2018 China domestic auto brand whitepaper Special research ......huge breakthroughs in R&D, design,...

2018 China domestic auto brand whitepaperSpecial research program of the China advertising association of commerce Issued by CIG and Deloitte

Foreword

Where domestic auto brands are now

Opportunities from upcoming industry change

Risks and opportunities in the mobility market

Current issues and challenges

Implications for domestic auto brands

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Foreword

Last year marked the 40th anniversary of China’s reform and opening up, during which the automobile industry, one of first to open up to the world early in China, faced major changes again. Most notably, it was announced that protection policies (high import tariffs and limits on stakes held by foreign investors) in the local auto industry, which have had a profound influence on its development, will be phased out completely by 2022.

This is much earlier than the market expected. Although most foreign manufacturers say they will continue to maintain the joint venture with existing Chinese partners and a few have even announced further investment plans; profit maximization remains their central goal. The liberalization of share ownership restrictions and number of JVs indicate that China’s auto market will become fully competitive, creating a fairer business

environment for private companies who have long appealed for an open market. However, for state-owned car companies who are dependent on profits from JVs, foreign manufacturers having increased stakes or being controlling shareholders will lead directly to profit declines among listed Chinese companies, and then further reductions of foreign manufacturers’ technology transfers, making JV factories impractical as OEMs.

Started on the basis of joint ventures, China’s domestic auto brands are at a turning point in their journey to maturity. China has already become one of the hottest markets, with domestic brands facing tough conditions in the post-JV age. In addition to policy liberalization, they face other challenges including stringent fuel consumption regulations, the technological transformation towards

connected vehicles and autonomous driving, the reshaping of the industry chain and the impact of new mobility models on traditional business models. The next move will be a key challenge for all domestic auto brands.

Through quantitative and qualitative methods, this report analyses the development of domestic auto brands and the shift in the competitive landscape since China joined the World Trade Organization. It elaborates on three major topics for domestic auto brands: structural opportunities for traditional fuel vehicles; first-mover advantages in electrification; and the risks and opportunities in the mobility market. The report then takes a deep dive into the problems and challenges domestic auto brands face, ending with several implications for how they can best win out in the market.

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Where domestic auto brands are now

2018 China domestic auto brand whitepaper | Where domestic auto brands are now

1 Looking backIn their three decades of growth, China’s domestic auto brands have seen several key milestones. First, joining the WTO in 2000 drove China to officially open up its auto market and then develop national policies on independent innovation in the auto industry. State-owned and private domestic auto brands, including Chery, Changan, Geely and Great Wall Motor entered the fast lane of development.

In 2010, driven by policies including incentives encouraging auto sales in rural areas and a 50% reduction in the car sales tax, domestic auto brands embraced peak growth, attaining an unprecedented market share of 45.6%. But, looking beneath the sales figures, there was a wide gap between domestic brands and their JV rivals in

terms of product R&D, technological level and quality control. Moreover, domestic auto brands mostly provided products costing less than RMB 80,000 with low brand recognition and non-premium capabilities.

Domestic auto brands went into a four years recession thereafter, until they regained their footing in the market in 2014 with market insights and rapid responses to match the emerging demand for SUVs.

Looking back, domestic auto brands went through vicissitudes from 2010 to 2017. They saw sales slump in the early years of this period and failed to step into the middle and high-end market, but then steadily expanded their leadership in SUVs with a series of well-designed hit products that have

been able to compete with JV brands over the last two years. Some brands even launched products priced over their normal ceiling of RMB 150,000.

In recent years, domestic auto brands have enhanced their overall competitiveness, achieving increased sales and market shares and higher prices. More critically, they have made huge breakthroughs in R&D, design, insights into consumer demand, platform building, product experience and marketing innovation. Some auto companies also leveraged changes in business models brought about by emerging technologies and mobility to acquire a competitive edge.

Domestic auto brands can be said to have entered their Era 3.0 in 2018. In this era, external competition

• Driven by policies on sales tax and encouraging rural car consumption, their market share in PVs reached a peak

• Sales dominated by low-end models costing less than RMB 100,000

• Prices and channels of JV brands sank deeper

• Domestic car sales and market share continued to decline

• Some domestic auto brands started to explore the middle and high-end market

• Sales climbed; regaining growth momentum from SUV

• Strategy refined back to one-brand approach

• SUV market continued to grow

• Returned to sedans market

• Tried again to step into high-end market, breaking through brand ceiling

Figure 1: Key developments of domestic auto brands in the last decade

Stage of development

Rising with fluctuations Growing steadilyGrowing pains Climbing back

2007 2010 2014 2017

Market share

Key points

Source: Market share data from the China Association of Automobile Manufacturers (CAAM)

41% 40%

44% 46%42% 42%

41%38%

41%43% 44% 45%

5

Note: Bubble size represents the sales of the top 10 domestic PV companies in 2017; * Percentage of total domestic PV company sales Source: China Passenger Car Association (CPCA)

Figure 2: The domestic auto brand hierarchy

75%

35%

-5%

55%

15%

-25%

0%

First tier Second tier Third tier

2015-2017 CAGR

Geely

Changan

Great Wall Motor

SAIC Motor Passenger Vehicle Co.

GAC Trumpchi

DongfengCheryZotye

Southeast Auto

Hawtai

FAW Car

BYDJAC

Brilliance

BAIC

Market share*

Industry average

2% 4% 6% 8% 10% 12% 14%

2018 China domestic auto brand whitepaper | Where domestic auto brands are now

will become more complex, with policy, technological change and the transformation of consumption models as the main drivers of industry growth. Domestic auto brands will adopt internal 'knock-out' systems, applying more organizational flexibility and stronger capital advantages, resulting in private companies further expanding their leading positions thanks to strategic adjustments and investments in early-stage technology. The integration among large SOEs will accelerate and extend to key areas from non-key ones, for example by moving into technology and systems integration from personnel changes.

2 Divergence among domestic auto brands Domestic auto brands have diverged clearly since 2017 and can now be

ranked into three tiers based on sales, growth rate and market share indicators.

Among the first tier, car companies, Geely, Great Wall Motor and Changan have reached absolute sales of over one million, with a growth rate on a par with or above the industry average, as well as taken substantial market shares in the domestic passenger vehicle (PV) market. These companies are expected to maintain their leading positions and one or two companies in the second tier are likely to ascend into the first tier.

In the second tier, auto companies have sold or will sell 500,000 vehicles, yet there is wide divergence among their growth rates. Some car companies have sales growth far above the industry average thanks to the launch

of product lifecycles and returns on early R&D investments, whereas the growth of other domestic auto brands that have entered this tier only because of their large bases will come under great pressure, with the risk of falling behind.

The third tier contains the largest number of domestic auto brands, which manufacture and sell 100,000 to 500,000 vehicles. These companies could be wiped out first.

The hierarchy of domestic auto brands is not constant but in a state of dynamic evolution. As car companies launch their product lifecycles, make up for shortfalls in product structure and improve their products and quality, some domestic auto brands are expected to enter the top tier.

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Opportunities from upcoming industry change

Entering 2018, domestic auto brands seemed more anxious than ever before due to operating pressure from a radically changing external market environment and the factors driving companies’ self-transformations.

