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SUV Boom: How do Domestic Brands Respond to the JV Challenge?

Date:05-19 10:19 Source:21st Century Business Herald Authour:Zhou Kaiping

Domestic brands need to change their ways, and that will pose a huge challenge. Most of the research firms interviewed by 21st Century Business Herald hold that it will be difficult for domestic brands to raise their prices if they continue to rely on measures to improve cost performance such as more models, providing better setup, lengthening wheel base, and enlarging interior space.

SUV Boom: How do Domestic Brands Respond to the JV Challenge?

It will be difficult for domestic brands to raise their prices if they continue to rely on measures to improve cost performance

In the last year or two, there have been high expectations of Changan Automobile. One of the reasons is the launch of a domestic brand SUV CS75, which showed the potential to be the best-selling car on the market. In January, more than 27,000 were sold. However, the monthly sales dropped to 12,000 in April, down by 47% from March.

Generally speaking, the fluctuation in monthly sales of a single model does not have a significant impact on the overall performance of an automaker. But the market is currently focused on the underlying problems behind an unprecedented boom for domestic brands in the SUV market. For example, the Great Wall H6, the longtime leader of SUV sales in the domestic auto market, was suddenly lowered in price.

In contrast, this year saw JV brands, after a few years of adjustment, begin to substantially increase the number of SUV models introduced to the market. JV brands now cover most of the market segments previously occupied by domestic brands. The ensuing price drop will constitute a serious challenge to domestic brands.

Domestic brands need to change their ways, and that will pose a huge challenge. Most of the research firms interviewed by 21st Century Business Herald hold that it will be difficult for domestic brands to raise their prices if they continue to rely on measures to improve cost performance such as more models, providing better setup, lengthening wheel base, and enlarging interior space.

JV Brands Wake Up

At the emergence of the SUV market, domestic brands made quick decisions and developed more models. They quickly gained a much higher market share than they had in other segments.In 2013 there were 62 domestic SUV models on the market, accounting for 37.4% of the entire SUV market. At that time, domestic SUVs were still small-scale, holding similar shares to those of passenger cars.Only a few domestic SUVs like the Great Wall made it into the top ten bestsellers..

But over the last two years, many domestic brands saw the opportunity to expand in the SUV market. Almost all of them were secretly investing in related models and intensifying their R&D.

2014 witnessed the launch of a large number of domestic SUVs. A year later, there were 110 domestic SUV models, nearly twice the number in 2013. JV automakerswere slow to react. Constrained by lengthy decision-making processes, strict R&D control, and the time lag for importing a new model, JV brands were unable to move swiftly in response to the market situation. Hence, they lagged far behind domestic brands in terms of the number of SUV models.

The JVs were still focused on the compact SUV market in the price range above RMB 180,000.The price was more attractive than sedans. However, under the onslaught from the domestic brands, it was very difficult for typical JV SUVs like the Tiguan and the CR-V to get into the top five sellers.

Nevertheless, last year, domestic brands enjoyed their last fling in the SUV market.According to data provided by WAYS, a professional auto consulting firm, JV brands and self-owned brands went almost 50/50 in the SUV market, taking 51.6% and 48.4% shares respectively. In each of the following months, domestic brands did better than JV brands by holding more than half of the market shares. In December, the share of self-owned SUVs even reached 58%, leaving JV brands way behind.

The number of JV SUVs kept growing. In total, there were 215 SUV models in the market, 129 of which were imported or developed by JVs.However,most JV models were compact or larger luxury SUVs.while the price of small JV SUVs had not dropped significantly. As a result, domestic SUVs were mostly competing with their domestic counterparts.

Around the time of Auto China 2016 held on April 25th, the number of newly released SUV products reached a new peak. The Dongfeng Fengshen AX7 and BYD Yuan were unveiled before the show. 67 SUV models were presented at the show by dealers, including 41 domestic models, accounting for 47.5% of all new cars. After the show, the BAIC Huansu S3 and Geely Emgrand GS hit the market.

JV brands started to catch the SUV wave. During the show, 15 new SUV models were launched by European automakers, 3 by American automakers, and 7 by Japanese automakers. The most significant feature is that most of these new SUV products belong to B-Class or lower, and mainly to A-Class. The JVs were mounting an assault into the heartland of the domestic brands.

This is just the beginning. More and more JV brands plan to roll out a line-up of SUV models. Jochem Heizmann, member of the Board of Management of Volkswagen AG and the CEO of Volkswagen China, recently announced that the SUV would represent the future of VW. Volkswagen is expected to launch 10 local models, including SUVs based on VW, Audi, and Skoda.

Even more threatening to domestic brands is that VW will start to manufacture small SUVs this year. VW brands rank second globally in terms of sales and first in China. Its leading position in Chinese market is attributable to its core competence of launching new products rapidly and in massive numbers.

Domestic SUVs Face a Threefold Crisis

The SUV market is thriving across the globe, especially in China and the US, both of which are big markets for large and medium-sized cars.

At least three consumer trends have led to the demand for SUVs: First, the push for individuation, American masculinity, and the atmosphere of free development Second, the sense of security deriving from a better view and bulkier size on congested city roads; third, the cost-effectiveness of A-Class cars or lower for SUVs offers the best balance between space, size, and social status.

Domestic SUV models actually began to chip away at the market share of A-Class sedans and even part of B-Class sedans. By last December, SUVs represented 20% of the total sales of domestic brands, and only 14.5% of the total sales of JVs. This is because JVs have an absolute advantage in B-Class cars and above.

If sales are largely driven by a single market segment or a star product, an auto manufacturer will face a growing long term risk. For instance, in spite of its immense popularly in the past two years, Great Wall is the target of increasing concern because it depends too much on SUVs, and particularly its star model, the H6.

Currently, domestic brands feature two similar characteristics: a great dependence on SUVs, with a single model representing most of the sales. Typical cases are the Haval H6, Changan CS75, Baojun 560, Trumpchi GS4, BAIC Huansu S3, and the Haiman S5.

Why do domestic brands have only one star product? The reason might be found in their limited brand power, product R&D, and technical and marketing capabilities. After concentrating all their energy on one model, they are short of resources to create another 'star'. Many 'new' models are simply based on modifications to space and wheelbase.

Due to relatively weak brand power, domestic SUVs are usually upgraded through adjustment of space, setup and other features, aimed at reducing costs and lowering prices, and improving overall cost performance ratios. It is hard to keep a firm foothold in the market with such a strategy when prices are dropping as a result of the JVs pouring a large number of products into the market at the same level.

A research firm predicts that in the next couple of years, VW will launch 5 new SUV models under the brand of Shanghai VW and FAW-VW, in A0-Class, A-Class and B-Class. Toyota will also introduce small SUVs in 2018. In addition, the price of the JV SUVs selling at more than RMB 120,000 yuan will fall by at least RMB 10,000 yuan.

Domestic brands also trail JV brands in marketing. According to sources from a mainstream JV automaker, Shanghai GM and other companies that are strong in marketing have sub-divided the SUV segment based on market situations and consumer groups. In contrast, few self-owned brands have ever practiced such a strategy.

Market researchers have reached a common view: the SUV market will continue to grow faster than the overall market for passenger cars and will serve as the main driving force to the entire market. However, domestic brands need balanced development. In addition to grabbing SUV market share, they ought to step up investment in sedan cars, strive to create star models in this sector, and try to polish their brand image.


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