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Brand or Sales? Executive Departures Reflect Dilemma in Auto Brand Development

Date:06-15 16:07 Authour:Zhu Shiyun

Are these executives leaving for personal reasons or because of the loss of “voice”? As market growth slows down, car companies, especially young luxury brands, are caught in a dilemma between targeting brand image and sales numbers. Which is the best way out?

Brand or Sales? Executive Departures Reflect Dilemma in Auto Brand Development

For car companies, especially young luxury brands, which is the best way out?

Since the beginning of 2016, China’s auto market seems to have entered a ‘new spring’. However, several top sales executives who had led their brands out of the ‘cold spell’, and even achieved good results, have decided to leave their posts. The wave of resignations started last year when Phil Murtaugh and Sun Xiaodong left Qoros. This January, Daniel Kirchert, the then General Manager of Dongfeng Infiniti, left office. Since then, several Dongfeng Infiniti executives have either left the company or been transferred to other posts, including Sales Director He Kuo, PR Superintendent Ding Qingfen, and Marketing and PR Director Liu Xu. Fu Qiang, president and CEO of Volvo China, also chose to leave his company to join an Internet auto maker.

Are these executives leaving for personal reasons or because of the loss of “voice”? As market growth slows down, car companies, especially young luxury brands, are caught in a dilemma between targeting brand image and sales numbers. Which is the best way out?

Executives leave office.

On June 1st, news leaked out that Liu Xu, Marketing and PR Director of Dongfeng Infiniti, would be transferred to head Infiniti global content marketing on September 1st. He would be responsible for global content marketing and management, and social media marketing. The departure of Daniel Kirchert, former General Manager of Dongfeng Infiniti took place just four months ago. In May, He Kuo, former Sales Director of Dongfeng Infiniti, also resigned and become GM of the Southern Division of Beijing Mercedes-Benz Sales Service Co., Ltd.

An industry veteran told China Auto: “Previously, there were rumors that Liu Xu would go to BMW. In the end, he did not leave. It means he still wanted to work for Infiniti. But apparently, there is not enough room for him to exploit his talent in the Chinese market. The transfer of Liu Xu indicates that Dongfeng Infiniti’s team for implementing brand marketing strategy has been completely disbanded, and the company might alter its marketing strategy in the future.”

Some evidence seems to support this view.

Daniel Kirchert’s replacement, Wu Bijia, described herself as a “successor”, and said: “There will be no major changes to our development policy. The only changes will be minor adjustments with market fluctuations in China.” However, she herself was replaced very quickly. In April, Lu Yi, former Vice President at BMW China Automotive Trading, was appointed GM of Dongfeng Infiniti.

In parallel with these rapid changes of personnel, Infiniti’s price war intensified. Tentative enquiries by Auto China suggest that new Dongfeng Infiniti cars are being offered at a discount rate at more than RMB 50,000 yuan against the prices offered by dealers to the media. In contrast, the discount rate of Lexus is no more than RMB 10,000 yuan. Our industry source told Auto China: “The discount rate from Infiniti is only lower than Audi and BMW. For a small brand, it means giving dealers a huge amount of subsidy, leaving less money available for brand marketing. In fact, Infiniti’s brand promotion has started to weaken following localization. The generous marketing budget of the past has been significantly reduced.”

"If the policy focuses on sales, marketing, and subsidizing dealers, the brand will have sustainability issues. It may follow in the footsteps of DS.”

In 2013, DS was localized in China. The brand planned to reach an annual sales target of 200,000 by 2015. However, after two years, its sales lagged far behind the goal. In 2014 DS sold 26,700 cars in China; last year it sold 27,000. Auto China wrote an article on this issue. The article points out that the sales target of 200,000 was a strategic mistake by DS in China. It distorted the behavior of all DS brand managers. Seeking short-term benefits and quick returns became the chosen option. Thus, all reasonable production plans and marketing strategies were inevitably distorted.

The failure by DS to meet sales targets in the short term led to the transfer of its former vice president Cai Jianjun. After that, DS chose to cut almost all brand marketing spend, and went all out for promotion. Not only did they fail to achieve the expected sales volume, they were hit with a decline in brand image and were marginalized in the luxury car market. “This was the problem with DS. We wonder if Infiniti will repeat the mistake.”

Shareholders call the shots.

In 2013, Daniel Kirchert, the then Brilliance Senior Vice-President, joined the troubled Infiniti, starting the three-year Infiniti “dare to love” brand marketing campaign.

According to our industry source: “Without the generous brand marketing before the localization, it would not have been possible for domestic products to contribute half of Infiniti’s sales in China once they hit the market. But for previous efforts by Daniel, Infiniti might be considered as Japanese cars in China-made shells in spite of localization.”

In the first quarter of this year, Infiniti’s global sales reached a record high of 57,200 cars. China contributed more than 16% of the sales, i.e. 9,610, a year-on-year increase of 21.7%. But Infiniti’s sales in China plunged in April to only 1,668. An official statement blamed product recall for the decline. But other voices have pointed the finger at Daniel, claiming that the fall was a backlash from dealers under the pressure of destocking.

Again according to our source: “Outsiders have a limited view. Sale executives cannot decide whether to destock or to take a sales-oriented approach. That decision is up to the headquarters and the two JVs. Sales executives tend to be conservative about sales targets, particularly in a situation where the Chinese market has developed into an oversupplied buyer’s market.”