First, the auto industry policy environment was changing significantly, marked by policies on wider opening up and raising the level of investment in the industry. The countdown to abolition of a policy restricting foreign share ownership that has been in place for 30 years has begun. China will gradually ease sector restrictions in stages and lift all limits on foreign investment by 2020. More change is coming from the Administrative Provisions on Investment in the Automobile Industry, which is still open for opinions. It proposes strict requirements on market access to industry investment, investment conditions and exit mechanisms, including prohibiting the creation of new internal combustion engine (ICE) vehicle companies and raising the investment bar for entry into the pure electric vehicle (PEV) sector. This shows how China’s auto industry is changing its way of thinking to strength from size. These regulations are expected to replace the auto industry growth policy introduced in 2004.

Detailed industry rules include a sharp decrease in subsidies for new energy vehicles (NEV) and changes to local supporting subsidies, taking the market into the dual credit review stage (new energy scoring starts this year), raising requirements on battery technology and cost control at NEV companies.

Second, China’s auto market has entered a long period of steady and low growth after achieving a policy-driven cyclical peak. Market growth was inflated by these policies, leading to fiercer competition among manufacturers. As a result, mismatched product lifecycles and strategic mistakes could prompt car companies to drop out of competition. In recent years, the increased market share of domestic auto brands is largely due to their rapid decision making mechanisms and speed at launching products. With several large JV brands having initiated new product cycles in 2018, domestic auto brands will face challenges to their unconsolidated advantages.

Moreover, consumers’ changing travel habits, commercialized industrial technologies oriented towards self-driving and the penetration of mobility platforms into auto industry have partly driven domestic brands to make changes to adapt to what is a new competitive environment. Most notably, more mobility service platforms have stepped into the downstream of the industrial chain and even upstream R&D and production. For example, DiDi has signed purchase agreements with several domestic auto brands who provide vehicles for DiDi’s car-hailing and car-sharing platform. Although car manufacturers are clearly aware of the impact of ride sharing on traditional business models, most of them are still uncertain about how to respond to the changes in the mobility market, switching back and forth between repositioning boldly like

foreign carmakers such as Toyota and Ford and remaining on the sidelines.

That said, judging from responses to our survey of companies, domestic auto brands remain most concerned about how to expand in the ICE vehicle market and take structural consumption opportunities.

This chapter starts with the development rules for the PV sector and analyzes its current situation and consumer groups, as well as the competitive edges and features of different domestic auto market segments. It aims to elaborate on the growth paths for China’s domestic auto brands in the next five years and inform how they can leverage existing resources to transform change into opportunity.

1 Structural opportunities in ICE vehicles: consumption upgrading will be the main driver of China’s auto market over the next decadeBefore answering the above questions, we first identified the current stage of China’s auto consumption market, its growth principles and key drivers for sales growth. First, in terms of car ownership, China’s auto market is transitioning from the late period of popularity to maturity. As of the end of 2017, average car ownership per 1,000 people in China is 150, reflecting a wide gap with well-established auto markets. Deloitte expects China's PV sales to reach 28 million by 2020 and exceed 35 million in 2027, with the CAGR slowing to 4%.

2018 China domestic auto brand whitepaper | Opportunities from upcoming industry change

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1.1 Post-90s replacing post-80s as main car consumers The growth characteristics of China’s PV market align with the rules of population growth and are related closely with population structure, income level and lifestyle. From a population structure perspective, the post-80s and -90s

generations are the main consumers in the auto market (as shown in Figure 4). In the first half of 2017, post-80s were main power in the auto market, accounting for 48%, with post-90s consumers accounting for less than 30%, albeit with outstanding growth. The post-90s will replace the post-80s as the main car consumers in China by 2025.

The consumption concepts and shopping preferences of post-90s differ a great deal from other age groups. They seek a personalized driving experience and focus on convenience and internet technologies, but are less interested in brand. These traits require domestic auto brands to target this group and develop differentiated brands, products, services and marketing systems.

Figure 3: Forecast for China’s PV sales (2020-2027)(Unit: 1,000 vehicles)

Source: interviews with auto companies, EIU, Deloitte analysis

Figure 4: New car buyers in China by age

Post-60s Post-70s Post-90sPost-80s Post-00s

3%

44%

39%

12%

5%

48%

33%

11%

9%

52%

28%

10%

14%

55%

23%

8%

26%

48%

19%

6%

39%

41%

15%

4%

11%

54%

25%

9%1%

2012 2013 2014 2015

Source: Turboinsight analysis

17,929 19,701

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2013 2014 2015 2016

+4%

+8%


16%5%

54%

14%

20%

56%

11%25%

2012 2022E

40%

16%

43%

45%

15%

31%

2% 8%

2012 2022E

9

Figure 5: Regional distribution of China’s middle class

1. Mapping China’s middle class, McKinsey2. http：//yuanchuang.caijing.com.cn/2018/0329/4427434.shtml

1.2 Purchasing power is shifting to third- and fourth-tier citiesFrom an income perspective, the per capita disposable income of urban residents has risen to RMB 36,000 in 2017 from RMB 6,200 in 2000, during which time a considerable number of families have entered the middle class and above by household income. Previous statistics from McKinsey1 show that the middle class and above will account for 81% in 2022, with the biggest jump coming from the middle class in third- and

fourth-tier cities, which will be the leading contributors to China's total household consumption and emerging consumption. From a regional perspective, third- and fourth-tier satellite cities from five urban clusters including the Yangtze River Delta, Guangdong-Hong Kong-Macau Greater Bay Area, middle reaches of Yangtze River, Chengdu and Chongqing, and Beijing-Tianjin-Hebei, will lead China’s consumption growth in the next decade2.


The underprivileged

Ordinary class

Middle class

Wealthy class

First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities

6%

10%

60%

33%

16%

20%

18%

32%

18%

16%

6%

12%

58%

39%

17%

21%

21%

22%

20%

12%

6%

9%

56%

37%

19%

25%

30%

28%

19%

11%

7%

9%

61%

32%

23%

11%

35%

40%

16%

12%

10

Figure 6: Preferences of domestic auto brand buyers of different ages

1.3 Demand from younger generations and for higher-end productsChina's improved population structure and income levels have different impacts on consumer demand for cars. In terms of population structure, the post-90s consumers emerging as the main force have distinctive consumption preferences, focusing more on price (32%) and appearance (16%) and less on brand and dynamics compared with other age groups. Meanwhile, the post-80s generation, which are current main car consumers, have more demand for replacement or additional cars due to changes in their family structures and income levels, so focus more on comfort (39%), space (20%) and quality (12%) (as shown in Figure 6).

Post-90s

Source: bitauto.com, Nielsen


Appearance

Space

Price

Brand

Maneuverability

Dynamic

Comfort

Safety

Quality and workmanship

Internet technology

Post-80s Post-70s Post-60s

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Demand for quality and brand will become the main driver of Chinese families' car purchases as the middle class continues to grow. Taking 2010 to 2011 as the peak of China’s auto consumption cycle, it is now entering the stage of replacement and upgrading as measured by the five to seven years’ car ownership cycle in well-established markets.

In particularly, the main purchasing power in coastal and first-tier cities has moved from first purchases to re-purchases, additional purchases or replacement. For example, in first-tier cities that have implemented purchase limits, replacement has taken the place of new purchases as the main market driver, with the sales ratio between new cars and used cars as 1:13. Prices of re-purchased/replaced cars range from RMB 200,000 to RMB 300,000. Families are more concerned about the in-vehicle space, safety, high quality and substantial technology configurations

of re-purchased cars, reflecting the surging demand for mid- to high-end SUVs, cars and luxury cars4. As the research data in Figure 7 indicates, in first- and second-tier cities, apart from safety and reliability, consumers place higher requirements on quality and brand with cost performance, traditionally the main factor in car purchases cars, ranking further down.

