Jaguar Land Rover – Strategy to expand in China
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Industry and Competitive Landscape
The market for premium cars in China, estimated to be 400,000 units, accounts for only 7 per cent of the total passenger vehicle market in the nation much lower than 15 to 20 per cent in developed economies. The segment however is experiencing massive growth. It is expected to grow by 100 per cent by 2015 and further reach 1.4 million units by 20201. The main factors driving the growth are the increase in income of the Chinese consumers as well as shift in socio-cultural factors.
In 2009, there were 477,000 millionaires in China as opposed to 2.9 million in the United States. However, 206 of every 1000 Chinese millionaires bought a super-luxury car while only 78 per 1000 did in US2. As the figure represents, there is a greater propensity to spend money on premium cars in China. A premium car represents a milestone in a (mostly young and typically from real estate, finance and mining and export businesses) Chinese’s life and uplifts his social standing. The market is expected to further grow disproportionately with the rise of Chinese elite. For reference, it is expected that 3.5 million people in China will have the financial means to buy a premium car by 2015 up from 1.8 million today. Furthermore, the global exposure and education has also contributed to a greater awareness of premium cars and differentiation from mass segment. There is thus a tremendous scope for Jaguar Land Rover to further exploit this opportunity.
Not unexpectedly, the segment is dominated by global brands. Brand value, technical competence and price insensitivity of buyer seem to be the major reasons for absence of any home-grown competitors. Audi, BMW and Mercedes-Benz accounted for roughly 76 per cent3 of premium car sales in 2009. They grew by 30 per cent on an average in 2010. Ferrari, Aston Martin, Rolls-Royce, Lamborghini and Porsche are other players present in the luxury and super luxury segments. Weakening sales in traditional markets (developed) and insatiable appetite of Chinese consumers continues to attract more brands in the country.
Trend in Retail Sales of Mercedes, BMW, Audi and Lexus4
Trend in Market Share of Top Three Players and Lexus5
The top three players compete intensely amidst themselves to increase sales and market share. All three companies are struggling to keep pace with the demand which is an indication of attractiveness of the country. The companies have reiterated their commitment to China by scaling up their local production, making available more global models, building up business expertise, investing in local research and development and increasing dealer force. All of them however enjoy certain advantages over their counterparts: lower prices, localization and tailored vehicles (implications detailed later).
Local Partner: Audi, the first international luxury brand to produce cars in China, is present in the country with a joint venture with the local partner FAW Group. BMW operates through a joint venture with Brilliance China Automotive Holdings. Mercedes has a production agreement with Beijing Auto Industry Company. In addition to acquiring local knowledge, the companies avoid paying steep import tariffs making their cars more affordable for consumers.
Comprehensive Portfolio: All companies have or are in process of introducing a full line of models from their stable owing to diverse consumer profile. Mercedes for instance offers the following:
Adapting to Local Preferences: The industry leaders have adapted their products and marketing strategy to local tastes and preferences. Buyers want cars with stylish designs and colour as well as which are durable and performance oriented. Chinese buyers tend to tilt towards the exclusivity- the more unique their car, the higher their social standing. The companies have in response introduced their limited editions in the country. Another interesting trend is that almost 30 per cent of buyers are female which influences marketing strategy as well as line up of models.
Current trends and characteristics – Chinese automotive market
1. Acquisition of foreign assets by Chinese companies
Chinese companies are yet to match the world class standards of the mature automotive markets such as US, Germany, etc. As a result, they are grabbing every opportunity to acquire foreign companies or their divisions. Owing to aftermath of recession, the Chinese companies are acquiring these assets for a fraction of the original cost. For instance, in March 2010 Geely Holding group took over Volvo from Ford.
2. Consolidation of Chinese vehicle manufacturers
As with any industry in its early stage of development, the Chinese automotive industry is a fragmented one with over 150 registered vehicle manufacturers. This environment cannot provide for a stable development for the domestic players. Hence, the government has decided to go ahead with a proposal to consolidate the industry into 2 distinct tiers. Tier 1 would have companies with more than 2 million units of annual capacity while tier 2 companies would have the same at 1 million units.
3. Hyper-competition in Chinese automotive market
With the luxury cars market in China growing by 10 per cent per year, most global car manufacturers have set up manufacturing facilities in China itself to counter the high duties on imported cars. Through reduced manufacturing cost and high margins on luxury cars, no manufacturer is willing to let go of this attractive opportunity. As a result, the competition in China’s luxury cars market has risen very fast.
4. Capital investment by non-Chinese companies
After recession, the global automotive industry went on a drive to reallocate its assets to a higher growth market such as China. With a forecast of 4.6% compound annual growth rate in Asia-Pacific region with China accounting for 54% of it, the capital investment and regional allocation in China has seen a sharp increase.
