China’s domestic car brands start to shine as SUVs set to drive growth

PUBLISHED : Friday, 23 June, 2017, 3:55pm
UPDATED : Friday, 23 June, 2017, 10:38pm

After weighing his options, Guangdong resident Zhihao Huang, 28, decided to go for the GAC Trumpchi instead of a Honda Accord in February.

For slightly over 210,000 yuan (US$30,730), he thought GAC’s flagship sport utility vehicle, with a turbocharged four-cylinder engine, offered more bang for the buck.

Besides, many people he knows, including his younger brother, have recently bought a Trumpchi.

“Ten years ago there were virtually no domestic brands in my community’s car park,” said Huang. “Now about half are domestic brands and half are joint venture brands.”

It has been a long time coming, but Chinese car brands are starting to dominate the mainland auto market. In fact, by 2020 over half of all SUVs on the local streets are projected to be domestic brands, according to a new Morgan Stanley report by analysts including Jack Yeung.

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The analysts said China’s car industry is “on the cusp of a structural change”.

The investment bank forecasts that annual passenger vehicle sales in China will grow at a robust 6 per cent in the coming years, with sport utility vehicles (SUV) being the major growth driver.

Over the last decade, China’s car industry was able to sustain a spectacular 17 per cent annual growth rate. As a result, penetration rates increased significantly, from about 20 units per thousand people in 2006 to over 100 units per thousand last year.

China has become both the world’s largest car market and the world’s largest producer of vehicles. And SUVs have become the darling of the market.

We expect SUVs will continue to be the major growth driver of China’s auto industry
Morgan Stanley analysts

“We expect SUVs will continue to be the major growth driver of China’s auto industry and gain share from sedans and MPVs,” Morgan Stanley analysts said.

It forecast that SUV sales will rise at a compound annual rate of 16 per cent from 2016 to 2020. By 2020, domestic automakers will account for over 50 per cent of market share in the SUV segment.

The investment bank is particularly bullish on SAIC’s Roewe and GAC’s Trumpchi, saying they are “likely to be able to outpace other domestic brands” by leveraging their partnerships with joint venture brands. SAIC partners with VW and GM, while GAC has joint ventures with Fiat, Toyota and Honda.

“Based on our observations of the smartphone industry, we think having an abundant group resource and tech support might allow [Roewe and Trumpchi] to make more steady inroads into the mid-to-high-end market, similar to Huawei’s case,” analysts said.

Huawei and Xiaomi caught up with foreign smartphone brands by upgrading their specifications and sticking to a consistent single-branding strategy.

Meanwhile, the popularity of domestic SUVs still primarily lies with lower priced models.

Domestic brands accounted for 80 per cent of China’s low-to-mid-range SUV market last year while joint venture brands accounted for about 90 per cent of the mid-to-high-end SUV market, the Morgan Stanley analysts said.

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Yuxuan Ye, 26, from Zhongshan in Guangdong province, purchased a Roewe RX5 for about 160,000 yuan in March, after also considering a Honda Civic.

“For SUVs priced under 200,000 yuan, domestic brands are a lot more competitive than the joint venture ones,” he said. “The hit models people have talked about in recent years are mostly those of domestic brands. I have always rooted for Chinese brands, so in terms of brand names Roewe is no problem with me.”

Ye added that another advantage for domestic brands is that maintenance costs are slightly lower.

Morgan Stanley’s report also pointed out that the 27 to 32 year old age group has lower loyalty and recognition of joint venture brands.

Trumpchi owner Huang said designs by Chinese carmakers are now on par with international players. “The old domestic cars made by BYD and Geely were hideous,” he said, “It’s important to young buyers that the appearance of the car is good.”

He added that the SUVs of domestic brands appeal to buyers because Chinese companies were perceived to have had success in making quality minivans in the past.

Analysts from Morgan Stanley estimated that total mainland sales of low-to-mid-range SUVs reached 5 million units last year, despite sales growth in the segment slowing to 42 per cent in 2016 from 82 per cent in 2015.

“With additional low-to-mid-range SUV model launches, we expect competition in this segment will get more intense in the next few years, and this should drag down the profitability of domestic brands,” the analysts said.

Besides SAIC and GAC, Morgan Stanley analysts also highlighted the success of other domestic carmakers including Great Wall and Geely, but expressed reservations regarding their multibranding strategy.

Great Wall and Geely launched their respective high-end brands, WEY and Link & Co, in the 150-200,000 yuan market segment in addition to their previous focus on the sub-150,000 yuan segment, which “incurs greater near-term operational risks,” the analysts said.

“Lessons learned from the handset and smartphone market suggest a dual-branding strategy cannot guarantee a higher probability of success, evidenced by poor sales of Sagem’s premium smartphone, Bird, and Alcatel’s TCL,” they added.