The consumption trend in fourth- and fifth-tier cities and county-level areas is more complex. First-car buyers still account for a large proportion of the market. They are highly sensitive to price and prefer SUVs with a budget mostly lower than RMB 80,000. Additionally, consumption upgrading in cities has diverged. For example, large numbers of microvans and low-end cars in counties and rural areas have reached a trade-in/replacement peak driven by incentive policies encouraging auto sales in rural areas since 2009. These consumers care less about the brand of their

replacement models but still value space, endurance and high cost performance. Research data confirms this trend (as shown in Figure 7). In fourth- and fifth-tier cities, price and practicality are among the most important decision factors. Consumers have lower brand loyalty and demands on quality. However, as the middle class in these regions are growing, their desires when purchasing cars will change.

All of the consumption trends above indicate that consumption upgrading will become the leading driver of China’s auto consumption growth in the coming decade, with a trend of moving into third- and fourth-tier cities and tilting to the post-90s generation. In terms of purchasing preferences, there is strong demand for higher class, larger space and better quality cars. (Details of consumption upgrading trends in different market segments are discussed in the next section).

3. http：//auto.sina.com.cn/news/hy/2017-07-20/detail-ifyihmmm7632343.shtml4. https：//www.gelonghui.com/column/article/154915

Figure 7: Preferences of domestic car buyers in different city tiers (Top five concerns)

1 41%

31%

25%

24%

19%

54%

37%

26%

24%

24%

44%

30%

27%

27%

22%

56%

34%

32%

29%

29%

49%

44%

33%

28%

16%

First-tier cities

Safey Safey Safey Safey Safey

Quality Quality Quality Quality Quality

Reliability Reliability Reliability Reliability Reliability

Practicality Practicality Practicality Practicality Practicality

Brand Brand Brand Brand Brand

Second-tier cities Third-tier cities Fourth-tier cities Fifth-tier cities

2

3

4

5

Source: bitauto.com, Nielsen


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Figure 8: Domestic auto brand consumers by gender and age (2017)

Figure 9: Regional distribution of domestic auto brand consumers

By gender By age

Source: bitauto.com

1.4 Domestic auto brands cover a few main consumers who are upgrading their consumptionThis segment looks at the coverage of the present main car buyers by domestic auto brands informed by an analysis of the growth drivers in China's PV market.

Compulsory traffic accident liability insurance data suggests that 72% of domestic car owners as of 2017 Q4 are male and 28% are female. The percentage of female owners has risen

sharply since 2015 (19%), indicating that domestic auto brands have covered more female users in recent years. In terms of age, the penetration of domestic auto brands among post-90s consumers has risen: sales among groups aged under 25 accounted for 38% in 2017 Q4, up from 15% in 2015. However, the coverage of groups aged over 35 shrank. Post-70s and older groups are the main consumers in the re-purchase/additional purchase market, showing domestic auto brands have primarily satisfied demand for

first purchases yet have covered less replacement/re-purchase needs.

In terms of regional distribution, third- and fourth-tier cities are the main sales destinations of domestic auto brands, contributing to over 50% of sales with increases year over year. At the same time, domestic auto brands have seen a dramatic sales slowdown in first-tier cities, the most competitive markets with the most models at the highest prices.

Female 2 8%

Over 5012%

Under 25 38%

25-3436%

35-4914%

Male 72%

9%14%

22%

36%

12%

14%

20%

34%

20%

13%

12%

20%

33%

17% 18%

2015 2016 2017

First-tier cities

Third-tier cities

Second-tier cities

Fourth-tier cities

Fifth-tier ciites

Shares increased


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2 How domestic auto brands can tap structural opportunitiesAfter identifying market growth trends, the regions and population for growth opportunities, how should domestic auto brands readjust their product planning, structures, areas and coverage, and build a differentiated marketing system?

Growth of domestic auto brands in market segmentsDomestic auto brands have developed unevenly across the sedan, SUV and MPV segments. They focus on SUVs and invest less in the sedan market, and stress low-end cars in the MPV market. Based on our analysis of passenger market segments from the perspectives of sales growth, industry concentration and product launch speed, we recommend domestic auto brands consider the following trends:

1) The market for A+ class vehicles priced over RMB 100,000 could become key for domestic auto brandsIn terms of sales growth, industry concentration and product launch speed, the sedan market has reached maturity, making it hard for manufacturers to differentiate themselves through price, performance and configuration, and

heightening the power of product and brand in market competition.

The CAGR of sedan sales from 2012 to 2017 was only 2%, well below PV sales growth. The number of sedan models in mass production as of 2017 has increased to over 400, indicating a stiffly competitive market. In recent years, well-sold SUVs have largely squeezed the growth room of sedans, especially compact sedans.

In terms of market share, JV companies have long dominated the car markets at all levels with their diversified product lines and reasonable arrangements. Domestic auto brands have narrow their products spectrums with a market share peak of below 35% and even falling under 20% in recent years. In the most competitive compact car market, JV brands have maintained their leading positions thanks to their higher brand premiums and wider price ranges. By contrast, domestic auto brands still concentrate most models in the low-end compact sedan segment with prices of RMB 50,000 to RMB 100,000 or below. They still compete on price due to insignificant product differentiation among brand products. Geely is the only domestic auto brand that has ranked in the top 10 for A-class sedan sales in recent years.

Nevertheless, this does not suggest domestic auto brands are missing the best opportunities. Amid the trend of consumption upgrading, domestic auto brands need to move away from low end and mid-tier markets including entry-level cars and step into the A+ class market to expand their brands. Since 2017, some domestic auto companies have started to focus on returning to the sedan market by implementing the strategy of providing A+/B class sedans of a more desirable size with higher class, diversified configurations to compete with A-class JV sedans. For example, the SAIC Roewe i6, GAC Trumpchi GA4, Changan Ruipin CC and BAIC Shenbao D50 are all A+ class products competing with A-class JV sedans.

However, they face several challenges. First, as the A-class car market is much more fiercely competitive than the compact SUV segment, domestic auto brands could be obliterated by JV rivals. Second, because differentiation competition in compact sedans is more dependent on brand, domestic auto brands are struggling to add brand premium through breakthroughs in appearance, space and interior by adding configurations.


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2) High end and crossover vehicles are SUV growth driversMarket concerns about how long golden opportunities for SUVs will last have emerged since 2016. However, from the perspective of indictors including CAGR, industry concentration, product intensity and number of models launched, the SUV segment has continued to grow. First, from a sales growth perspective, the CAGR of SUV sales was 41% from 2012 to 2017, with their proportion in overall PV sales increasing to 43% in 2017 from 17% in 2012, becoming second only to sedans (49.5%) and expected to have surpassed it in 2018.

Second, SUVs look set to remain the priority of Chinese and foreign car companies in the coming years: there are 330 SUV models in China as of 2017. In plans for new models disclosed by car companies, SUVs account for 58% in 2018 and took up about 66% of total car sales by domestic auto brands. From an industry concentration perspective, the concentration of the top 10 SUV models by sales fell to 26% in 2017

from 53% in 2010, suggesting new entrants and products have large room for growth as the SUV market continues to transform.