5. Investment in new energy vehicles
With rapid growth in China’s automotive market, pollution levels have significantly risen. To encourage the use of more fuel efficient and less polluting vehicles, the central government’s 2009 stimulus plan included objectives for increasing the proportion of smaller vehicles in the China market. It also includes a 50% reduction in the sales tax for under 1.6-liter vehicles, additional taxes on larger vehicles, and a relaxation of restrictions on small cars. Top market players such as Mercedes, BMW, and Audi have announced plans to launch their Hybrid models in China.
6. Global expansion of China’s automotive market
With China becoming the largest car market in the world, all the ingredients are there for it to expand to the global markets. Because a significant percentage of the total cost of a car is in the manufactured components, there has already been a significant movement of the production of supplied parts to China. This is purely driven by the efficiencies gained from sourcing in China.
7. Chinese government’s push to Build Brand Equity for local manufacturers
With an eye on the growth of local brands, the Chinese government in 2009 reduced tax rates by 5% on the purchase of vehicles below 1.6L engine displacement, as well as fiscal subsidies to rural customers for vehicle replacement. Local brand manufacturers who tend to build small, compact cars with smaller engine displacements clearly would benefit from these subsidies.
8. Growing demand in China’s lower tier cities
As a result of the economic development, China has experienced the emergence of a multi-tiered city structure. This has resulted in huge prosperity for people across all tiers and has contributed immensely to the growth in the automotive industry. A significant percentage of China’s population is migrating to these new cities from rural areas and is moving from poverty to prosperity.
The below PESTEL analysis summarizes the current trends and characteristics of the Chinese automotive market.
Hurdles and Obstacles
The Automotive Sector in China is the second largest Contributor to GDP. The industry is dominated by foreign car manufacturers. In addition, the domestic auto manufacturers are highly fragmented. China is fast becoming the largest market for most of the luxury car manufacturers including BMW, Rolls Royce, and Mercedes etc.
In 2011, for Jaguar-Land Rover, China became the third largest market for its cars. Although a lucrative market, it has up till now been mainly exporting cars to China. In order to make use of this opportunity it makes sense for the company to manufacture in the country. Their intent is also clear in that respect. However manufacturing and selling in china also throws challenges.
1. Form of Investment
Chinese Government insists on any foreign car manufacturer to own only up to 50% of the company6. This limits the flexibility of the firm to make independent decisions. It also leads to sharing of technology which most companies are afraid to. A lot of knock offs are already being sold in China. Sharing of technology may lead to increase in competitors in the future.
A disadvantage of this form of FDI is protecting their patented technology under the current technology transfer requirements to local partners that China has. For instance, in the 90’s, Audi’s partner launched the Red Flag sedan, which was similar to the Audi 5000.
2. Local Component Requirement
There are more than 1000 component manufacturers in China. They lack in technology and efficiency due to their smaller scale. On the other hand the government encourages local component use by imposing favorable tariffs for use of local components. Although the government has plans to consolidate the industry and improve efficiency, it may pose a challenge to Land Rover if it needs to source components locally. The 11th 5 Year Plan intends to reduce the no. of component manufacturers by 70%7. Consolidation in the Auto components industry would increase the buying power of these suppliers.
Due to higher costs it does make sense to source components locally. However that would mean lower quality which the premium car makers cannot afford.
3. Late Entrant
Volkswagen and GM hold the top 2 spots in terms of auto- sales in China. They have been manufacturing in China since over a decade8. Audi recently sold its 1Mnth car in China and projects to sell another million in the next 3 years9. They have already begun production in China and have built considerable learning’s from the operations of its other sections.
For Jaguar- Land Rover they may take time to build from scratch. Although they have local networks in terms of sales offices, they will need to build great networks to compete with other luxury car manufacturers.
4. Localization of Products
Manufacturers such as BMW have modified their products to the local needs of China. Land Rover will need to rapidly adapt to these idiosyncrasies and localize their products.
An example of this is that BMW noted that users in China were mainly young executives who hired chauffeurs to drive them around. Thus BMW modified their cars to allow more legroom at the back with better ability to control the electronics such as audio systems.
Many suits have been filed by Mercedes, Honda, Smart Car etc. wherein lookalikes of the car models of these manufacturers have been sold under different names. It is difficult to tackle this problem for any manufacturer.
Although improving logistical issues have affected the Auto manufacturers. “In the spring of 2004, Volkswagen, Audi, DaimlerChrysler and BMW chose to take matters into their own hands. Recognizing that these problems were too massive to tackle individually, the companies formed a joint logistics partnership called Coreteam to deal with logistics and supply chain issues”10. However infrastructure remains clogged due to high economic activity. The sector is fragmented which leads to multiple handling points. This affects the seamless flow of goods.
Currently JLR sends 4 containers on a daily basis to China from the United Kingdom which is also a logistical nightmare. However logistics of manufacturing within China and selling throughout the vast nation may be an added obstacle.