Savvy and sophisticated: Meet China’s evolving car buyers
Our 2017 survey of Chinese auto consumers shows they’re demanding more from carmakers. How can companies keep up with shifts in this must-win market?
After China’s automotive market registered its lowest growth since 2011, it rebounded strongly in 2016 (Exhibit 1). Jumping 20 percent from 2015, much of this vigorous expansion resulted from the country’s temporary suspension of sales taxes for cars with small engines. Volatility continued in 2017. A large drop early in the year reflected the strong “pull ahead” sales in December 2016, as many consumers sought to take advantage of a lower sales tax rate before an increase took effect on January 1, 2017. However, sales growth eventually picked up again over the course of the year.
While the recent resurgence in sales represents one of the most dramatic shifts in China’s automotive market, a variety of other factors are at play that will drive even more profound changes in the industry over the coming years. Perhaps the biggest of these changes involves the transformation taking place among car buyers. Increasingly savvy and sophisticated, today’s auto buyers demand more digital features and are growing increasingly unhappy with the traditional dealer experience. The emergence of this more demanding segment of car buyers is reshaping the car industry.
To better understand China’s car buyers, and how changes in consumer behavior will impact the future of the auto market, we conducted an extensive survey in July 2017 of more than 5,800 consumers who purchased cars within the last year. (For more on our methodology, see sidebar, “About the survey.”) These consumers came from 44 tier-one to tier-four cities and seven counties, located in 19 key city clusters across China. Collectively, these clusters contribute 90 percent of China’s urban GDP and contain half its population. In addition, this report reflects the latest forecasts from our proprietary China new-car-sales database, as well as insights from the McKinsey Global Institute.
Continued dominance through 2022, but rules for winning will change
Despite its recent volatility, we expect the Chinese auto market to remain the global industry’s primary growth engine (Exhibit 2).
Although sales should increase by a modest-for-China 5 percent annual rate through 2022, this will equal 53 percent of the growth in the global car market—still a lower share than in the past five years, when China contributed 78 percent of global growth in car sales. In contrast, the developed markets of Europe and the United States will either contract or stagnate during the same period, with much of the remaining global growth coming from a fragmented set of emerging markets.
Sources of sales growth: SUVs and premium segments
Sport-utility-vehicle (SUV) sales continue to dominate growth in China, and are expected to move beyond entry-level segments. In the last 4 years, the SUV segment accounted for 66% of total car sales growth. This was largely driven by small SUVs in the B and C segments1, which last year accounted for 78 percent of SUV sales (Exhibit 3).
Chinese brands are the biggest winners in the entry-level SUV segment (priced between 50,000 renminbi and 100,000 renminbi, equivalent to approximately $7,650 and $15,300 as of this writing), where they faced limited competition from international players. They captured an 89 percent share of this lower-price-tier market. Dominating this segment helped Chinese local brands increase their combined total market share, not including joint-venture brands, in the SUV market from 27 percent in 2012 to 48 percent in 2016.
We expect SUVs to retain their strong appeal. This growth will occur across all SUV segments and price bands, with the entry-level SUV segment contributing 44 percent of the total. This means that in 2022, one out of every two cars sold will be an SUV.
Premium is on the rise. Like in many other consumer categories in China, the move upscale to premium products is an ongoing trend in the car market. Our survey shows that 55 percent of respondents who replaced or complemented their existing cars in 2016 chose more expensive new ones. Also, although we found that around half of our respondents no longer think of cars as status symbols, young people and those who bought expensive cars (vehicles costing over 400,000 renminbi) are still more likely to consider cars status symbols than the average consumer.
Moving forward, as the market slows from double- to single-digit growth, we expect that premium brands will continue to outpace the rest (Exhibit 4).
Looking at price segments, cars costing more than 250,000 renminbi should see sales expand at a compound annual growth rate of 10.5 percent, while the rest are expected to increase just 4.1 percent. Support for this scenario comes from over half of our survey respondents, who say they plan to trade up to a more premium car for their next purchase. And 31 percent said they will reevaluate at the time of purchase, based on the new brands and products trending when they look again.
Entry-level SUV makers must grow beyond their segment. Entry-level SUVs have propelled local OEM growth, explaining 98 percent of local OEMs’ increase from 2012 to 2016. The overall B- and C-segment SUV markets grew by 10 percent and 38 percent a year, respectively, from 2012 to 2016. In comparison, local brands in these segments grew by 94 percent and 90 percent, respectively, during the same period (Exhibit 5).
