European Union

Chinese Brands: A Real or Perceived Threat?

michael.j.gartside@uk.pwc.com

There has been much speculation as to how the arrival of low cost Chinese cars will impact the EU market - yet estimated sales amounted to less than 2,000 units in 2007, a figure well below automakers' ambitious projections. How real is the threat posed by Chinese brands within the EU market and will the competitive landscape be forever changed?

 
China's eleventh and most recent "five year plan" supports the growth of a robust automotive industry and encourages the development of light vehicles destined for export.

To date, the majority of sales initiatives in the EU have come from local entrepreneurs who have seen an opportunity, though negligible sales in 2007 surely call that opportunity into question.

One reason cited for the likely success of Chinese brands in the EU is the achievement of the Japanese and Koreans. However, if the past is to provide an indication of the future, it must be placed into proper context.

A host of internal and external factors have aided Asian brand growth in the EU over the past three decades, most notably the demise of British Leyland/MG Rover and weaknesses among Fiat, Ford and GM at the start of this decade.

These factors, combined with the launch of competitive diesel engines, crucial in a diesel-centric market, along with products in strong growth segments such as midsize SUVs, accelerated market share growth. Additionally, arguably higher levels of quality and equipment for a lower price and heavy investment in localising design, product development and assembly in Europe also contributed.

None of these elements apply to the Chinese product at present - if anything, generally, the opposite is the perception. Chinese automakers have launched substandard and inappropriate products in a market currently characterised by strengthening local player and increasing competition.

In a market intensely focused on safety and the environment, poor crash test ratings and high CO₂ emissions will represent just two of the many hurdles on the path to market prominence. Brand image and recognition are also likely obstacles that may prove difficult to overcome in the near-term.

Presently, the value oriented status of the current wave of Chinese products represents their core unique selling proposition. However, Cost-of-ownership analysis suggests Chinese products can' be more expensive than competitors. Additionally, the nearly new car market will further undermine their value proposition in the overall vehicle market.

The European auto industry cannot afford to be complacent as Chinese OEMs will undoubtedly close the competitive gap in the future as they mature and begin to utilise established global suppliers. However, although Chinese sales will likely increase, significant gains may be harder fought than in the past.

More Negatives than Positives

Chinese brands will have to invest heavily in product advancements to increase competitiveness if they aspire to sell more than a few thousand vehicles annually in this uncompromising market. In the near-term, targeting less mature markets like East Europe and Africa may provide an easier route for growth outside the Chinese mainland.

Does Low Price Sell? - Proton UK Market Share

 
In spite of a UK dealer network, new products, and the Lotus connection, low price cannot compensate for poor and inappropriate product, a lack of diesel options, and weak branding. These factors and increasing competition have contributed to Proton's declining market share.

China Brand Eu+EFTA Market Share Scenarios

 
As next generation models appear and marketing and distribution strategies develop, gradual growth should be observed. However, consolidation in the Chinese auto sector, combined with likely cost increases and growing value oriented competion could limit market share gains.

Examining the Value Proposion

Chinese Products vs. Key Competitors

Model Trim	Country of Origin	Retail Price (Euro)	Fuel Economy (1/100 km)	Fuel Cost (3 yrs in Euro)	C02 (g/km)	C02 Tax (France in Euro)	Residual Value2 (36 mths)	3 Year Cost of Ownership3
								Lower (Euro)	Upper (Euro)
Chevrolet Captiva 2.0L VCD	South Korea	26,000	7.4	5,150	197	750	50%	19,174	19,174
Landwind X-Pedition 2.0L Petrol	China	15,990	10.61	8,331	237	1,600	35% / 30%	21,061	20,267
Kia Sorento 2.5L CRD LX	South Korea	26,960	7.9	5,498	209	1,600	45%	21,872	21,872
Great Wall Hover 2.4L Petrol	China	19,600	12.3	9,660	250+	12,500	35% / 30%	25,980	25,000
Shuanghuan CEO 2.4L Petrol	China	25,990	10.5	8,253	208	1,600	35% / 30%	28,046	26,747

¹No data provided for X-Pedition so estimated from consumption at 90kmph +25%

²Retained value for Chinese brands is an estimate

³Based upon fuel cost estimate over 60,000 km, CO₂ registration tax in France and depreciation cost.