gap closing. It intends to sell around 40000 units this year which will be 54% jump over their last year's figure. Clearly China forms a centre of JLR's market strategy and we recommend the following suggestions-
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Product Mix
It should offer its optimum range of models in China and not necessarily all. It should offer a wide range to meet the choices of the customers. For example, Jaguar should not offer all the variants in each of the three categories. It has 4 variants each in its XK and XJ range and 6 variants in its XF model. Reduced number of variants in China will help keep stock and costs down. Extreme performance models like the XFR can be avoided in the short term JLR strategy.
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Product Localization
Chinese customers are different and predominantly have chauffer driven cars. The Chinese luxury car customers are much younger with ages 18 to 34 which account for 30% demand of the luxury cars elsewhere. JLR has understood this and has launched XJ 3.0 and Range Rover Evoque especially based on this. The new Jaguar XJ 3.0 is tailor-made for the new generation of business elites, offering smaller engine capacity and comfortable rear seat space. It has cooling, heating and a massage function in the rear seats. The new XJ 3.0 is also a long wheelbase model. Range Rover Evoque is the lightest vehicle in its range and offers the best fuel economy. The 2.0-liter engine capacity meets market demand for smaller capacity engines in China. The Range Rover Evoque is a true SUV designed for a younger, urban and trendy audience. Customers in China can create their own bespoke Range Rover Evoque with a tempting array of colours, finishes and luxury designs, based on two distinct design themes, Prestige and Dynamic.
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Marketing and Distribution Network
JLR needs to reach the customers in innovative ways especially since it is a late entrant. In 2010, JLR established a separate nationalised sales company to focus on the Chinese market. It has increased its dealers from 40 to 100 by the end of 2010 and expanded its number of central parts distribution centres to 4. Additionally, it has also opened two training centres in Shanghai and Beijing to provide training and for its employees to be able to provide better services to the clients. It should continue its efforts to increase its reach to its consumers. JLR can also introduce the concept of Approved Used Cars that it uses in the Europe to increase the resale value of its cars. This will help increase its market penetration.
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Local Partner and Manufacturing
JLR has shown intent for a JV initially to start with and follow up with the manufacturing facility in China. Audi, BMW and Volvo have set precedence and have been successful in choosing the right partner. However, experience has shown that a company has to be more careful while selecting a partner in China because of the lack of transparency and complexity of state involvement. It should use the technique of Relationship Mapping to determine the off-balanced sheet risks and the relationships that the target organisation and its individuals have with the ecosystem. JLR should hire consultants and invest time in forming relationships to build trust, confidence and gather information for its due diligence. A right partner will help in the effective execution of the other strategies mentioned. Setting up a manufacturing facility will help result in development of local vendors. Sourcing materials from low cost country will bring down material costs which account for major share of total costs.
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Leveraging the differentiated brand image-
JLR is a late entrant after Daimler, BMW, Audi and Lexus; however, the Chinese consumers are looking for a brand that is different. JLR is less commonly seen and therefore will become a compelling reason for consumers to choose it. Its marketing strategy- choice of channels, ambassadors, sponsored events are vital to leverage on this and maintain the exclusive image. Riding on its increased popularity from the success of its new launches in Europe and US and acclaim from auto analysts in last two years, JLR will get better brand acceptance in China. 6. Effective relations with state- JLR has to ensure that it understands the structure of the state and its working. It has to maintain relationships at every level of the concerned government authorities. This is necessary to get the necessary grants and permissions to carry out its business. For it to form a JV, it needs the approval of the relevant government authority. The local government also affects the business through taxes, audits, ad-hoc fees and approvals. E.g. Volvo maintained a great relationship with the state official right throughout in its construction equipment business.
Jaguar Land Rover Expands its presence in China - 25th April 2011 Shanghai Daily
Craze for luxury cars in China, hope for automakers but consumption mentality called flawed 3rd May 2011 Copyright 2011, Xinhua News Agency.
http://www.china.org.cn/business/2011-04/25/content_22433200.htm
http://www.china.org.cn/business/2011-04/25/content_22433200.htm
http://www.autocar.co.uk/News/NewsArticle/AllCars/255353/
Relationship Mapping - Qi Tang
JLR to open sales firm in China to push volumes - 19th June 2010 Press Trust of India.
Brief Note on Chinese Construction Equipment Engineering Industry by Dry Eric Thune April 2011.