The SUV sweet spot is increasingly crowded. While the SUV market recently has been an attractive source of growth, the segment is becoming an increasingly crowded battleground. In 2015, 16 new SUV models were launched in the market; 26 were released in 2016, and an additional 32 models (not including new generations) debuted in the first half of 2017. Compare that with an average of 12 models from 2011 to 2014, and it becomes clear why the impact on margins has been significant. One of the leading local players, Great Wall, announced a 50 percent drop in net profit, which fell from 12 percent in 2016 to 6 percent in the first half of 2017. What’s more, local OEMs saw little success in other segments. For instance, they lost share in the sedan segment, dropping from 22 percent in 2012 to 16 percent in 2016.
To avoid fierce price wars in this lower-price market segment, players are launching more premium SUVs (or, in the case of Great Wall, an entirely new, more premium brand) to improve margins. However, it remains too early to tell whether such actions will convince car buyers to buy these brands in a segment filled with established international brands.
Local brands find their boosters. The biggest fans of local automakers (meaning they consider them either more reliable than or on par with foreign brands) are from Northern China, where 43 percent of respondents agree with this statement, compared with 33 percent in other regions. Nationwide, 38 percent of the mass-market middle class express good opinions of local brands, versus 26 percent in the affluent segment. Also, 39 percent of respondents in the customer segment characterized as “non-digitally savvy” speak positively about Chinese brands, while only 25 percent in the “digitally savvy”2segment say the same.
One thing consumers across all dimensions agree about is the lack of upscale strength among local brands. Only 8 percent say local players have aspirational brands they want to buy next. Clearly, whether local players can replicate their current success with entry-level SUVs across other segments remains an open question.
Looking forward, Chinese brands may also increase their presence in the electric-vehicle (EV) segment as more car buyers recognize that Chinese carmakers produce acceptable EVs. The domestic industry’s growing production share of EVs, from 18 percent in 2016 to 23 percent in 2017, provides proof of this increasing awareness.
Consumer trends: Less loyal, but more connected
Our survey of China’s car buyers shows declining repurchasing loyalty (from rates already lower than those seen globally) but growing demand for digital features such as connectivity. A new generation of Chinese car buyers has goals and desires different from those of previous respondents, and fewer survey takers express satisfaction with the dealer experience.
Falling loyalty compels automakers to rethink brand strategies
Our survey indicates that only 12 percent of recent car buyers want to buy the same brand the next time (Exhibit 6). While China’s car buyers have always been fickle regarding brands, this represents a steep decline from the 19 percent registered in last year’s survey.
Nevertheless, loyalty among international car owners is higher than that for local ones. For example, 15 percent stated they will buy the same international brand next time, compared with 9 percent of local car owners. Also, our research suggests consumers have the highest loyalty to premium brands, although the ratings are still only 18 to 23 percent. One potential explanation for this is that many consumers are likely to trade up (43 percent of the respondents plan to buy a more premium brand); another could be that consumers simply value a specific offering at a given moment.
From a consumer-segment perspective, younger (under 34 years old), more affluent consumers exhibit the most loyalty, with 18 percent choosing to repurchase the same brand, compared with 11 percent for other segments. Whatever the reason, mainstream brands must rethink their strategies for capturing the imagination of potential buyers. Conversely, it opens the door for ambitious players with growth plans.
The next generation of car buyers is transforming the market
Our survey offers a glimpse of the next generation of China’s car buyers, who, while heavily invested in connectivity, appear less convinced of the need for a personal car. Among our insights:
Cars are no longer essential. Fifty-two percent can imagine life without a car, 36 percent agree it’s not as important to own a car as it was in the past, and 38 percent are willing to give up their cars if they receive free shared mobility in return.
‘Stay connected.’ Asked about their satisfaction with current entertainment and navigation features and services, 10 percent more young buyers than other groups considered their current in-car systems outdated, and 83 percent of them found it “appealing” to have phone-car synchronization.
Shared mobility is rising. Millennials are twice as likely to use car-sharing services on a weekly basis compared to older generations (12 percent versus 6 percent) and are more likely to use peer-to-peer (P2P) car-rental services (14 percent versus 9 percent). Although 22 percent of older drivers are unwilling to share their cars on P2P car-lending platforms, only 11 percent of millennials say the same.
E-commerce is gaining ground. More of the next generation (23 percent versus 10 percent of those over 24 years old) are using online channels to make purchases.
There’s less trust of commercials. Young consumers show slightly lower trust (three to eight percentage points less than older segments) regarding information sources such as dealer call centers, TV commercials, newspaper, and road shows.
