A tankful of potential

Editor’s note: Barton Lee is managing director of East Marketing Research Automobile Research Group, Shanghai, China.  David Tatterson is the firm’s vice president, North American sales.

China has been described as the next big potential automobile market in the world. Even with the recent worldwide recession, China’s domestic automobile market has grown. The estimated market size in 2003 was 4.2 million units sold, representing about $5 billion in sales revenue. This figure is up from 2002 by 30 percent. As a result many of the automobile giants such as Ford, GM, and Toyota have entered China’s market in the last several years. Some manufacturers such as VW and Chrysler have been there for some time.

Our firm, East Marketing Research (EMR), has explored the Chinese automobile market, collecting brand preference, demographic and purchase intent data on current and potential automobile owners. The findings indicate that the fortunes of the automobile in China are rising with the growth of the middle class.

EMR conducted random telephone interviews of 848 current and potential car owners with age range from 18 to 49. The interviewees in the groups were 244 and 604, respectively. The interviews, conducted in December 2003, covered four cities: Beijing, Shanghai, Guangzhou and Chengdu.

Results

  • Brand preferences

The Chinese automobile consumer has a wide range of vehicle brands from which to choose. These include imported brands such as:

- German, such as VW, Audi, Mercedes-Benz and BMW;

- Japanese, such as Toyota, Honda, Nissan, Mazda and Isuzu;

- American, such as GM, Daimler-Chrysler and Ford;

- other European cars;

- Korean.

There are also domestically produced brands to consider. These include Guangzhou Honda, Shanghai VW and Shanghai GM.

Among all respondents (both current owners and potential buyers) the preference is for a foreign brand: 26.4 percent would choose German; 15.1 percent would choose Japanese; 7 percent would choose American. Only 11.7 percent would choose domestic Chinese. Perhaps the most interesting finding is that 44.1 percent of consumers were uncertain about their next brand - a fact that provides a great incentive for aspiring automobile brands in the Chinese market.

The other interesting finding is that German - and not Japanese or American - automobiles dominate brand preference. These results were confirmed more recently in face-to-face interviews at the June 2004 Beijing Auto Show. Show attendees preferred German brands (Mercedes, BMW and VW) over Japanese and U.S. brands. The attendees reported they were drawn to the German brands because of style and a reputation for quality construction. It probably also helps that German automobile manufacturers have been in China for a long time. Shanghai-Volkswagen is one of the oldest automobile joint ventures in China.

Turning to the Chinese domestic brands, the demographics of those thinking of buying a domestic automobile are young and low-to-middle-income. Among 18-to-29-year-olds, 47 percent prefer a domestic brand. Among respondents with an annual income less than $6,000, 55 percent prefer a domestic brand. Thus, the target for the domestic brand automobile is fairly well defined.

Among the potential buyer group (Figure 1), the undecideds dominate, with 44 percent uncertain as to the brand they would purchase. Demographics show this uncertain group to be middle-income with annual income between $3,000 and $9,000; median $5,900.

The other striking feature of Figure 1 is that there is no dominant single brand among those who have decided on a brand. Most brands appeal to less than 5 percent of potential buyers. Domestic brands (d) are intermixed with foreign brands. These are the characteristics of a very competitive market. However, in total, German brands (Jetta, Santana, VW, VW Polo and Passat) dominate.

The picture is clearer among the current owner group. Figure 2 shows this group’s brand preferences. Once again there is a large uncertain group, 35 percent. However, among the brands selected, foreign brands are clearly preferred. BMW, Buick and Audi are the top selection. This result suggests that current owners intend to move up in status with their next purchase. With a median annual income of $7,800, they are in a better financial position to move up. Once again, in total, German brands dominate.

• The impact of price

As with the purchase of any capital item, price is an important consideration. Figure 3 shows the price range current owners and potential buyers are considering for their next automobile purchase.

The $12,000-to-$18,000 price range is the most popular for both groups. Approximately one-third of respondents in both groups picked this range. However, the distributions vary significantly. As suggested above, current owners are looking to purchase more expensive automobiles in the future. About 28 percent are considering cars in the $24,000+ range. These results reflect the fact that current automobile owners are more affluent than potential automobile owners. The median income of current owners is $7,800/year versus $5,900/year for potential automobile owners. Chinese automobile consumers purchase a low-priced starter vehicle and then upgrade as their economic situation allows.

• Demographic considerations

Marital status is an important consideration in the purchase of an automobile for both the current owner and potential buyer. Of the group of current owners, 74 percent are married and 26 percent are single. Of potential buyers, 67.3 percent are married and 32.7 percent are single. Dual income families are in a better position to purchase an automobile than single individuals.

