Full speed ahead as carmakers shift gears

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Consumer interest in luxury cars helped keep China’s auto industry afloat in the black in 2017, and that trend is expected to continue into the new year.

The big market trends — electrification of vehicles, autonomous driving, connected driving and car sharing — have gained pace and are set to continue defining the auto industry going forward.

Overall, sales in the passenger-car segment slowed this year after double-digit growth in 2016. Still, foreign carmakers were busy launching new vehicles in China, especially luxury cars and sports-utility models. Domestic auto companies, meanwhile, have sought to lift their brand profiles and to expand into higher-priced cars and overseas markets.

So what’s ahead for 2018?

Premium cars

Chinese car buyers have always been enthusiastic about luxury cars, which resulted in expected 16-17 percent sales growth this year. Industry analysts said that rapid pace shows no signs of abating.

“The luxury segment remains the most attractive segment,” said Xu Qian, China head of automotive practice at AlixPartners. “Most luxury brands have shown significant sales increases this year. I expect that momentum to continue in 2018.”

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Bill Peng, a partner with PwC’s Strategy&, agreed with that assessment. Many consumers are likely to choose a luxury vehicle car as their second car, he said. “In major cities, consumers are now in a transition period from first car to second car,” Peng said. “Five years ago, they bought their first car. With an increase in disposable income, they will tend to buy more expensive cars the second time around.”

The “second tier” of the premium car segment is expected to show particularly strong growth in the coming year. “First-tier premium cars include Mercedes-Benz, BMW and Audi,” he said. “But it’s the second-tier brands such as Cadillac, Jaguar Land Rover and Volvo that are set to do especially well, with the introduction of new models. This trend already began this year, with sales of General Motor’s Cadillac as one example. Chinese consumers are willing to try new brands, and if second-tier car brands can offer competitive models, people are likely to buy them.”

Ye Sheng, auto research director at market research firm Ipsos, takes the same view.

“Second-tier luxury brands will see faster growth,” he said. “They have diversified products with different price ranges that appeal to the younger generation. Chinese consumers are looking for distinctiveness when buying vehicles. Many second-tier premium car brands are good at telling the stories behind their brands.”

Domestic carmakers

Domestic carmakers, long the laggards in vehicle sales, are seeking to improve their image with higher-priced models to attract more consumers. Sales of domestically made cars are expected to maintain stable growth next year, but the competition and differentiation between domestic car manufacturers may get fiercer.

“Domestic brands will likely continue to maintain a steady upward trend next year,” said Ye Liang, a Shanghai-based principal of Roland Berger. “Chinese car manufacturers are seeking opportunities to improve themselves in terms of price, quality, after-sales service, product experience and other areas to compete with joint-venture automakers.”

Domestic carmakers are also making inroads overseas. Chinese automaker Zhejiang Geely Holding Group launched its Lynk & Co brand, which will be introduced to the US and Europe, and Great Wall has unveiled a premium brand called WEY.

Indeed, Chinese carmakers are on a roll in research and development to catch up with foreign brands. Those companies failing to innovate will be left behind.

Ti Gong

In order to enhance their advantage, domestic carmakers are also starting to collaborate with one another.

Earlier this month, Chinese auto giants FAW, Dongfeng and Changan signed an agreement on joint technology innovation, industrial value chain operation, global expansion and new business models.

“The strategic alliance of these three companies is a good example of the new trend,” said Ye Liang. “In the future, competitive breakthroughs may be achieved through cooperation. Chinese carmakers are seeking opportunities to work together in areas such as connected vehicles, mobility service and batteries.”

Domestic brands are also positioning themselves in the field of new energy vehicles amid a national drive to encourage pollution-free driving.

“Next year, domestic brands will put more focus on new energy vehicles and entry level products in the luxury segment so that they can elevate their brand image and increase profit margins,” said Xu at AlixPartners.

Government policies

China’s auto market faces the implementation of several policies next year, affecting both manufacturers and buyers.

On January 1, the purchase tax for vehicles with engines below 1.6 liters will be raised from 7.5 percent to 10 percent, according to the Ministry of Finance. Analysts said the change is leading to a small peak in sales at the end of this year and perhaps will result in a slight reduction in car sales for the first half of next year.

New car loan policies also come into force in the new year. China’s central bank and the China Banking Regulatory Commission announced earlier that consumers may borrow from banks up to 85 percent of the cost of a green vehicle for personal use. The ratio for traditional internal combustion engine vehicles is 80 percent.

“The policy is a good sign for new-energy vehicles,” said Roland Berger’s Ye. “It will enlarge the potential consumer base for new-energy vehicles and prompt the sales of more green cars, even in the premium segment. The new policy may also further promote the development of car sharing because it reduces the initial investment costs for companies operating in that realm.”