Exponential growth in the Chinese auto market is a thing of the past. The explosive growth of recent history was primed by economic policies created to stimulate consumption along with strong economic expansion fueled by foreign investment. With the expiration of subsidies, growing interest rates and more rapid inflation, consumption has slowed.
The compound annual growth rate for the Chinese auto market is estimated at 7.4 percent between 2011 and 2015. Comparatively, the U.S. growth rate is 7.2 percent.
Ganesh Relekar, Director, Automotive Industry, Nielsen Greater China, discussed the issues and challenges facing the automotive industry and outlined the strategies necessary to meet the emerging demand of Chinese consumers. Speaking at Nielsen’s Greater China Consumer 360 Conference in Beijing, Relekar said that understanding the changing demographic landscape and knowing where and how to reach consumers is critically important as these changes will impact automotive demand and expectations.
Chinese auto makers face three major challenges: Finding the right demand in market, reaching consumers effectively and creating optimal distribution systems.
Evolutionary consumer dynamics are reshaping the vehicle demand structure. By 2020, China’s population in the 45 and older age group will increase by 118 million, while the 25–44 age group will decrease by 22 million. Such a shift in age structure implies a growing base of wealthy consumers with an increased need to trade up.
A few factors will affect future car-buying behavior considerably. Industry overcapacity issues will intensify in the next five years, growing from eight percent in 2011 to an estimated 21 percent in 2015. This oversupply will fuel increased competition and drive down car prices.
Surging fuel prices will also affect consumers’ purchasing decisions. As gas prices increase, so will the demand for hybrid and smaller vehicles. With hundreds of models to choose from, savvy consumers are looking not only for high-performance, fuel-efficient vehicles, but good-looking ones too.
The past decade’s luxury car sales growth more than doubled the pace of the total market. Market size of luxury vehicles is close to one million and expected to double in the next five years. However, with rising wealth and rising aspiration, the market is growing heterogeneously.
As the competition and demand landscape is changing, Nielsen classified luxury car consumers into five groups with a number of attitudinal and behavioral variables. Each group showed distinctive differences in car needs, media habits and lifestyles. For instance, more Value Seekers (34%) and Business Leaders (28%) are interested in buying a hybrid vehicle than other segments.
In the future, Value Seekers and Image Enhancers will represent higher volume opportunities, as they are predominantly younger or female buyers looking for luxury A/B segment vehicles (e.g., MB B-class, BMW 3 series, etc.). Brand Leaders and Technology Upgraders represent higher profitable opportunities, as these consumers are about 35 years old, intending for luxury C/D segment vehicles (e.g. Audi A6L, Lexus LS600).
Increased marketing costs are posing a real challenge to auto marketers. Nielsen reports the average cost to air a single commercial increased 63 percent in five years from 9,000CNY in 2007 to 14,000CNY in 2011. Auto marketers are actively complementing traditional TV and print campaigns with online advertising strategies. In fact, the Q2 2011 year-on-year growth rate of online advertising (18%) exceeded the growth rate of traditional media (14%).
Regardless of the medium, effective automotive advertising effectiveness in an era of heightened marketing costs must resonate with the audience using compelling creative that is delivered in engaging programming. Nielsen research shows that developing a creative that connects with the viewer exceeded brand recall norms:
Which markets are ripe for auto expansion? What is the city capacity for distribution and what locations are most successful? Taking into account factors such as demographics, income, competitive landscape, cartography, etc., a fact-based expansion strategy can be developed that pinpoints the hot-spot cities with the highest probability of distribution success.
In order to achieve success in a single-digit growth market, China’s auto makers need to devise a new winning formula, one that focuses on maximizing consumer value through continual product and marketing innovations. At the core of this formula is listening to what consumers are saying and watching their behavior.