• Income distribution

Figure 4 shows the annual income distributions for the two groups. As discussed above, the owners of automobiles have higher income levels.

• Age distribution

In terms of age distribution of the two groups (Figure 5), current owners are concentrated in the 30-to-39-year-old range, almost 50 percent of respondents. This group is old enough to have established their careers and income but not old enough to have suffered the ill effects of the Cultural Revolution on their education and income level.

Growing fast

A number of key conclusions can be drawn from this study.

• The Chinese automobile market is growing fast.

• Chinese consumers prefer foreign brands but domestic brands appeal as starter vehicles to younger and lower-income consumers.

• No one brand dominates the market but collectively German automobile brands are dominant.

• As the Chinese consumer becomes more affluent, their desire for high-end automobiles increases.

• The automobile market in China is very competitive with many brands available and a large pool of consumer uncertain as to which brand they will purchase.

ARTICLE SIDEBAR

Japan, U.S. and China in favor with Chinese consumers

Japan, the U.S. and China are the most favored nations among Chinese consumers for supplying computers and consumer electronics, according to a national, urban-rural survey.

The survey found that the three countries are ranked first, second and third in each product category, well ahead of other nations including Britain, South Korea and other European countries.

The bi-annual survey, “China in Transition to a Market Economy,” is a nationally representative consumer sample survey of all 31 mainland China’s provinces (except Tibet) and gives equal sampling weight to cities, towns and villages outside the country’s first- and second-tier cities.

The latest wave found that almost a quarter (24 percent) of Chinese people rank Japan the best country for computers and consumer electronics, ahead of the U.S., which is favored by nearly a fifth (18 percent) and China which is favored by slightly more than one in 10 persons (12 percent).

The survey, which annually interviews 6,000 consumers, 3,000 in urban areas and 3,000 in rural areas, collects basic demographic and consumer ownership and attitudinal data. Each survey is based on a multi-stage probability sample from which 300 locations drawn, half in urban and half in rural areas.

“The results have implications for all producers trading in China,” says David Bottomley, managing director of Hong Kong-based Asia Marketing Research Directions, which conducted the bi-annual survey with Shanghai’s TC Research. “Apart from the big three - Japan, the U.S. and China - other countries are facing a major perception barrier in China’s developing markets.”

Population shifts mean marketing strategy changes

But, say the researchers, all Asian countries and their producers are also facing major socio-demographic changes with a continual, large-scale migration of people from villages and towns to the big cities, attracted by higher wages.

Survey results show that indicative monthly incomes in the major cities are about two-and-a-half times those in villages (2,080 yuan compared with 860 yuan) and more than 30 percent greater than in the towns and about 45 percent greater than in rural areas administered by cities (1,570 yuan and 1,430 yuan, respectively). The major cities, like nations, are building their economies fast on the back of the “internal” migrants, say the researchers.

While established marketing techniques may still be working in the mature markets of those cities - it’s 25 years since China adopted its open-door policy - the migration means that different strategies may need to be developed to tackle the new waves of consumers.

But the data also show that there are opportunities in the rural areas on the doorsteps of the major cities, in smaller cities with populations less than a million people and in villages with populations less than 50,000 people because rising income levels are increasing people’s disposable incomes.

The results show that rural areas - those surrounding cities and villages - currently have the lowest ownership rates for consumer goods such as mobile telephones, computers, cameras, camcorders and electronic game players.

Mobile phones: Only 13 percent of rural residents and 24 percent of residents in rural areas surrounding cities own a mobile phone, compared with 51 percent in the major cities and 44 percent in towns. (These figures do not include the small but significant percentages of people who share usage).

PCs/laptops: Only 3 percent of rural households and 9 percent in rural areas surrounding cities have personal or laptop computers compared with 34 percent in the major cities and 24 percent in towns.

Cameras/electronic games: Ownership is also substantially lower in households in rural areas than in cities and towns.

Bicycle ownership: Close to being the same - nearly eight in every 10 (78 percent) of households own a bike, although the percentage will fall in cities where increasingly bicycles are being banned from city centers.

Cars: Despite high costs to put a new car on the road, the new private car market is booming. Buying has been accelerated by the availability of bank loans for purchases, the survey indicating that already 4 percent of homes have a car for private use.

Motorbike/scooter: The only consumer products covered by the survey for which ownership is, understandably, higher in rural areas than in cities and towns - 34 percent of rural households and 44 percent in rural areas surrounding cities own one compared with 27 percent in cities and 38 percent in towns.

Credit cards: Rural households are not big owners of credit cards - in practice, debit cards - only about one in six (16 percent) having a national card compared with 37 percent in rural areas surrounding cities, 42 percent in towns and 64 percent in cities.