As JV brands initiated a new product cycle in 2018, domestic auto brands faced unprecedented competitive pressure. JVs, including VW and Toyota, have many SUVs planned, with VW launching 12 SUV models before 2020, which will affect domestic auto brands in different price ranges and sales regions with the advantages of JV factories.

Judging from Deloitte's interviews with domestic auto brand executives and industry experts, the SUV market is not yet saturated. Fourth- to sixth-tier cities still have strong demand and first car buyers contribute 75% to 80% of sales in these regions. Moreover, the growth momentum of SUVs has shifted from small and compact models to mid- and large-sized ones. Driven largely by the trend of consumption upgrading, mid-tier and high end, luxury and personalized SUVs will become new growth engines.

Given all this, domestic auto brands need to expand their channels and products in fourth- to sixth-tier cities. They should also set the pace in product iteration across their existing markets, develop second and third generations of competitive products, follow the consumption upgrading trend and satisfy consumers' need for mid- and large-sized, mid-tier and high end SUVs.

Domestic auto brands have launched several mid- and large-sized SUVs priced at RMB 150,000 to RMB 200,000 since 2017 to satisfy consumers' demand for space and comfort driven by family structure changes and births of second children. Meanwhile, the SUV market is being refined and optimized to disrupt relatively fixed market segmentation and customer groups. By providing crossover models, JV brands have already started to compete for consumers who have strong demand for personalization and quality in cars costing RMB 150,000 to RMB 200,000.

Figure 10: Sales growth in China’s SUV segments (2015-2017)

2015 2016 2017

28%23% Segment

Small SUV

Mid sized SUV

Compact SUV

Mid-large sized SUV

GAGR (2015-17)22%

51%

23%

3%

56%

17%

1%

56%

15%

1%

12%

58%

21%

193%

Source: CPCA, gasgoo.com


26% 23%14% 9% 8%

54% 52%56%

57% 52%

20%

1% 1% 2% 3% 4%

24% 28% 31% 36%

2013 2014 2015 2016 2017

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3) Fill the gaps in the mid-tier and high-end family MPV marketMPVs, as the third largest PV segment, sell less than sedans and SUVs and are mostly low-end microvans and entry-level models. As at the end of 2017, MPVs account for 10% of the PV market. Within this 10%, microvans and entry-level models from domestic auto brands have nearly 90% market share while JV brands dominate in high-end business vehicles priced at over RMB 200,000.

With changes in consumption structure over recent years, the MPV market has seen new growth momentum: soaring demand for mid-tier family models, stable growth of demands for high-end business models, but an accelerated decline for entry-level MPVs priced lower than RMB 100,000, especially those for both family and business purposes and focusing on goods transport.

Combined with the consumption upgrading trend and second child policy, mid-tier family MPVs are expected to become the third segmentation, with their burgeoning demand following that of sedans and SUVs. From the perspective of consumption upgrading, with extended overall length, advantages in space in their third rows of seats and in comfort, MPVs will become the top choice when consumers in first and second-tier cities buy other cars. The second child policy will boost MPV models' growth in the next three years, especially as the six-person family structure takes shape, with further demand for mid-tier and high-end family MPVs released.

Since 2017, domestic auto brands have stepped up efforts to fill the gap in the mid-tier and high-end family and business MPV market (priced at RMB 100,000 to RMB 200,000), especially with the recent BYD Song MAX and GAC Trumpchi GM8. Previously, JV brands had fewer mid-tier and high-end MPV products. This segment

is therefore expected to be a new battlefield between JVs and domestic auto brands.

4) Brand upgrade breakthroughsFrom a price perspective, PVs of domestic auto brands generally cost RMB 50,000 to RMB 150,000, but the overall transaction price has risen in recent years, leading to a drop in the proportion of vehicles priced at RMB 50,000 to RMB 100,000 and stable growth in those priced at RMB 100,000 to RMB 150,000. Compulsory traffic accident liability insurance data shows5

that the weighted average transaction price of domestic PV brands has exceeded RMB 100,000, with Wey, a mid-tier to high-end marque owned by Great Wall Motor, transacted at the highest weighted price, followed by QOROS and GAC Trumpchi. SAIC ROEWE and Geely (excluding LYNK&CO) are also growing quickly, although the transaction prices of other domestic PV makers are all lower than RMB 100,000.

Figure 11: Domestic auto brand market share changes in different price ranges

Source: WAYS (data for 2017 only includes January to June)

5. Total compulsory traffic accident liability insurance data for 2016 and 2017


MSRP range

Over RMB 150,000

RMB 80,000-RMB 150,000

RMB 50,000-RMB 80,000

Under RMB 50,000

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The rise in transaction prices of domestic vehicle makers is primarily due to the large proportion of SUVs in their products and breakthroughs in the mid-tier and high-end markets. As Figure 11 shows, the share of domestic SUV brands has dropped in the market for RMB 50,000 to RMB 80,000 vehicles but risen in the market for vehicles priced at RMB 80,000 to RMB 150,000 and above.

Despite domestic auto brands' enormous incursions into the mid-tier and high-end market through growth, they are still unable to navigate the gap with JV models in terms of market reach, public praise and quality. The

breakthroughs in the market of vehicles priced at over RMB 150,000, particularly those from Great Wall Motor and Geely, are driven by the overall uptrend in the industry and the core strengths and capital of these car companies.

Considering their growth in the past year, domestic auto brands have two ways to develop their presences in mid-tier and high-end markets. First, launch independent mid-tier and high end brands akin to Great Wall Motor's Wey and Geely's LYNK&CO; second, launch higher level models shattering the brand ceiling of RMB 150,000 based on existing brands, where the key to winning will be

cross-level configurations, higher cost performance and quality, as seen at GAC’s Trumpchi, SAIC and Changan. Wey and LYNK&CO play down the impact of their parent companies in introducing mid-tier and high-end models independently. The common ground between them lies in having designs that are in line with international practices, key components and parts with technical support from international experts and suppliers, higher quality control capabilities and diversified intelligent configurations.

Figure 12: Model comparison of Wey and LYNK&CO

Source: Deloitte Research

Domestic auto brands' paths into mid-tier and high-end markets

Design Independent design with a big gap from parent brand’s segment

Independent design with a big gap from parent brand’s segment

Product matrix A-C class, only covering SUVs A0-C class, covering SUVs, sedans and MPVs

R&D system Relies on Haval’s existing technology and hires external experts

CMA structure developed by Geely and Volvo

Technical reserve

Target consumers Third- and fourth-tier consumers, consumption groups derived from the Haval brand

First-, second-tier and young consumers

Brand positioning "China's luxury SUV pioneer" Downplays vehicle image and emphasizes personalized lifestyle

Marketing model Independent sales network but still applying traditional sales models

Integrated online and offline channels


2012 2013 2020E 2025E201620152014 2017

4,6004,4004,2004,000

0200400600800

1,0001,2001,400

17

3 How to manage fuel vehicles and the trend of electrificationIncreasingly stringent regulatory limits on fuel consumption are the key constraint on the growth of domestic auto brands. Domestic auto brands are widely believed to have higher credits for fuel consumption and new energy, but it should be noted that limits on the transfer of fuel consumption credits are increasingly tight and the average curb weight quality of those who plan to launch more SUV products will continue to rise. The goal of setting a 5L average fuel consumption limit per 100km by 2020 is likely to create substantial challenges for these companies.

As traditional energy saving and emission reduction technologies, such as lightweight body, turbo engine, gasoline direct injection, are unable to address fuel pressure alone, companies need to address the balance by developing new energy vehicles. How

domestic auto brands will address the conflict between fuel pressure and companies’ strategies to develop new energy vehicles is critical.