There’s big appetite for in-car connectivity, but many are hungry for existing features to improve
Consumers are difficult to please when it comes to in-car connectivity services. They want in-car services and will switch car brands to get what they seek. Connectivity is a must-have feature, and they are more willing to pay subscriptions for content than customers in Germany or the United States.
Consumers are choosy about services. Seventy-nine percent of consumers see a need for in-car services. They are, however, picky regarding what they want. Sixty-four percent of consumers in China are willing to switch brands if their requirements go unmet—substantially more than the 37 percent in the United States and 19 percent in Germany (Exhibit 7).
While half of respondents express satisfaction with their in-car entertainment and navigation services, the other half view these features as outdated with limited functionality. Smartphones seem to set the expectations bar when it comes to functionality and ease of use. Consumers also see a need to have their in-car and other mobile experiences at least partially harmonized: half of all consumers recognize the benefits of smooth synchronization between their phone apps and car services.
Demand for in-car connectivity is much higher in China. A third of the respondents say it is critical to have in-car connectivity, compared with 20 percent in the United States and 18 percent in Germany. Only 11 percent of respondents are not willing to pay extra for an in-car connectivity system, compared to 43 percent in Germany and 30 percent in the United States.
Subscriptions seem to have potential as a new revenue stream. Sixty-two percent of customers in China are willing to pay subscriptions, significantly more than the 29 percent in the United States and 13 percent in Germany. An increasing appetite to pay for content is also emerging in other digital areas, such as online video, where—contrary to many predictions—people are willing to pay for high-quality content. For example, iQIYI, an online video platform, has more than 20 million subscribers today, up from virtually none three years ago.
Is downstream trouble ahead?
Consumer expectations continue to rise regarding the retail experience. There are fewer first-time buyers, and customers are increasingly digitally savvy in all aspects of their lives. Although consumers say they visit authorized car dealers (also known as 4S stores, for sales, spare parts, service, and survey) multiple times before buying a car, only 49 percent express satisfaction with this experience. The main sticking points include low information transparency (for example, on options, features, and prices), time-consuming purchases and other processes, long travel times to the closest 4S store, and relatively low-tech and outdated service offerings.
Automakers could address most of these factors by applying digital solutions. Although online channels play a leading role during the initial stages of the consumer journey, automotive players have not been able to develop an integrated online-offline journey. The integration should start from linking social media, offline activities, and the consumers’ personal circles of friends, and be rolled out to all dealers.
Automakers have already positioned themselves to develop a customer experience like leading digital players, given that consumers view their websites as the most trusted digital sources of information. What’s more, while customers may express dissatisfaction with offline dealers and services, these facilities won’t disappear in the foreseeable future. In fact, 87 percent of car buyers value the expertise and aftersales service offered by dealers. The key factors valued by buyers visiting 4S stores include the one-on-one dedicated salesperson experience, the ability to explore the store freely, and having desired car configurations for test drives. By integrating these and other services into a seamless online-offline journey, automakers could help 4S dealers improve their differentiation from both competing brands and emerging channels.
Our survey reveals an urgency to act now as far as integrating online and offline elements of the retail experience. This holds true for both brands and 4S dealers seeking to avoid losing direct contact with the customer or even losing sales. For example, increasing numbers of car buyers are making purchases online. In 2016, customers purchased 5 percent of vehicles online, compared with 1 percent in 2014 (one caveat: in this case, online still means that customers close deals for these vehicles via nearby 4S stores). The shift to online could accelerate strongly, however, since buyers in the 18-to-24-year-old age range are almost twice as likely to purchase online as older consumers. On the supply side, digital players are exploring potential roles in the industry. For example, auto vertical Autohome has already organized two virtual car shows in 2017 collaborating with around 30 brands.
Online financing companies are making headway
Financing has played a key role supporting car sales in recent years. About 30 percent of overall buyers use financing when purchasing a car.
Although traditional players like banks and OEM financing companies dominate, online financing companies—typically supported by venture-capital firms, banks, and sometimes leading Chinese Internet companies—are gaining share. Currently, 3 percent of those surveyed report receiving a car loan from these sources.
Residents of tier-one and tier-two cities are five times as likely to shop at and use online financial companies as other car buyers. The reasons consumers choose these sources include their (perceived) higher acceptance rates, lower loan costs, and more flexible and attractive loan terms. Players are attempting to differentiate themselves by moving beyond competing on price alone. For example, WeBank and Xin.com partnered to provide financing for used-car buyers, with novel programs such as guaranteed returns in 15 days, financing approval in an hour, and the ability to select custom payment schemes. Such schemes can include no payments for the first two years, a low annual percentage rate, or a car trade-in option after two years.
