Chinese car market growing rapidly, premium models in demand

The Chinese car market has seen 20% growth over the past year. Almost 23 million units were sold during 2016, following the removal of sales tax for small vehicle engines. Chinese consumers tend to remain unwedded to particular brands, while increasing individual affluence is enticing increased numbers to trade up to premium rides.

To better understand the dynamics present in the Chinese market, McKinsey & Company’s Global Institute surveyed 5,800 new vehicle buyers, from tier-1 cities, who purchased cars within the last year, as part of its wider ‘Savvy and sophisticated: Meet China’s new car buyers’ report.

Passenger-car sales volume growth has seen ups and downs in recent years, with a low of 6% growth in 2011, and another dip in 2015 to 11%. The recent boost has come, in part, due to a suspension of the sales tax on vehicles with small engines, as well as green car subsidies.

Last year car sales in China were up 20% on the year previous, topping out at 23 million new units. According to the researchers, this reflects the rise of the Chinese middle class, following a huge boom in the country’s economy – which grew at more than double digits, before falling to around 7% in line with wider changes to a consumption-led economic model.

The increased demand for vehicles means manufacturers in the country can expect to contribute around half of the additional 14 million new vehicles which McKinsey presently forecasts to be sold by 2022. As it stands, around 76.8 million were sold last year, with China by far the biggest market, followed by the EU and US, both at 14.4 million new units sold. By 2022 China will see an increase of 7.4 million units sold, or a total of 30.1 million units. The EU will see little growth, while the US is projected to decline. India, and the rest of the world are expecting 15.9% and 34.9% of total new vehicle growth respectively.

On top of increasing purchases of automobiles, the nature of the vehicles in demand has also seen a shift. Premium vehicles are expected to increase, as incomes among the wealthiest segments rise, allowing consumers to opt for more than the bare necessities when it comes to transport. Interestingly, premium cars for around half of respondents, particularly older individuals, were not seen as status symbols, with luxury increasingly seen as important on a personal basis, rather than a method of keeping up appearances.

Loyalty decreases

In 2012 the number of premium sales stood at 1.2 million units, by 2016 this had increased to 2.3 million units, while projections for 2022 point to 3.2 million units. Premium brands tended to outperform non-premium brands, with relative growth to 2016 at 6% and 4.6% respectively, although around 50% said that they would consider trading up in their next purchase journey.

Increased spending power has also seen consumer loyalty to discount brands take a knock. A range of online tools, as well as more empowered consumers mean individuals are more able to shop around than previously, when individuals were often tied to a particular brand. Brand loyalty, in so far as they intend to buy the same brand again, was highest among the affluent, at 18% of total, while 15% of those that preferred a foreign brand were noted as loyal. Average loyalty stood at 12%, down considerably on last year’s survey result of 19%.

Concluding the report, the authors stated, “China will remain a must-win market for car brands in the foreseeable future. As Chinese consumers continue to become more sophisticated, automakers must reinvent their success formulas to surprise and delight them. That means delivering leading-edge connectivity options, pursuing digital innovations, participating in the electric vehicle space, and taking steps in the burgeoning used-car market. With increasing competition from Chinese brands, digital players, and shared mobility companies, no traditional automotive player can afford to put off the substantial actions they should take today. Yesterday’s “easy” growth in China is a memory; tomorrow’s success will require a different set of skills and ideas.”