PEV rather than transitional technology, such as mild and micro hybrids, is encouraged as a means to develop NEVs in China. The Chinese NEV market has grown to be mainly pure electric supplemented by plug-in models.

The EV models of domestic auto brands have evolved from fuel cars over time. Most of them cannot deliver the overall user experience and drivability to obtain policy subsidies, failing to compete with fuel vehicles in the same class. As the market is increasingly driven by credit, shifting from subsidies, and will eventually be driven by the market itself, companies have to redefine their NEV strategies in light of their technology reserves, resources and market positioning.

Figure 13: China’s new energy PV market (2012-2025) (Unit: 1,000 vehicles)

100%0%

10 10 55207

336

579

1,066

4,510

76%19% 22% 16% 11%

84%

89%

81%93%7%

69%31%

71%29%

144%

+33%

Source: CAAM, IHS

Penetration rate of new energy PVs

Pure electric PVs Hybrid electric PVs


=

18

3.1 A00 PEV-led structure could be disrupted The CAGR of China’s NEV sales was 125% from 2012 to 2017, well above the average in the traditional PV market. The NEV market is dominated by PEVs and A00-class models. As at the end of 2017, pure electric PVs have taken over 80% market share and plug-in hybrids have fallen to 19% (from 31% in 2014). Statistics for A-class and above new energy PVs, which cater more to consumer needs alone, show the market shares of plug-in and PEV models are 47% and 53% respectively. However, sales of plug-in models have overtaken those of PEVs, reaching 67%6 when removing rental vehicles for non-individual usage.

The dominance of A00-class PEVs is not a sign of a well-established market, but rather a consequence of policies. In 2017, 259,000 NEVs were sold in Europe, with the PEV/plug-in ratio reaching 51/49 and A-class vehicles dominant; this is similar to the US, where the ratio was 53/47, with almost all models A class and above. These statistics indicate that NEVs in Europe and the US are driven by end consumers.

Domestic auto brands with a deep understanding of policies and rules have long focused on PEV models. In 2017, domestic auto brands took up over 80% of the pure electric PV market and more than 70% of sales came from low-end, entry-level models with a range of 150 to 200km.

The A00 class-led market is expected to have been disrupted in 2018. New subsidy policies have set higher requirements for battery energy density (the threshold for subsidies is 105wh/kg). Under new policies, subsidies for PEVs with ranges lower than 150km are being rolled back; those for PEVs with ranges of 150km to 300km are being reduced sharply; and long-range models are being encouraged, with subsidies for models with ranges of 300km to 400km and over 400km rising significantly. Given this policy tide, improving the range of entry-level models and launching mid- and long-range A-class sedans/SUVs are likely to be the next priority of domestic auto brands.

6. https：//www.thepaper.cn/newsDetail_forward_1962988


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3.2 Hybrid is the most practical short-term solution for high fuel consumption car companiesIn addition to PEVs, car companies can also develop 48V micro, full and plug-in hybrids for energy conservation and fuel consumption reduction.

48V technology is the most economical, requiring only minor changes to overall body structure, yet has unsatisfactory fuel saving results and is unlikely to help companies cope with the next challenging fuel consumption requirements. In recent years, foreign carmakers that are less competitive in new energy credits have leveraged micro hybrid technology to comply with regulations on fuel consumption limits and developed plug-in/PEV models that meet market demand in catering to emerging Chinese EV consumers. For some domestic auto brands, micro hybrid technology is likely to be the most practical solution to make the production of high fuel consumption models and fuel consumption regulations balanced.

Despite effective fuel savings, full hybrid solutions are costly in the overall system, and Japanese carmakers block the access to their technologies before 2017. They are not the preferred option for domestic auto brands. However, the full hybrid vehicle market grew rapidly in 2017, with the Corolla Hybrid and Levin the main growth engines. That year, there were 59,433 Toyota Corolla Hybrids and 53,420 Levin Hybrids sold in China, up 53% and 43% year-on-year respectively.

Subsidies for plug-in hybrid electric vehicles (PHEVs) have been reduced slightly under the policies introduced in 2018. Most sales are in cities where

local supporting subsidies have been introduced. Among domestic auto brands, only SAIC and BYD stepped into the PHEV market early. In terms of new car launch plans in 2018, several carmakers had developed multi-path plans, with domestic auto brands who previously insisted on PEVs turning to launch PHEVs based on hot-selling fuel vehicles and selecting PHEVs for the mid-tier and high-end market. Foreign carmakers have been accelerating their introduction of NEVs since 2018 and consider hybrids their first choice to enter the Chinese market. Notably, Japanese carmakers who have solid foundations in NEV are likely to create challenges for domestic auto brands.

3.3 From subsidy-driven to credit-drivenThe EV market is still in its early stages, with vehicles differing less in product performance and configuration. Given subsidies were reduced in 2018, domestic auto brands will speed up readjustment of their NEV product matrixes. Primarily, they will lengthen the range of entry level PEVs, although this means higher costs for micro PVs priced at RMB 50,000 to RMB 80,000. This makes it challenging for carmakers to control costs.

From a price range perspective, the weighted transaction price of an A00-class PEV was RMB 67,7007 in 2017, with entry level PEVs mainly sold to cities implementing purchase restrictions and third- and fourth-tier city users who are sensitive to prices. This segment is being affected significantly by policy volatility. Although considered transition products, these PEVs offer a poorer user experience than fuel vehicles do, leading to bad reputations and damaging the product

upgrading and market expansions of domestic auto brands. For example, some A00-class EV models are produced primarily to meet the national minimum technology standard for pure electric PVs rather than because manufacturers' focus on consumer demand is driving technology R&D and innovation. Besides, some A00-class models can reach a top speed of 100kmh, yet the energy density of the batteries with which they are equipped can only meet the minimum standard for subsidies. Many new PEVs with ranges of 251km to 301km were launched in 2018.

Driven by increased subsidies, mid- and long-range vehicles will be the top priority in domestic auto brands' development of NEV models over the coming three years. More critically, a range of 300km or more under working conditions will be considered the starting point for developing pure electric PVs. In terms of model options, more domestic auto brands are selecting A-class and small entry level electric SUVs as new growth engines, rather than focusing on A00-class models. In 2018, the New Emgrand EV (A-class sedan), BAIC EU400 (A-class sedan), ROEWE ERX5 (compact SUV), ARRIZO 5E (A-class sedan) and Trumpchi GE3 (small SUV) entered the market with a range of over 300km.

Currently, the NEVs of domestic auto brands (PVs and PHEVs) are still built on ICE vehicle platforms rather than through setting up new PV platforms for R&D and manufacturing, leading to poor product experience and performance. Judging from the views of NEV buyers, range, battery life and vehicle safety are the top three concerns when considering a purchase.

7. Data from bitaoto.com


20

"To break through in NEVs, domestic auto brands need to recognize that they are unlikely to secure long term competitiveness from closed competition. Although they are expanding market demand rapidly (such as taking the opportunity in cities with license plate restrictions and car-sharing), they should be aware of the difficulties and heavy costs in moving forward traditional vehicle reconstruction to develop competitive products. They need to step up efforts to develop new, dedicated PV platforms and technologies to significantly enhance product performance and user experience and lower costs."