Although online financing is becoming more attractive, 97 percent of financing buyers still choose traditional providers. Our survey indicates that this is simply due to the perceived convenience of offline financing and the preference among buyers to finance from the dealer from which they bought the car. The rise in online sales mentioned earlier could, however, erode this advantage.
Used cars gain market share
Although the Chinese used-car market remains immature compared with other major car markets, used-car sales continue to gain market share. Top reasons for considering a used car include lower cost and the chance to buy a better model and brand for the same price. Those who did not consider buying used cars indicated their concerns centered primarily on the vehicle’s history with previous owners and potential safety issues. People who bought used cars focused more on their value-for-money aspect in 2017 than they did in 2016, when they typically sought only a low cost. What’s more, concerns for not considering used cars have dropped overall compared with 2016. As we mentioned in last year’s survey results, new entrants like renrenche.com and Xin.com—second-hand-car platforms—are trying to build trust in used cars among consumers. However, we don’t see higher interest among younger car buyers, something we would have expected. Additionally, we think that car brands can play a more important role by having more proactive trade-in programs to stimulate new-car sales while expanding the pool of attractive, younger vehicles on the market.
Electric-vehicle demand is centered in restricted-license cities
China is the largest market for new energy vehicles (NEVs) in the world now. However, demand is still highly concentrated and regulatory driven. The cities in China with license-plate restrictions for cars powered by internal combustion engines (ICE) account for about 60 percent of national NEV sales (and only about 10 to 15 percent of ICE sales). Although we expected to see interest in purchasing a NEV increase, our results show that it remained flat, with about one out of five car buyers expressing interest.
Our survey also shows a positive correlation between a consumer’s household income and his or her willingness to consider and purchase an EV. Affluent consumers with incomes that exceed 25,000 renminbi a month are three times more likely to purchase an EV than consumers in the mass middle class with incomes in the range of 4,000 renminbi to 12,000 renminbi per month.
Among current EV owners, 78 percent express satisfaction with their vehicles, slightly more than the 69 percent seen in 2016, and 63 percent would recommend them to others. The top drivers of EV satisfaction identified by consumers include exemptions from “no-drive days” and license restrictions, cost savings for fuel, and free use of city-wide charging service platforms. Top reasons for not buying EVs have shifted; in 2016, respondents cited issues such as the scarcity of charging locations and high pricing, while in 2017 they expressed concerns about the quality and safety of electric vehicles, as well as the lengthy charging process. This indicates that the investments in charging infrastructure and its higher visibility are starting to work. Now it is up to the car brands to deliver attractive, high-quality models. Another point to consider: more than half of car owners would consider purchasing an EV if the driving range increased to 400 kilometers, or if prices dropped to match those of ICE models.
Although infrastructure is less of a concern for new buyers than in the past, 23 percent of current EV owners would still like to see more charging stations. About one-third of EV owners lack their own charging infrastructure, with 38 percent of them stating that their residences do not allow the installation of charging stations. Building a public charging network could be a solution for this, since 67 percent of people would be interested in a subscription-based charging service, and 59 percent of people would be interested in a pay-as-you-go charging service.
Looking further ahead, perceptions of autonomous driving are shifting
Although self-driving cars are not available in the market yet, we also tested consumer thinking around autonomous driving. Overall, consumers are excited about autonomous vehicles and have faith in them. More than 60 percent of survey respondents believe autonomous cars will transport families in the future, compared with 43 percent in the United States and 31 percent in Germany. Our survey shows that 61 percent expect that car OEMs will have the best autonomous-driving technology, with two-thirds of these respondents preferring foreign OEMs. Surprisingly, only 12 percent expect technology players such as Baidu, Google and Tencent to develop the leading technology. This lead nearly matches the 38 percent of ICE car buyers who believe foreign OEMs are more reliable than local ones, and likely reflects the same thinking. However, when it comes to operating an autonomous fleet, many respondents prefer parties outside the traditional automotive industry. One-third of respondents say car OEMs enjoy the best positioning, while 26 percent and 15 percent, respectively, prefer the government or new mobility players.
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 to safeguard used-car prices in support of new vehicle brands and profitability. 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 skill and ideas.
Author: Wouter Baan, Paul Gao, Arthur Wang, and Daniel Zipser
Date: September 17th