There’s Much To Gain In China’s SUV Market — But For Whom?


Americans love their SUVs and Crossovers, and this trend seems to have reached the Far East. While sales of passenger cars, including small, midsize, and large sedans, have decreased in the U.S. light-duty vehicle market, SUV and Crossover sales have grown by double-digit percentages. SUVs/Crossovers form around 34% of the country’s light-duty vehicle market, and with improved customer purchasing power owing to low oil prices, and historically-low unemployment rates, demand for these large and powerful vehicles could remain strong in the next few years. SUVs and Crossovers have found a budding market in China as well, driving growth in volume sales in the country in recent times.

Sales of passenger vehicles surged 9.9% year-over-year in 2014 to 19.7 million units, with a 36.4% rise in unit sales for SUVs, and only a 3.1% rise in car sales. [1] As can be seen from the table, the demand for SUVs has strengthened even more in the country this year, while the same can’t be said for the car segment. Customers are opting for SUVs, which combine the looks of a car and the functionality and power of a utility vehicle, over sedans. SUVs and Crossovers have more capacity, a higher vantage point for drivers, and also carry most of the features that make a passenger car attractive, such as connected car features, comfortable seating, and attractive styling. These vehicles are also considered safer due to their larger size and more power, and also preferred for their off-roading capabilities. In the smaller cities of China, these vehicles find more use due to the bumpy road conditions. SUVs form approximately 24% of China’s light-duty vehicle market, according to our estimates, lower than the 34% market composition for SUVs and Crossovers in the U.S. — suggesting there is room for growth in China.

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China’s economy has slowed down from the high growth levels seen in previous years, mainly due to industry overcapacity, slowdown in infrastructure, and the real estate sectors. However, the GDP growth for the country is expected to be 7% this year, which is still solid. As disposable incomes increase, especially in the Tier-3 and 4 cities, customers are willing to pay a little extra for the more powerful and spacious SUVs. Production of utility vehicles increased by an impressive 36.7% to 4.32 million units in China last year, and could top 7 million units by 2018, according to IHS Automotive. This means there is huge potential to tap — for both the domestic and foreign automakers.

…..So Who Could Make More Of The Large SUV Demand?

By the looks of it, domestic manufacturers, with their budget SUVs have taken the cake in the last few months. In the first four months of this year, Chinese-branded passenger vehicles increased their market share to 43%, 4.2 percentage points more than 2014 levels. This was on the back of a 19.5% year-over-year rise in vehicle sales for local manufacturers, which included a whopping 104% rise in sales of their SUVs, which formed one-third the net volume sales for these manufacturers. On the other hand, car sales for Chinese companies fell 5% during this period. It has solely been on the back of SUVs that domestic automakers have gained ground in the country’s vehicle market, at the expense of foreign automakers, some of which import their SUVs, making them more expensive due to the added import taxes.

Eight of the ten highest-selling SUVs in China were from domestic automakers, including Great Wall Motors’ Haval H6, Chongqing Chang’an’s CS35, and Chery Automobile’s Tiggo — all of which are priced below 100,000 yuan (~$16,000). [2]

Which Foreign Automakers Are In Contention?

Volkswagen AG (OTCMKTS:VLKAY) is the largest automaker in China, with around 13% market share in the country’s overall automotive market. The group has sold only 0.2% more vehicles in the country through April, compared to the year ago period. Volkswagen has lost sales due to a surge in demand for budget SUVs/crossovers and minivans in the Chinese auto market, which is why the company lost some of its market share in the country in the last quarter, and could continue to do so. China is key to Volkswagen’s growth, and the Volkswagen Group China and its two joint ventures, Shanghai Volkswagen and FAW-Volkswagen, are planning to increase production capacity in the country to over 5 million vehicles by 2019, up from 3.5 million vehicles in 2014.

Volkswagen sold four of the six highest-selling sedans in China last year, with the Lavida selling 372,000 units. In comparison, the group had only the Tiguan in the top ten best-selling SUVs in the country, selling 237,400 units. Expanded manufacturing capacity will remove supply constraints for the group, but in order to stimulate more demand for its vehicles in China going forward, Volkswagen will have to respond better to the shifting market trends in the country.

What’s In Store For Luxury SUV Manufacturers?

The market for luxury SUVs in China is expected to double to 1.2 million units by 2020, further boosting growth prospects of Audi, BMW, Mercedes-Benz, and Land Rover in the country. Just for reference, less than 200,000 units of luxury SUVs were sold in China in 2010.

Tata Motors‘ (NYSE:TTM) Jaguar Land Rover is rolling-out its locally built Range Rover Evoque in China this fiscal year, but is facing some trouble scaling-up its output. China is JLR’s largest market, constituting 26% of the British luxury brand’s net volume sales last year, but in the first four months of this year, sales in the country have dropped 21%. This might be mainly as the Chinese customers decided to wait for the locally-built cheaper JLR models, or it might be due to the measures taken by the government to make domestic automakers more attractive, such as encouraging parallel imports of premium vehicles and gray-market vehicles, not authorized by the automakers, which are sold below the official market price. [3]

Luxury foreign automakers came under the scrutiny of, and were later fined by, China’s antitrust regulator last year, as many were found guilty of monopolistic practices pertaining to highly inflated vehicle and spare part prices. Foreign automakers tend to mark-up their model prices in China, to account for taxes and costs of transportation and assembly, but still earn a hefty margin on sales in the country. Seeing how domestic automakers are taking away share from foreign makers, mainly due to budget SUVs, local production might be the answer for JLR at least. Local production will help JLR evade China’s 25% import taxes, as well as bring down model prices. In fact, the imported Range Rover Evoque is around 1.61 times as expensive as the locally-built Audi Q5, reflecting how imported cars are less competitive on the pricing front. Jaguar Land Rover’s vehicle prices are expected to fall by 15% on account of local production, which should help the automaker gather higher volume sales, going forward.

There’s Much Room For Growth In SUVs…

SUVs are growing at a fast pace in China, and there’s still room for growth due to increasing disposable incomes in the country, and as customers opt for these vehicles over compact, mid-size, and large sedans. In addition, it might be easier for an automaker to penetrate the SUV segment, as opposed to the car segment. And here’s why…

The top 10 models formed over 40% of the net volume sales in SUVs in China last year, and 24% of the net volumes in sedans. [4] [5] [6]  The lower number of brands and models competing in the SUV segment could make it easier for a new entrant, and an automaker might need only one SUV model to do well in the Chinese market, to gain from the strong demand for larger vehicles in the country — unlike sedans, where there are more options for customers to choose from.

From large global companies to domestic automakers, there are a lot of potential growth opportunities in China’s SUV segment. As aforementioned, the Volkswagen Tiguan alone sold 237,400 units in China last year, which is approximately 9% of the net volumes sold by Volkswagen’s namesake brand, and 6.5% of all the Volkswagen sales last year in the country. On the other hand, Great Wall Motors’ Haval H6 accounted for a substantial 43% of the company’s net China sales of 730,000 units last year.

SUV demand in China is here to stay, and the potential growth is up for grabs — for foreign and domestic manufacturers, in both luxury and budgets segments.

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Notes:
  1. China automotive market sales data 2014 []
  2. Chinese Domestic Auto Makers Fuel Rise in Sales []
  3. China rethinks its car-sales model []
  4. Passenger vehicles sold in China []
  5. China-leading sedans by sales volume []
  6. China-leading SUVs by sales volume []