—Wang Lang

Executive director of Chery's Strategic Planning Division

Figure 14: Considerations in domestic NEV model purchases

Range

PHEV

Importance 1

1

2

3

1

PEV

Maneuverability

Price

Body type

Dynamics

Branding

Battery safety

Battery life

High quality

Repair and maintenance

Ride comfort

Design

Vehicle safety

10 10

Source: bitauto.com


21

China’s NEV market will continue to be policy driven until 2020, making last year and the next two years critical for domestic auto brands' involvement in NEVs. JV carmakers are expected to swarm the Chinese market in late 2019 and early 2020 with PEVs, PHEVs and other new models. They are extremely likely to compete with domestic auto brands with low-price strategies, compensating for NEVs losses with profits from ICE vehicles. Besides, new carmakers are speeding up product launches thanks to support from the capital market. We expect China's NEV segments to split further and optimize as more players rush into competition.

The rollout of the dual-credit system from 2020 to 2025 will shift the market from being driven by policies to being driven by credits. A pure market-driven landscape is not likely to emerge. Consumers are still reluctant to buy EVs, and EV products are failing to offer a satisfactory experience with convenience, price competitiveness, performance and experience that matches or surpasses that of ICE vehicles. Almost all of the current

best-in-class JVs are building new EV platforms that will facilitate effective production at lower prices and they will eventually develop products with proper space arrangements and range design. The overall costs of JVs’ EV platforms are close to those for traditional vehicles, a situation that cannot currently be matched by domestic auto brands. Compared with JV brands, domestic carmakers are under less pressure to develop NEVs. They can benefit a great deal from reselling new energy credits from their high sales over the past years. To break through in NEVs, domestic auto brands need to recognize they are unlikely to secure long-term competitiveness from closed competition. Even as they expand market demand rapidly (including by taking opportunities in cities with license plate restrictions and timeshare rentals), they should be aware of the difficulties and heavy costs involved in developing competitive products with the existing platforms. It's essential for them to expedite their exploration of platform-based EVs.


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“老有所医”——中国医养结合趋势展望 | 医养结合大趋势下对市场参与者的启示

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Risks and opportunities in the mobility market

Over the past five years, ride-sharing services have emerged and gained popularity at a pace that the government, society and the public had never anticipated. Although it takes a small share of China’s current transportation market, this new mobility trend is disrupting the auto industry. Several foreign auto brands have announced their transformations into mobility service providers; by contrast, domestic auto brands have been slower in responding to and embracing

changes in the mobility market. Only some domestic auto brands can provide more than two kinds of mobility services.

What confuses domestic auto brands is not whether they should enter the mobility market, but what approach they should adopt and which segment they should enter. Whether they should make strategic investments in emerging mobility service platforms, adopt the capital-intensive self-operation model,

or provide only mobility platforms and services? Should they enter the established online car-hailing market where new entrants could face strict government supervision, or the emerging car-sharing market where there are a large amount of players but a low concentration rate? More importantly, how should OEMs make profits from abundant customer mobility data and apply this to the broader mobility market?

Figure 15: Car-sharing platforms operated by domestic auto brands

Category Car-sharing platformsoperated by domestic auto brands

Covered cities Fleet scale Vehicle models

Time-share leasing

Shouqi Group-Gofun 21 cities including Beijing, Shanghai, Xiamen, Qingdao, Wuhan, etc.

>30,000 vehicles

Chevrolet Cavalier, Chery eQ1

BAIC BJEV-qingxiangchuxing.com

12 cities including Beijing, Sanya, Weifang, Taizhou, Cangzhou, etc.

10,000 vehicles

BAIC BJEV EX200, EV160,EC180, LITE, EX260

BAIC-Morefun 12 cities including Beijing, Kunming, Xi'an, Qingdao, Changsha, etc.

>18,000 vehicles

BAIC BJEV EX200, EU260

Lifan-Panda Chongqing >10,000 vehicles

Lifan 820

SAIC-EVCARD 31 cities including Chengdu, Haikou, Nanjing, Chongqing, etc.

>10,000 vehicles

SAIC Roewe E50, Chery EQ, BMW Brilliance ZINORO, BMW i3

Haima Motor-Fenmiaochuxing

Zhengzhou >100 vehicles Haima@3, Haima Aishang EV

Online car-hailing

Shouqi Group-iZU 52 cities including Beijing, Hangzhou, Xiamen, Wuhan, Nanjing, etc.

27,000 vehicles

Toyota Camry, Buick GL8

Geely-Caocao 19 cities including Ningbo, Hangzhou, Qingdao, Nanjing, Xiamen, etc.

>12,000 vehicles

Geely Emgrand EV

Source: public information, Deloitte Research

2018 China domestic auto brand whitepaper | Risks and opportunities in the mobility market

24

Currently, domestic auto brands have three main approaches to entering the ride-sharing market:1. Platform-based model.

Establishing an independent business division within a company or subsidiary to provide only one kind of mobility service. Vehicles for the platform can be from the company itself and from other auto brands.

2. Self-operation model. Unlike the first approach, all the cars operated under this model are provided by the auto company itself.

3. Acquire or invest in mobility service companies and provide cars for them.

Among these ride-sharing models, most domestic auto brands choose

the car-hailing model, and car-sharing specifically, as it is closely related to their businesses and has lower operating costs. Geely is one of the most active players in the mobility market. It has adopted the self-operation model in the online car hailing and car-sharing segments. Apart from early players, most domestic auto brands have transformed their mobility services from independent to collaborative operation. Given their strategic importance, ride-sharing platforms will be the key channels for domestic auto brands to increase their sales of NEVs. In the past, most auto brands have signed purchase agreements with mainstream mobility platforms or provided online car-hailing services by jointly establishing car-leasing companies.

Early in 2018, DIDI announced it had signed agreements with 12 auto brands (including BAIC BJEV, BYD, Changan, Dongfeng, Hawtai, JAC, Geely, Chery, FAW, Zotye, etc.) to build a NEV ride-sharing service system. The domestic auto brands involved will provide vehicles to DIDI and share their third-party car-sharing platforms.

In general, most domestic auto brands remain cautious about the ride-sharing concept, for two main reasons: first, this new mobility pattern requires huge investments and has not seen any successful, profit-making examples; second, there is still a long way to go before domestic auto brands can drive emerging businesses with data.

Figure 16: Four scenarios in the future mobility

Source: Deloitte Global Future Mobility Market

Personal Vehicle ownership

Ass

et e

ffic

ienc

y

Vehi

cle

cont

rol

Assi

st

Driv

erAu

tono

mou

s

Shared

2018 China domestic auto brand whitepaper | Risks and opportunities in the mobility market

1

3

2

4Shared autonomous driving

Phase 2Phase 2Phase

2

Shared driver-driven

Phase 1

Personally owned driver-driven

Personally owned autonomous driving

25

Deloitte Global has predicted four scenarios for the future of mobility. In the first scenario, the mobility market will feature progressive changes. Car ownership will still be the mainstream and customers will continue to desire the privacy, flexibility, security and convenience of car ownership.

The second scenario is the car-sharing world. As ride sharing constantly gains more market share, some households owning with several cars will use cars less frequently and others could consider giving up car ownerships or reducing their purchase demand.

The third scenario is the reform of autonomous driving, wherein it will be proven to have feasibility, security, convenience and economy.

The fourth scenario is the ultimate one, namely autonomous driving and sharing plus electrification.

Some of the companies surveyed expressed similar opinions when asked to look into the future of the mobility market. The future auto industry will take on a cascade structure, from traditional cars to electric vehicles, autonomous driving and ultimately, ride sharing, from the bottom up.

