A young mother takes her child to an auto show in Zhengzhou, Henan province, on Nov 4, 2016. (Photo by Zhang Tao/For China Daily)
Industrial insiders predict substantial falls in profits for automobile manufacturers in the Chinese market in the near future, as car buyers born in the 1990s lead a shift toward entry-level vehicles.
They observed that the average age of first-time, new car buyers are dropping, causing cheaper, entry-level products to gain in popularity. This could lead to fierce rivalry among automakers in the low-price segment, driving down profitability.
According to German firm Roland Berger Strategy Consultants, the majority of carmakers in China could face a scenario in which average product prices slide while costs will be hard to reduce, squeezing profits over the next five to 10 years.
"International brands used to contribute a larger portion to the industry's profit pool, but their product prices will be further slashed in the future to achieve target sales volumes," said Zheng Yun, principal of the automotive practice at Roland Berger.
"There won't be a big differentiation between brands, so international brands will struggle to maintain their already narrowed pricing premium. They will have to join the race with local brands in the future, by lowering their prices.
"Looking back, those cars now priced at 120,000 yuan ($17,500) used to cost from 150,000 to 160,000 yuan," he added.
Recent research from Nielsen China, a United States consumer research company, forecast that passenger cars priced from 50,000 to 120,000 yuan would be the mainstream in the Chinese market by 2020 and represent a 69 percent market share by volumes.
With year-on-year sales growth at the forefront of automaker executives' minds, entry-level vehicles are an obvious solution because they are more affordable for young Chinese buyers. But, such products usually contribute limited profits, or even cause losses for manufacturers, as pricing is a key competitive tool to drive up volumes in this segment.
"The majority of new car buyers in China will be those born in the 1990s. They are becoming one of the industry's biggest potential targets. But, migrants to large cities are also among the first-time new car buyers," said Zhao Xinzhi, director of Nielsen China's auto vertical division.
A shift to local brands
According to Zheng, the 25-30 age group has become the Chinese mainstream and each generation differs from another.
"The generation born in the 1980s often perceive cars carrying international brands as higher-price with better quality, in contrast to the lowprice, poor-quality Chinese brand cars," Zheng said.
"But those born in the 1990s have a higher acceptance of Chinese brands. They are seeking value for money, at a time when local brands are rising in quality. These brands meet younger Chinese buyers' desire for lower-priced vehicles perfectly."
Nielsen China's research echoed these comments. It said Chinese brands are now favorites among the younger generation, while second place goes to Japanese brands, followed by German brands.
Both firms anticipate rising Chinese brands with better performance.
Neilsen's Zhao said: "We are optimistic about Chinese brands, which we expect will take about half the market volume in the next five years, with a great leap from about 7 percent currently."
Zheng, at Roland Berger, said the firm expects local brands to catch up with international names in the next five to 10 years, not only in terms of product quality, but also in average product prices.
He said: "Prices for Chinese-branded products will climb to an equal range with international brands in certain niche markets. Many local brands, such as SAIC's Roewe, GAC Motor's Trumpchi, Chery, Geely and Great Wall, have their strengths in specific segments."
Thanks to rising average product prices and cost effectiveness, many domestic brands are very likely to evade the low profitability trap, according to Zheng.
He also said that some will even achieve higher profits in the future, "but it won't alter the overall industry trend toward lower profits, as these carmakers contribute a limited amount to the wider market".
