Automakers face challenges in China

23 November 2012

BEIJING: Automotive sales are set for further growth in China, but brand owners will have to tackle falling prices, increased marketing costs and the need for geographical expansion, a study has suggested.

McKinsey, the consultancy, said passenger vehicle sales should rise by 8% per year from 2011 to 2020, hitting 22m overall, and therefore surpassing combined figures for North America and Europe.

While this pace of acceleration is anticipated to lag the 24% average growth recorded each year from 2005 to 2010, China is still pegged to deliver 35% of the industry's global growth from 2011 to 2020.

In all, some 150 out of every 1,000 people across China should own a car by the latter date, reaching 200 in urban areas and just 70 in rural markets. The nationwide total stood at only 85 in 2011.

Urbanisation will aid this process, with 60% of people living in cities by 2020, versus roughly 50% today. The number of households earning RMB80k a year is also due to rise from 17% to 58%.

"Higher incomes plus low auto penetrations suggest that the passenger car market has not reached the saturation level," the study suggested.

Sedans will take 70% of the market by 2020, with SUVs on 20%. Third and fourth tier cities should yield 60% of new sales by the close of the forecast period, measured against 40% at present.

According to McKinsey's estimates, the ten largest global automakers have spent $38.4bn in China during the last two years as they bid to tap into the country's growth potential.

Prices, however, will fall by a compound annual rate of 4% and 6%, depending on the category, in the last decade, and are "expected to decline over the next five to ten years," the study said.

Intense competition will also force manufacturers to add more features and boost their marketing spend, pressurising margin levels.

An unpredictable regulatory climate is another issue, alongside greater official restrictions on ownership. Beijing, Guangzhou and Shanghai all introduced such limits, and McKinsey said 20 more cities will by 2020.

The firm also divided the market into 25 distinct regional "clusters" with different priorities. Buyers in Shanghai and Fuzhou are thus "more sensitive to price" while their peers in Hangzhou and Shandong favour "external styling".

Data sourced from Wall Street Journal, Reuters, Bloomberg, China Daily; additional content by Warc staff