Lower-cost brands from Sino-foreign joint-venture carmakers tap demand
With more than 50 brands, the Chinese auto industry is usually viewed in two categories - domestic brands such as Chery, Geely and BYD and foreign brands like Toyota, Hyundai and Volkswagen.
But another approach - the joint-venture domestic brand - has recently emerged.
In 2008, joint venture Guangzhou Honda, now called Guangqi Honda, launched its Everus brand developed by the R&D department of the joint venture instead of Honda.
Two more new joint-venture brands arrived in 2010, the Baojun from SAIC-GM-Wuling and the Venucia from Dongfeng Nissan. Other joint ventures are also preparing domestic brands.
They represent a possible change in a market long dominated by joint ventures and their existing brands.
Foreign brands such as Volkswagen and Toyota had a more upmarket image and that enabled them to charge premium prices.
Chinese brands, which lagged behind in technology and brand image, focused on the entry-level segment of the market.
An example of the pricing division can be seen in subcompact models - domestic models cost about 80,000 yuan, while foreign brands have a sticker price of around 100,000 yuan.
But rapid growth in Chinese companies over the past five years is changing the situation.
Low-end segment
Since 2009, demand has increased in smaller cities across China where cars priced between 50,000 yuan and 90,000 yuan dominate the market.
Such models have become key drivers for the Chinese automotive market. With improved design and competitive pricing, domestic brands today have over one-third of new passenger vehicle sales and their market share is climbing.
After severely underestimated demand in the smaller cities and watching the growth of local automakers, most joint ventures now realize they have few competent models in that low price range.
The majority of today's joint-venture models are developed overseas, so every unit sold in China bears a technology fee that might account for as much as 10 percent of the total retail price.
Sino-foreign joint ventures are designing new models with full intellectual property rights that avoid conflict with the existing foreign-branded models.
Their plan is to acquire the joint venture's outdated platforms, develop new cars on them and position these vehicles at the low end of the segment.
One of the future Everus branded cars is developed on Guangqi Honda's Fit. Baojun's new compact car will be on Shanghai GM's Excelle platform, while the first car with the Venucia badge is built on Dongfeng Nissan's current Tiida platform.
The models will be ideal for joint venture entry into the low priced vehicle segment and will also help them to expand their market share in smaller cities. As well, their existing component supplier base and distribution system will help save costs.
Big winners
Honda and Nissan are expected to be the big winners from this trend since they would still enjoy profits from their joint ventures while their brand prestige is barely compromised.
What is doubtful is how much their Chinese partners such as Guangqi, Dongfeng or SAIC benefit from these joint-venture domestic brands.
In the last two decades, the strategy of offering the latest technology was the loudest slogan for most joint ventures.
The global companies did win market share as their Chinese counterparts failed to develop their own R&D skills and remained heavily reliant on foreign models. As a result Dongfeng or FAW-branded cars resemble their partner's models and are fitted with similar powertrains.
Although new joint-venture domestic brands are developed on old platforms, the Chinese companies can still greatly improve their capability through the whole process.
The leading example of this success is PATAC, the technology center of Shanghai GM. Through years of localization of GM models, the center has mastered vehicle development skills. The Chevrolet New Sail, designed by PATAC, has now become one of the best-selling small cars in the market.
But there is a danger - history could repeat itself if the Chinese companies only focus on short-term sales.
If their global partners start to worry about impacts from new products on their own models, they might stop transfer of platforms or technologies, leading to problems for new brands.
The impact on homegrown brands looks negative since more customers may choose the Venucia or Everus compared to a BYD or Chery because they have more confidence in the joint venture manufacturers.
On the other hand, it is also a good opportunity for Chinese brands to prove their skills by taking on these new rivals before challenging those real global brands.
The author is a senior analyst at JD Power Consulting (Shanghai) Co Ltd.
(China Daily)