Some auto companies think online car hailing and car sharing, which are now popular in the capital market, are just primary forms of ride sharing and the concept of “sharing” will continue to evolve. Auto companies need to conduct more studies and reach more judgments at this stage. For example, under the car-sharing model, the usage environments and scenarios for cars will be quite different to those of traditional cars. How will these changes in demand influence car R&D and design?

2018 China domestic auto brand whitepaper |Risks and opportunities in the mobility market

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27

Current issues and challenges

1 Domestic auto brands are vulnerableIn R&D, domestic auto brands have no well-defined product planning and lifecycle management, instead of taking the opportunity to make minor vehicle changes, model adjustments in the middle term or upgrades.

In recent years, domestic auto brands have made progress in the appearance, style and interiors of their vehicles, even obtaining stronger brand recognition than JVs in compact SUV products (see Figure 17).

Figure 17: Comparison of domestic auto brands and JV brands by public praise

60 600 0-30 -30

Domestic compact SUV

Domestic compact sedan

JV's compact SUV

JV's compact sedan

Convenience

Fuel consumption

Maneuverability

Interior

Space

Comfort

Appearance

Dynamic

Overall recognition

Information and

multimedia

Source: Index on public praise from bitauto.com

2018 China domestic auto brand whitepaper | Current issues and challenges

Industry average

Industry average

Negative satisfactionUnsatisfactory to the left

Positive satisfaction Satisfactory to the right

Negative satisfactionUnsatisfactory to the left

Positive satisfaction Satisfactory to the right

Convenience

Fuel consumption

Maneuverability

Interior

Space

Comfort

Appearance

Dynamic

Overall recognition

Information and

multimedia

28

Figure 18: Domestic models' lifecycle

Three to five years

Less than one year

One to three years

Over five years

Almost every domestic auto brand had one or two hot selling SUV models from 2015 to 2017 and won public recognition. However, none of these domestic auto brands has launched second or third generation products based on these models.

Looking at the lifecycles of domestic models launched in the past few years, the lifecycles of about 50% of them has lasted less than one year from going to market. This means challenging model discontinuity for most domestic auto brands that could hurt product continuity and consumers' recognition of their brands. The lifecycles of 40% of models have been one to three years while only 12% of models have lasted more than three years.

All of the above are due to carmakers' lack of comprehensive model planning during their strategy development. Domestic auto brands leveraged multiple model strategies to gain market shares a few years ago, typically launching several models in the same segment at the same level. The absence of JV brands in the mid-tier and low end SUV market enabled domestic auto brands to perform better in sales as they launch qualified models with high cost performance. The multiple model strategy often helps create sizzling sales at first but draws products into price wars as competitors at the same level step into the market. Some models even saw sales plummet within one year, which in turn hobbled carmakers' brand upgrading.

Source: bitauto.com

10%2%

49%Post-launch lifecycle

39%


29

The absence of model lifecycle management also leads to heavy internal losses and undefined product focus. For example, launching two or more models at the same level, but with minor differences at overlapping prices, boosts sales of new models at the expense of the potential growth of old ones. New products on old model platforms that have not yet reached the end of their lifecycles but have weak growth are another example.

So far, there have been no successful cases of upgrading by domestic auto brands because most models come to an end after their hot sales periods and these periods are contracting sharply. This tends to hurt product continuity and brand extension. For several hot selling domestic SUV models nearing

the end of their lifecycles, managing the lifecycles of older models and launching new iterations are major challenges for domestic auto brands.

Furthermore, in terms of production, especially within the supply chain, most domestic auto brands are disadvantaged in competition for the first supplies of core parts and still have large room to improve procurement and production cost control.

Domestic auto brands have higher rates of transmission procurement, including of ATs, which are dominated by Aisin-AW (more than 80%) and DCTs, which are dominated by GETRAG (acquired by BorgWarner). As domestic auto brands step into the mid-tier and

high-end market, they are increasingly dependent on others' key parts.

Foreign suppliers have slowed their investments in China over recent years and strictly implemented long-term plans rather than conducted massive expansions. Domestic auto brands have little say over the first lines for supply of key parts. For example, GAC had to lower monthly output of its GS8 model due to a lack of transmissions.

However, this could change as domestic auto brands are building JVs to ensure enough supply for production. In April 2018, GAC and Geely signed JV agreements with Japanese transmission supplier Aisin to secure their output of 400,000 vehicles in 2020.

Figure 19: Automatic transmission (AT) supply among domestic auto brands

Domestic auto brands Transmission Home-made/procured Suppliers

SAIC DCT, AT Home-made DCT, procured AT Aisin-AW

Changan AT Procured Aisin-AW

GAC DCT, AT Home-made DCT, procured AT Aisin-AW

Great Wall Motor DCT Mainly procured GETRAG

Geely DCT, AT Home-made DCT, procured AT Aisin-AW

Chery CVT, DCT Procured WLY, GETRAG

BAIC CVT Procured WLY

Source: Great Wall Securities


30

2 Brand upgrades cannot rely solely on displacing competition Market watchers are concerned that domestic auto brands have made little progress in branding and have increased their market shares only through displaced competition, with cross-market and cross-level competition the most common. For example, domestic auto brands leverage SUV models to compete for potential buyers of JV sedans or offer larger vehicles and more configurations at the same price range to satisfy consumers' needs within their budgets. The typical competition is between sales of domestic auto brands' compact SUVs priced at RMB 100,000 to RMB 150,000 and JV's small SUVs. In this segment, consumers are less loyal to brands and more sensitive to cost performance and practicality.

The biggest risk in the aforementioned approach is in its strong impact on the products, channels and services of domestic auto brands as JVs expand their SUV product lines and fill in gaps in market segments with their strengths in platforms and differentiated factory arrangements. For example, in early 2018, VW and Toyota completed their SUV product matrixes by launching new models. Besides, VW plans to unveil a third brand dedicated to economical family cars and produce its first three models in 2019. The first model will be a low-end SUV priced at RMB 60,000 to RMB 80,000, followed by sedans that will all be priced at less than RMB 80,000.

Public praise for domestic auto brand products in the SUV market does not mean brand upgrades. In the eyes of the carmakers surveyed, domestic auto brands have not yet made

breakthroughs in brand premium. Instead, they have simply moved to the next price range and maintained fixed price gaps with JV brands, i.e. the prices of domestic auto brands are only 60% of those of JV brands at the same level and size.

Price is the most visible quantitative index for brands. Domestic auto brands have made substantial progress in transaction prices and should be aware that brand upgrades require years of investments and experiences in technology, product, emerging technology and insights into user demand. Domestic auto brands have a long way to go to benefit fully from technologies.

Currently, most domestic auto brands are still in the stage of self-development and a long way from having brand value or social responsibility resonance. In terms of brand advocacy, such as quality and durability, domestic auto brands are weaker than foreign ones. Despite substantial investments in marketing over the years, domestic auto players have failed to develop integrated brand building plans for sub-brands or at the group level due to a lack of overall development of their marketing systems.

