Auto Industry

Shifting into third-tier

Why foreign carmakers are excited by Chinese cities you’ve never heard of

Shifting into third-tier

It is the people’s car after all: VW

Foreign car companies are looking for growth in some of China’s remotest regions.

Take Gansu, which has more than its share of mountains, desert and scrub. Home to a stretch of the ancient Silk Road, the western province has long been traversed by horse or camelback. But travellers should now forget beasts of burden and buy a Volkswagen, says Liu Xiaojun.

In charge of marketing the German brand, Liu has been promoting Volkswagen at a series of “town square” events across Gansu. He has a straightforward plan: park his Volkswagens in the centre of town, and locals will gather to see what the fuss is about. Then send in the salespeople to talk face-to-face with potential customers.

Up to 300 people per event have been expressing an intention to buy, Liu told the Nanfang Daily.

Volkswagen is one of a number of foreign car brands making a push into China’s less developed regions, with Nissan, Ford and Chevrolet also holding similar events in third and fourth-tier cities.

The focus on frontier territory is being driven by slower sales in more mature markets. After two years of annual sales growth of 45% and 32% respectively, the industry is now having a breather. Car sales are now forecast to grow just 3-5% this year, according to the most recent projections from China’s State Information Centre.

As a result many brands are struggling to meet targets, and some are cutting prices. Consumers are holding off: waiting to see if there will be further reductions or put off by the rising cost of credit. Worsening traffic in the bigger cities may also have disssuaded some potential buyers.

Even during the days of accelerated growth, third and fourth-tier cities offered better-than-average results, with an executive telling Southern Weekend that Volkswagen experienced 100% sales growth in 2009 and 50% in 2010. But there now seems to be a more deliberate effort to chase sales outside the major urban centres. The newspaper also spoke to a Nissan representative who said that more than 50% of its sales are coming from third-tier markets and below.

It helps, of course, that few of these locations have the restrictions on car ownership now introduced in cities like Beijing, Shanghai and Guangzhou.

The dropping of a two-year subsidy programme for purchases of smaller cars may also be helping indirectly, with buyers trading up as the price gap narrows between the cheaper entry-level vehicles and the mid-tier brands now being offered at more of a discount.

Selling outside the big cities is not an entirely new tactic, mind you. In 2004, in one of the previous periods of sales slowdown, China Automotive News, an industry publication, launched its first National Car Tour, visiting 100 cities. Car bosses came away with a better awareness of the potential purchasing power outside the big cities and the more developed coast.

There was another push during the 2009 financial crisis, when sales growth dropped to 8% and the government introduced subsidies for some vehicle types sold in the countryside.

But generally it has been the domestic brands that are better established outside the larger cities. What’s different this time is that the foreign marques are also making more of an effort to expand. As these models also tend to be higher-priced, the move can also be interpreted as evidence of improved spending power in the inland economy.

Hence the need to widen sales and distribution networks, in search of a broader commercial footprint. Zhengtong Auto recently announced that it would pay Rmb5.5 billion ($860 million) to acquire Shenzhen SCAS, one of China’s largest dealerships. It is the third such acquisition that Zhengtong has made this year.

Next stop Gansu, perhaps.

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