It was around 2007, while the world was struggling with the early shocks from the financial crisis, that China overtook Japan to become the world’s second largest automotive market.
With the economic turmoil of the following years, car makers saw the country as a beam of hope, helping them sustain sales and make up for losses in other regions. Speedy growth and healthy consumption habits in China gave both Original Equipment Manufacturers (OEMs) and dealers the confidence to make large investments, which appeared healthy and sound for the decade to come. However, as the market saturated, and with the country dealing with pressure from a trade conflict with the US, 2018 started seeing a decline in sales trends.
2018 and 2019 worried investors, but the real moment of reckoning arrived in February 2020 when China was hit by the Covid-19 pandemic. According to the Wall Street Journal, Chinese car sales in 2020 China saw a 6.8% contraction, and while economists were upbeat about recovery in 2021, we learned that the overall retail market underperformed, growing 17.7% against the forecasted 24.9%. This, and other market data, lead to the People’s Bank of China stating that the foundation of China’s economic recovery is not yet solid. One thing is clear. After being in a relatively comfortable position during a decade of consistent growth, automotive marketers in China have had to quickly reinvent their approach in the last three years. They are now focusing on brand experience, optimising budgets and effectively targeting younger consumers groups, especially Gen Z. But how have consumers’ habits changed?
According to a recent report by McKinsey, a mix of various factors are at play. These include increased digitisation, declining global exposure, heightened competition, a coming of age of consumers, and the rise of the private sector. Combined, these factors create economic conditions that require an overhaul in marketing strategies.
While we could argue that digitisation and rising competition among brands are global post-pandemic trends, declining global exposure and consumers’ coming of age are distinctly local factors. For the first time in a decade, we see concern over unnecessary spending among younger consumer groups in China, as well as a lower level of exposure to global trends, and an enhanced interest in national brands. When making purchase decisions, Chinese Gen Z consumers are likely to stick to brands that they trust, and they appreciate these brands’ efforts to cater to their own specific needs. This means brands should be attentive to consumers to build trust and have the flexibility to respond quickly to demands for personalisation.
Foreign brands have seen challenges across sectors. For example, in the sportswear market, leading brands such as Adidas and Nike are facing challenges from local competitors Anta and Lining. According to Quartz, in the last year, Adidas’ value growth was at 39% while Anta’s was at 157%, creating a very possible scenario in which Anta may soon take Adidas’ place as the second-largest sportswear brand globally, despite the fact it has less brand recognition across markets. This points to the power of Chinese consumers with the sportswear market in the country now representing 16% of global sales. According to analysts, this figure will reach 21% by 2025.
Lower exposure to global trends and post-pandemic travel restrictions are also important factors here. In late June, the Chinese State Council said that China’s borders may remain closed until the second half of 2022, which means consumers will still be unable to travel and shop abroad, as many are accustomed to doing. According to a Boston Consulting report, 73% of Chinese shoppers plan to convert half of their annual overseas shopping budget to China, prompting international brands to double down their effort in the country, relocating part of their investments away from mature markets, and rebalancing their retail footprint in the process.
So, what does all this mean for European car brands in China? They are no doubt feeling the pressure from Chinese brands. This is particularly true beyond more mature markets such as Beijing, Shanghai and Guangzhou where consumers tend to be savvier and more informed. In the faster-growing second to fourth-tier cities, there is more sensitivity around price and a lack of understanding about foreign brands and their heritage. Some of our clients have even reported that due to foreign brands taking Chinese names in China, consumers might at times be unaware that these brands are foreign at all.
Currently, buying a European car still has status in China. That means ensuring that brand heritage is clearly communicated remains of paramount importance. Brand experience makers should also bear in mind that cultural relevance is key, and the way Europeanness is experienced must resonate with Chinese consumers. Due to the ongoing travel restrictions, there is a pent-up need to experience foreignness or an idealised version of foreign luxury. This opens up opportunities to transport consumers on these much-desired journeys, bringing them closer to European brands, enhancing brand equity, and - ultimately - converting into sales.