3 Organizational efficiency is the largest constraint on state-owned auto brandsThe most critical issue for domestic auto brands facing change in their industry is to integrate existing resources, overcome operating obstacles, improve organizational efficiency and maximize resource allocation and optimization. The multiple-brand strategy that prevailed

among domestic auto brands a few years ago, sluggish product development, a lack of product competitiveness, and setbacks in recent attempts to step into mid-tier and high-end markets all reflect that domestic brands lack clear strategies for brand growth, and more critically, a set of scientific systems. On the surface, brand is a vulnerability for domestic automakers, but more deeply, this is about their limited capabilities in building systems, including every segments required to create visible and tangible touchpoints with consumers, such as market-oriented product R&D systems, technical systems, supply chain management systems, marketing and aftersales systems.

As a result, domestic auto brands need to build long-term and stable decision-making mechanisms and effective organizational processes. Today, state-owned domestic auto brands all face lower organizational efficiency, primarily due to decisions made by their leaders, including in product planning, R&D and design, procurement, production and marketing systems building. The appointments of these leaders are all decided by central and local functional departments and management assessment mechanisms that focus on the performance of the group as a whole, which is one of the reasons for domestic auto brands' neglect in systems building, strategic delay or poor continuity. In recent years, state-owned carmakers have made frequent changes in their organizational structures and personnel, disrupting their corporate strategies and brand continuity.


21

32

Implications for domestic auto brands

1 Build solid foundations before upgradingAs stated earlier, domestic auto brands have made progress in terms of gaining public praise of their models, but still need to spend several years turning these star products into brand equity. Over recent years, one important way for domestic auto brands to improve their products has been to provide more configurations and outstanding design to cater to the preferences of Chinese consumers. However, in terms of parameters used to assess carmakers' core performance, such as fuel consumption, drivability and dynamics, they are still a long way from JVs.

Though technology and safe configurations such as ESP, smart connectivity and super control panels can enable companies to overtake JV sales in the short run, they are unlikely to turn into long-term competitiveness or improve brand awareness and reputation. Because market competition is shifting from product to brand, domestic auto players need in the short term to solve the more critical issues of product quality, power and performance, including how to enhance

their technical capabilities in the independent development of chassis, powertrains and gearboxes, acquire foreign brands and introduce dynamics technology. In the end, however, improving independent R&D is their key to victory. Domestic auto brands have vulnerabilities in quality control and assurance. For example, carmakers can rank among the top 10 best sellers yet also see sales drop or even suffer reputational damage from the same hot products due to product quality and consistency issues. More critically, as previous hot selling products reach 100,000km, problems including quality issues erupt, reflecting carmakers’ low basic capabilities. Parts quality, assembly process and vehicle quality control are touchstones for domestic carmakers' quality control capabilities.

Moreover, raising brand premium is not just about product, but also about services, especially during and after sales. The development trajectories of South Korean auto brands can offer some valuable experiences. Growing with policy support, South Korean

carmakers are dominant in their local market and rank highly in the hot sales lists in well-established auto markets including the US and Europe. They are also at the top of the J.D. Power car quality list in terms of product quality. Hyundai and Kia first attract consumers with high cost performance, i.e. deploying the so-called "high-level configurations at a lower price strategy" (low-priced models equipped with configurations usually only seen in higher-level models or even limousines) to step into the market. However, what has helped these two foreign carmakers take hold in the US and Europe has been their breakthroughs in design, excellent quality and service guarantees, such as innovative services like 10-year/10,000 km warranties and commitments to free returns in the US when it was hit by the financial crisis.

Currently, domestic auto brands have weak service quality and efficiency, including in sales and aftersales, versus JV brands. Nevertheless, thanks to cooperation with internet companies, domestic auto brands are in a position to narrow the gap in service quality, purchase and aftersales experience.

2018 China domestic auto brand whitepaper | Implications for domestic auto brands

33

2 Focus on system buildingLooking at the domestic auto brands that have grown rapidly in recent years, there was one similarity in their platform strategies a few years ago that enabled them to achieve breakthroughs in model development flexibility, productivity and cost control. Platform-based operations allow carmakers to diversify their product categories and develop different kinds of products that align with models with various purposes and styles.

In the PV market, the main foreign carmakers are building new PV platforms with the objective of effective production at lower cost. Examples include VW's MEB platform on which 50 PEVs and 30 PHEV models are built8, and Toyota’s TNGA platform. Toyota has placed platform strategy atop its agenda, introducing two domestic JV factories into its TNGA platform that developed the new generation Camry Hybrid as its first model in the Chinese market.

3 Newcomers need to play it safe as the channel for brand upgrades is narrowingRisks and challenges have long co-existed in Chinese auto market. The market sent a clear signal from 2016 to 2017 that domestic auto brands have room for growth, but that room is narrowing. The launch of independent mid-tier and high-end brands from Geely and Great Wall Motor was driven by external factors and the inevitable result of their growth. These two companies have sold nearly one million vehicles and built sizable client bases with their excellent products, so took the opportunity to launch mid-tier and high-end brands.

Some fast-growing domestic auto brands have benefited from their focused strategies. They achieved positive results in sales and product reputation on which they built their brand identities and expanded this to new models, as well as created product matrixes with distinct brand symbols, eventually turning these into their brand language. Notably, GAC’s Trumpchi and SAIC’s ROEWE have thee

8. https：//www.d1ev.com/kol/61262

2018 China domestic auto brand whitepaper | Implications for domestic auto brands

GS4 and the RX5, two compact SUVs that won followers and user praise, before they rapidly pushed forward small-, mid- and large-sized SUVs and compact sedans during the golden age of hot selling models.

However, in the meantime, most domestic auto brands are still stuck with undefined brand positioning, redundant product lines and intensifying internal consumption. It is not always appropriate to aggressively launch mid-tier and high-end brands or cut down product lines to concentrate on developing a hot selling model. Domestic auto companies must be fully aware of their own positions and reinforce their foundations. After reaching a certain size, they can upgrade their brands through generations of products that narrow the price gap with JV brands. This is inevitable given brand upgrading and the shrinking market for cars selling at less than RMB 100,000. For all carmakers, this means they need to develop strategic plans to pushing ahead in the mid-tier and high-end market.

Acknowledgements

Authors

Special thanks go to our respondents: Li Xisha, chairman of the China Advertising Association of Commerce; Wang Lang, executive director of Chery Strategic Planning Division; Wu Songquan, director of CATARC Policy Research Center; Tu Jianfeng, general manager of Guangzhou Dentsu and Xu Cheng, Guangzhou Brandmax Marketing CEO for their support.

Executive chief editor: Andy Zhou, Lydia ChenMembers: Zoe Wu, Li Shuai, Che Haoyang, Du TaoContacts: Nickie Wang, [email protected]

Song Panpan, [email protected]

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more. Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities provide services in Australia, Brunei Darussalam, Cambodia, East Timor, Federated States of Micronesia, Guam, Indonesia, Japan, Laos, Malaysia, Mongolia, Myanmar, New Zealand, Palau, Papua New Guinea, Singapore, Thailand, The Marshall Islands, The Northern Mariana Islands, The People’s Republic of China (incl. Hong Kong SAR and Macau SAR), The Philippines and Vietnam, in each of which operations are conducted by separate and independent legal entities. The Deloitte brand entered the China market in 1917 with the opening of an office in Shanghai. Today, Deloitte China delivers a comprehensive range of audit & assurance, consulting, financial advisory, risk advisory and tax services to local, multinational and growth enterprise clients in China. Deloitte China has also made-and continues to make-substantial contributions to the development of China's accounting standards, taxation system and professional expertise. To learn more about how Deloitte makes an Impact that Matters in China, please connect with our social media platforms at www2.deloitte.com/cn/en/social-media.

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