High sales expectations and the pressure of destocking on dealers are strong reasons for excellent marketing professional managers to leave office. The departures of Phil Murtaugh and Sun Xiaojun from Qoros, Cai Jianjun from DS, and Fu Qiang from Volvo, are all associated with these two factors.

A professional analyst who keeps close tabs on luxury manufacturers explained to Auto China: “The brand and marketing managers of sales companies are put in an awkward position. On the one hand, they have to meet sales targets set by the headquarters; on the other hand, they have to withstand profit pressure from the dealers. Currently the business is profit-oriented, with shareholders calling the shots. Marketing professionals have no opportunity to display their talents. This is the main reason why executives are leaving.”

The analyst told Auto China that the years between 2006 and 2013 marked a golden period for major car companies investing in China. “They were willing to spend money on brand marketing.” However, with the slowdown in the growth of China’s auto market that began in 2014, shareholders have become ever more concerned with financial results and profitability.

A report from analysts Roland Berger shows that in 2014, the car companies’ ROIC was only 8%, less than other heavy industries. The operating margins of the automotive industry also lagged behind other industries.

According to the report, many auto makers are making money mainly from China. Taking tax and spare parts sales and other factors into account, the value of the market in China is up to half of net profit. However, with increased pricing pressures in the future, return on sales in China will be normalized and will fall. Moreover, with the sales of more compact cars in the cities and their suburbs, sales of highly profitable large cars will decline, further exacerbating the business problems of auto makers.

Under these pressures, auto makers will definitely move to cut costs. Because it doesn’t have an instant impact, brand marketing spend is likely to become the first victim.

Auto China has previously had access to the bidding process for the brand marketing plan of a first tier luxury brand. There are two rounds of bidding. The first round is business bidding. The three companies with the best plans will win and enter the second round of commercial bidding. In the second round, another three companies will be introduced. The company offering the lowest price will be awarded the contract. “Procurement has the final say.”

According to our analyst source the practice is quite common in the industry. “Everything is calculated and oriented to sales targets and profits… This will eventually hurt the brand. Nowadays, products are very similar to each other. Branding is increasingly influencing buyers and their decision making process. If the brand is damaged, sales are likely to suffer.”

The industry veteran echoed this analysis. A reduction in brand spending is likely to be fatal for luxury brands. Luxury brands must continue to build a good brand image. Brand premium is ultimately based on market image and the sense of presence.

We cannot have brand and sales together?

How long does it take for a luxury brand to build its brand?

Although BBA were lucky to have entered the Chinese market at the right time, their success was not achieved overnight. BMW spent 12 years on localization. During this period, Christoph Stark, former president of BMW Greater China, took eight years to transform the brand image from “sheer driving pleasure” to “Joy of BMW”. Thanks to the transformation, BMW’s sales rocketed from 15,000 to 300,000. It took ten full years for Audi to establish a brand image equal to that of Mercedes-Benz and BMW. Even now, the top 3 German brands are promoting brand image at all costs. For young luxury brands, a good brand image is a must.

Our industry veteran told China Auto that the problem is how to balance sales and brand marketing in a difficult financial conditions: “For a young brand, it’s too early to expect returns. Because its brand image is still very immature, without promotion in the market, it is likely to be forgotten. For such brands, marketing spend cannot be subsumed into annual sales costs. Instead, it should be counted as a necessary long-term investment, which will pay itself back in the future.”

Unfortunately, as the Chinese auto market becomes increasingly oversupplied, intense price wars and huge dealer subsidies are now commonplace. Marketing and PR teams are being turned into vassals of the sales department within the enterprise. Contribution to sales is the only assessment criteria on KPI.

But there is one “alien” in the market: Selling only imported vehicles, the luxury brand sold 32,500 cars from January to April, a year-on-year increase of 40.1%. In April alone its sales exceeded that of Jaguar Land Rover, becoming one of the top 4 luxury brands in Chinese market. Nevertheless, the current inventory of Lexus only lasts 0.4 month, far below the 1.54 months average stock coefficient among auto dealers in April. The brand also has the most stable price.

Tetsuya Ezumi, executive vice-president of Lexus China told Auto China: “This year, Lexus has not paid any incentives. We want to create a business environment in which dealers can achieve good returns without relying on rebates from auto makers. From their point of view, selling cars at a much lower price before getting to know how much rebate they will receive from auto makers to make up the deficit is a very destabilizing process. Among all auto makers in China, I am the only executive to make dealers’ profits one of my KPIs.”

Our industry source claims that the biggest problem in the market is excessive concern about sales. Lexus has had the good sense to figure this out for itself. From a market-driven stance, it straightened out its business relationships from parts suppliers to dealers, and actually responded to the needs of the market. “The market is cruel. Companies will have to completely abandon the conventional business-driven strategy and resort to demand-driven strategy. This is an old cliché. But among the luxury brands, only Lexus has completed the transformation and earned the market returns.”

Our veteran also pointed out that the Lexus transformation is inseparable from its short logistics cycle. As early as 2005, Audi tried to adopt a make-to-order system. Their effort ended in failure due to the slow speed of international logistics. “But new opportunities might emerge in the future.”

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