Don Draper would love China’s largest carmaker, Shanghai Automotive Industry Corp (SAIC). In the first half of the year it devoted Rmb4.74 billion ($703 million) to advertising its brands. According to ThePaper.cn that not only ranked first among listed carmakers in China, but was twice the aggregate amount its closest rivals spent.
The advertising and marketing expenditure of second-ranked Chang’an Auto, for example, stood at Rmb562 million in the first half. FAW spent Rmb488 million while Guangzhou Automobile (GAC) forked out Rmb438 million on ads during the same period.
This prompted ThePaper.cn to ask why SAIC so vastly outspent its peers, describing the figure as “staggering”.
A senior executive at SAIC told the online newspaper that the figure was not just for advertising but also for what it terms ‘propaganda’, i.e. releasing financial information, performance reports and such like. The problem, the executive said, is that SAIC – which has joint ventures with Volkswagen and GM plus less known units such as Huayu Auto – has “hundreds of subsidiaries and affiliate firms”. The combined advertising cost of these units, all consolidated onto SAIC’s account, has proven costly.
“SAIC’s different units cover a wide range of businesses including the production of vehicles and spare parts, as well as after-market, financial services and so forth, of which the total sum of propaganda costs is particularly high. As far as I know, other listed car firms don’t have so many units, so SAIC’s propaganda spending is much higher than several others,” the official explained.
To be fair, SAIC was nearly three times more profitable (in the first half) than second-ranked Chang’an (SAIC made Rmb15 billion) but it still puzzles some analysts that it took such a considerably bigger advertising budget to achieve this.
The good news – at least insofar as Beijing policymakers are concerned – is that SAIC seems to be devoting some of that colossal spending to growing the market share of its homegrown brands.
When it released its second quarter results recently, the group said its own-branded unit should either break even or turn a small profit on a production basis (excluding R&D expenses) by the end of the financial year. During the first half of the year, sales of its own-brand passenger vehicles rose 61% to 110,000 units compared to 2.56 million units sold overall. By 2020, it hopes to produce one million own-brand cars.
For many years, the company has been defined by its reliance on joint ventures with Volkswagen (inked in 1985) and GM (in 1997). But this summer the focus has been on a very different car; its own-brand SUV called the Roewe RX5.
Analysts report a three-week waiting list for the internet-enabled car, which features Alibaba’s operating system, YunOS for Car (the tech giant’s first auto tie-up). This success suggests consumers no longer have the same quality concerns about domestic brands. The consultancy firm JD Power, for example, expects the quality gap with Western cars to be closed within two years. At the moment, it says the major gap relates to the engine and transmission system of locally branded cars.
The Roewe RX5’s success has also enabled SAIC to outpace the industry sales average, with year-to-end September sales growth of 124% for own-brand cars.
The Chinese Automobile Manufacturers Association reports that overall car sales surged 30.4% year-on-year in September. (However, analysts caution that figure benefits from a low base effect following the stock market crash in 2015.)
By the same token own-brand car sales are expected to remain strong, and is back on track to overtake the 50% ratio (versus foreign brands) it hit in 2005 before market share plummeted to a low of 33.4% in 2014. It currently stands at 42.2%.
“We know how to shoot the arrow at the target now,” Zhang Fan head of design at GAC told CCTV (for a profile on this firm download from our website our recent Sinopolis about the city of Guangzhou). The race is on to become the government’s auto champ: i.e. a domestic manufacturer capable of reaching the goal of producing two million locally designed vehicles per year. The question is whether that target is more likely to be reached by an SOE – such as SAIC or GAC – or a private firm like BYD, which is growing fast selling homegrown electric and hybrid vehicles.
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