Chinese auto brands must adapt approach

29 July 2010

BEIJING: A global auto brand is unlikely to emerge from China if companies in this sector fail to adapt to a range of local and international trends.

In a new report, McKinsey, the consultancy, argued that carmakers in the country will need to follow a nuanced strategy if they are to gain a meaningful foothold overseas.

Geely set a precedent having recently purchased its Swedish counterpart Volvo from Ford, and has also outlined the objective of selling two million units in the US by 2015.

However, while IHS Global Insight, the research firm, has predicted the share held Chinese marques in areas like the US and Western Europe is due to double by 2020, this figure will still only stand at 0.2%.

In the first instance, McKinsey said, negative quality perceptions in these regions must be overcome to reach any kind of criticial mass.

Chinese companies should also establish the "right frame of reference" to precisely quantify their specific strengths and weaknesses.

To take just one example, manufacturers headquartered in the world's most populous nation enjoy a 35% cost advantage linked to factors such as lower labour rates and cheaper commodities.

Wider forces that could be made to work in favour of Chinese enterprises include the growing financial muscle of emerging economies.

Tapping in to the rising importance of green issues may also mean these businesses "leapfrog" existing engine technology to deliver highly fuel-efficient or electric models, with BYD already moving in this direction.

Governmental grants supporting this idea, and the introduction of practical incentives for drivers in China, like preferential traffic lanes, should then exert a multiplier effect.

"Such moves might inspire a large-scale consumer preference for alternative-technology vehicles, allowing Chinese automakers to achieve the required scale to begin mass production," McKinsey said.

"This, in turn, would give China's carmakers a cost and knowledge advantage that might help them pass over competitors in the developed world."

Another viable possibility is the acquisition of one of the top five players in the segment, such as General Motors, Toyota or Ford.

"This move would speed the transfer of best practices to local Chinese companies, thus helping them to move rapidly up the learning curve, to improve their brand image, and to develop a more sophisticated understanding of consumer needs," McKinsey argued.

For manufacturers focusing on organic growth, Hyundai constitutes a particularly useful benchmark to measure their progress against.

The Korean firm was associated with poor quality when it first entered the US in 1980, at which time it was generating similar volume sales to those of many Chinese marques at present.

It is now "quite successful", but only after spending two decades steadfastly competing on price, building a sales network and improving brand equity.

Data sourced from McKinsey; additional content by Warc staff