Luxury Auto Marketing in China Research Paper

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Executive Summary

There is a shift in the Chinese luxury car market, and BMW is building a plant to take advantage of it. The top three luxury automakers – by far – are Audi, BMW and Mercedes. They each are very similar to one another, and have similar market shares in China as well. Early adopters in China were the newly-rich, making their first luxury car purchase as a status symbol. This is shifting, and to win greater market share BMW will need to win existing customers to buy a second or third BMW. The problem is that a) their marketing strategy in the country isn't built around that objective and b) Chinese consumers have very low brand loyalty compared with those in other nations. This report will outline the unique characteristics of the Chinese market, and make recommendations for how BMW can target the new segment – current customers – in order to meet its aggressive sales targets. The key elements of this plan are in the product, the buying experience and the messaging.

Part I. Current Marketing Situation

Market Description

BMW is based in Germany, and this report will focus on the company's approach to the Chinese (PRC) market. The People's Republic of China is one of the world's largest auto markets. BMW's positioning slots in more or less at the lower end of the luxury market, where there is a fairly sizable market worldwide among people who are generally well-off but not super-rich. BMW ranks 4th in its domestic market, behind Volkswagen, Mercedes and Audi, meaning that it does not capture the number one position in the German luxury market. It has a 7.8% share in Germany (Bekker, 2017).

The Chinese auto market has accelerated rapidly in the past fifteen or twenty years, from being a relatively minor market with huge potential to a major market but still with huge potential as China's economy continues to grow. BMW is approaching the Chinese market aggressively, building a plant in Shenyang in order to increase Chinese production capacity by 50% to 450,000 vehicles (Clover & McGee, 2017). For reference, BMW sold 262,000 cars in Germany in 2016 and 313,000 in the United States, so that figure would make China the company's largest market by far (Car Sales Base.com, 2017; Bekker, 2017).

The Chinese market is generally favorable, at least to foreign companies willing to open manufacturing facilities in the country. China has a totalitarian Communist regime, which means that there is both significant corruption (Transparency International, 2016) and significant government interference in business (Heritage.org, 2017), but private enterprise that partners with Chinese entities or creates large amounts of jobs generally receives favorable treatment. Overall, though, China is a riskier place to do business than Western democracies.

Because the Chinese market is has such potential, competition is high. All luxury automakers want a piece of the Chinese market, and thus are invested in growing their market share. That the market is growing allows for all companies to compete more on the basis of establishing their brands in the market than on fighting each other for share; building share is competitive, but not ruthlessly so, because it doesn't need to be.

There is an interesting juxtaposition in the Chinese economy. The automobile industry is growing rapidly, turning in 13.6% growth in 2016, but that growth is expected to slow to 5% in 2017, which still leaves the country as the world's largest auto market. The country's growing economy is one of the reasons why its auto market is booming. But the government is also conflicted about the auto market. Aware of the need to curb the country's contribution to climate change – China has massive pollution and water issues (Hsu, 2016) – the government has incentivized smaller vehicles, at the expense of luxury vehicles. However, the cross-price elasticity of demand between those small vehicles and the luxury car market is minimal; the latter is driven by the economy rather than by tax policy. Further, the government is instituting a complex quota system in order to reduce the number of gasoline or diesel-powered vehicles on its roads (APF, 2017). This could put BMW's new plant's success at risk.

Overall, the Chinese market remains highly lucrative. Most automakers, faced with mainly-mature markets in their home countries, see China as one of the major key pathways to growth.

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Thus, they are willing to put up with the different challenges in doing business in an unfavorable environment, just to gain access to the sort of growth and market scale that China has to offer.

Channels and Logistics Review

As a general rule, automobiles in China are sold through dealerships, not entirely unlike what is familiar in the West. This distribution model was basically brought to China by foreign automakers that wanted to retain a familiar distribution channel for their autos. There are, however, a number of different forms that this takes. The different distribution models found in China's retail auto market are: 4S, auto supermarkets, mega-dealerships, auto trade markets, and auto parks. Auto loans are common to help move vehicles, and these are government by government-run banks (USCBC, 2010). To put things in perspective, the top-selling group in 2010 was the Shanghai Automotive Industry Group. They moved 2.4 million vehicles, which means that one company is 25% bigger than Canada, as an auto market.

A review of the different distribution channels, along with their pros and cons, is as follows:

Type of Channel

Strengths

Weaknesses

Segment served

4S

· Comprehensive service

· Popular with consumers

· High start-up costs

· Most lose money

· Poor OEM-dealer alignment

· Lack of reliable dealers

Mainstream consumer market in big cities

Auto supermarkets

· Variety of brands at single location

· Consumer choice

· Penetration into small- and mid-sized markets

· Brands sold alongside rivals

· Cost pressures

Small- and mid-sized markets

Mega-dealerships

· Sell multiple brands

· Generally profitable

· 44% of auto sales

· Brands sold alongside rivals

· Poor value prop for luxury brands

Low end / mass market

Auto parks

· Clusters of different types of dealers

· Financing services on site

· Newer model, relatively untested

· Only major cities

Not 100% known but seems to be mass market in big cities

Source: USCBC (2010)

Market Characteristics

As noted above, China is the world's largest auto market, and growing rapidly. Sales at the low end are governed to an extent by tax policy, but for luxury automakers this is less important that the overall health of the economy. Luxury cars are seen as status symbols. The market is very competitive, but high growth rates have allowed all competitors to grow quickly, and BMW has made a massive new investment in a manufacturing facility in order to capture more share in the market. The Chinese auto market is estimated to be around 29.4 million vehicles. At capacity of domestic supply, BMW would make 450,000 cars, for a 1.5% share of the market. This is much lower than its share of its domestic market in Germany, but still would make China its biggest market by far.

Market Potential

The Chinese market's estimated 2017 growth rate is 5%. Last year's high rate was illusory, based on a tax policy that has since lapsed. Without that tax policy, and knowing that China's economy is starting to slow, a continued 5% rate can be expected. That delivers the following estimates for the size of the Chinese auto market over the next three years:

2017

2018

2019

2020

Vehicles Sold (millions)

29.4

30.9

32.4

34.0

USD value (billions)

$ 572.5

$ 601.1

$ 631.1

$ 662.7

Thus, the growth in terms of units and dollars is still projected to be very strong. By 2020, BMW hopes to make 600,000 autos a year in China (Clover & McGee, 2017), and sell them. That would give them a market share of 1.76%. up from 1.5% today . With current volume at 300,000, this means that BMW will double its 2016 sales level by 2020, just to capture that tiny bit of added share.

Customer Needs

There are two reasons why people buy luxury cars – because they are great cars, and for the status that luxury cars convey. The Chinese car buyer certainly appreciates the former, but also buys for the latter, to a greater degree than a Western auto buyer might. A lot of that comes down to many.....

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