Across The Border

Domestic car makers flourish on strong demand from lower-tier cities

China’s 1.4 billion population owned 190 million cars last year, according to the Ministry of Public Security, and the number is expected to keep accelerating

PUBLISHED : Thursday, 09 March, 2017, 7:57pm
UPDATED : Thursday, 09 March, 2017, 10:30pm

“I’d rather cry in a BWM, than smile on a bicycle.”

This was a meme put forward by a woman contestant in a Chinese dating show – but might that change in the very near future, from the luxurious German car marque, to a “Made in China” brand?

After years of fighting for market share with foreign heavyweights, Chinese car makes are now being bought in greater numbers by domestic drivers, especially people living in second- or lower-tier cities.

“Chinese brands had only 30 per cent the market share in mid-2012, mostly concentrated on the low-end segment,” according to Paul Gong and Yizhe Wang, analysts at Citi in a recent research note.

“But this has been growing since 2014, “ the note said. “Within just two years, the Chinese brand market share has hit 40 per cent.”

China’s 1.4 billion population owned 190 million cars last year, according to the Ministry of Public Security, and the number is expected to keep accelerating.

Many still think Chinese customers with the real spending power only means residents living in its most affluent cities including Beijing and Shanghai, But just under half the nation’s population actually live in the tier-four and -five cities, and they own a growing 26 per cent of the cars on the road.

More importantly, that 49 per cent of the total population, or almost 700 million people, are becoming more willing to spend, and spend big.

The country’s customer base has gradually been shifting, from elite tier-one and -two cities, to more working class tier-four or even -five cities, the Citi note said.

In China, the tier system is used to classify its 660 cities.

Traditionally, Beijing, Shanghai, Guangzhou and Shenzhen are considered to be tier-one, thanks not only to their size but also the fact they have the highest incomes.

Provincial capitals and special administrative cities such as Chongqing, Hangzhou and Tianjin are usually classed in the second-tier, while prefecture level or county-level capitals including Lanzhou, Guizhou and Sanya are generally considered to be in the third-tier or lower.

Riding on the back of this fast-changing, and wealthier customer base, central and western Chinese regions have now been continuously outpacing the traditionally richer coastal cities in terms of car sales for the past three years, according to Gong and Wang.

Geely Automobile, the Chinese carmaker whose parent owns the Swedish brand Volvo, is also targeting stronger sales at home.

In a recent interview with South China Morning Post, Gui Shengyue, the company’s chief executive, said: “Foreign brands are declining in China, and the future of the country’s domestic car market lies in the hands of indigenous players that offer better value for money.”

Carmaker Geely has its headlights firmly set on the home market

Wang Mao is a 27-year-old from Luzhou – a prefecture-level city in the southeast of Sichuan Province – and becoming the typical, aspirational Chinese car owner.

He drives a home-built BYD electric vehicle, which also chimes with the Chinese government’s promotion of eco-friendly cars.

Luzhou was “hardly even a third-tier city in the past,”he says.

However, with the country’s economy expanding fast, many of his fellow residents of the same age in the lesser-known city have started treating themselves to a smart, new, top-of-the-range set of wheels. And they are Chinese brands.

While admitting “peer pressure” adds to the desire, he and others in lower-tier cities still look for value-for-money.

“But I don’t feel inferior having a BYD rather than a BWM,” he said. “My main concern is that my car has enough space inside and is a good price.”

BYDs cost between 120,000 yuan (US$17,370) and 300,000 yuan. Wang’s annual pre-tax income is around 130.000 yuan a year, so a new car is a big commitment, on top of the 60 per cent of his salary used to pay back his mortgage.

He would like to spend more on other personal needs, but “having both a nice property and a car”, he adds, is a Chinese euphemism for being rich.

The global business advisory firm McKinsey now predicts as China’s local demand grows, it expects a number of Chinese automakers to consolidate, which should make them even better able to serve the domestic market.

After that, it adds, they will be looking to make an impact globally – perhaps through joint ventures and partnerships with some of the world’s biggest players.