The race to win: How automakers can succeed in a post-pandemic China

| Report

The Chinese auto market has been rapidly evolving over the past decade, and the COVID-19 pandemic introduced even greater changes. Sales plunged precipitously at the beginning of 2020, but the latter half of the year saw a strong uptick and the vigorous growth of the new-energy-vehicle (NEV) market. We are now at the beginning of an important and decisive phase, as the recovery from COVID-19 continues and more Chinese consumers contemplate an auto purchase or upgrade.

McKinsey has followed developments in the Chinese auto market closely over the years by conducting a series of consumer surveys. This article consolidates the findings of the most recent survey of approximately 2,400 auto consumers in 19 major Chinese cities. The results paint a picture of a transformed market in which first-time buyers are falling and interest in “trade-ups” is rising. The survey also shows that OEMs may benefit from increasing their focus on customer engagement, brand building, digital marketing, NEVs, connected cars, and other innovative offerings.

The market contains fewer first-time buyers and interest in trade-ups has risen

After about 20 years of continuous growth, sales of passenger vehicles (PVs) in China have been falling since 2018. The first quarter of 2020 saw an unprecedented decline as COVID-19 spread, but the market recovered in the second quarter. For 2020 as a whole, vehicle sales in China were down only 7 percent (Exhibit 1). Currently, demand is overwhelming, especially from customers whose existing vehicles are priced at under 200,000 renminbi.

China’s passenger vehicle (PV) sales fell ~7% in 2020, but some bright spots persisted.

Our survey shows that today’s buyers are somewhat different from those who dominated the market just a few years ago. Only 59 percent of respondents were first-time buyers in 2021, compared with 90 percent in 2017. The percentage varied by segment, however. For instance, 80 percent of respondents with monthly household incomes under 24,000 renminbi were first-time buyers.

One finding in our survey stands out: a marked preference for trade-ups among consumers with less expensive vehicles. Sixty percent of respondents with vehicles valued under 200,000 renminbi said that they intend to upgrade at their next purchase, while owners of cars priced above that level were more likely to say that they planned to make a purchase in the same price range. To boost revenues, OEMs should closely observe trade-up trends.

Brand loyalty is declining and local brands are gaining ground in non-premium segments

Our survey shows that the top carmakers in the Chinese market remain in a strong position, even though competition has increased. In 2020, 13 OEMs accounted for 69 percent of market volume, partly because long-established players are working hard to remain at the top. Within the premium segment, the top five automakers experienced a slight drop in market share, but they still accounted for almost 80 percent of total sales. In the nonpremium segment, the top five OEMs increased their market share from 65 percent in 2017 to 79 percent in 2020.

The top players may encounter some future challenges, however, since brand loyalty has decreased. Only 27 percent of respondents in our most recent survey said their brand of choice would be the same for future purchases, compared with 31 percent in 2019. We documented the greatest declines in brand loyalty among customers in tier three and tier four cities and those who are in the price range of 100,000 renminbi and under.

Brands from multinational corporations and joint ventures (JVs)—those with Chinese and foreign partners—still dominate the premium segment of the market. These brands have lost their leadership in the nonpremium segments that account for more market volume, however. A few local competitors are already recognized as equals to JVs, and when consumers were asked about smart-vehicle technologies in our survey, they primarily cited local brands.

To remain strong as brand loyalty drops and competition increases, OEMs must determine how to get their vehicles into the initial consideration set (ICS) for consumers as they contemplate a purchase. The ICS typically consists of two or three brands and then narrows as consumers acquire vehicle information. OEMs must also place more emphasis on creating a superior brand image.

Digital touchpoints have become deeply embedded in the decision-making process

Use of digital channels during the vehicle-purchase process increased significantly after the onset of the pandemic, as did the influence of online video platforms and social-media networks. Our survey shows that these sources have supplanted friends and family recommendations, auto shows, and traditional offline channels as the primary source of information during the purchase process (Exhibit 2). Of all consumers, NEV owners are most likely to use social media and video-sharing websites.

China’s PV market recovery has outpaced other countries.

Our survey shows that the number of customers who favor “new retail”—an omnichannel approach to shopping and sales—is about equal to the number who prefer traditional service models. Both emerging players and established carmakers must heed this trend. For traditional players, this will mean adopting a customer-centric approach that strikes a balance between old and new channels. OEMs and dealers must also act quickly to connect online and offline channels seamlessly to create a better customer shopping experience, since discrepancies were the most frequently reported pain point in our survey.

NEV popularity continues to grow, leading to higher sales volume, market acceptance, and brand stickiness

While overall vehicle sales fell in China in 2020, NEVs showed impressive growth of 22 percent (Exhibit 3). Our survey reveals that 63 percent of Chinese consumers are willing to purchase an NEV, up from 20 percent in 2017. In the highest income group, nearly 90 percent are willing to purchase an NEV.

China's NEV market recovered in 2020, with 22% YoY growth

Despite recent developments, some consumers are still concerned about NEV driving range, availability of charging facilities, technology maturity, and safety. For instance, the number of potential buyers who set their minimum driving range at or above 600 kilometers on a full charge was notably larger in 2021 compared with 2019. Consumers are also concerned about the residual value of NEVs, since new battery technologies and other advances can quickly make older vehicles obsolete. Our survey shows that many consumers are now more optimistic about NEV residual value, however. As NEV technology becomes more and more mature, the perceived residual value of NEVs and vehicles with internal-combustion engines (ICE) may become roughly equal.

Smart vehicle technologies are important to Chinese consumers, but companies need to learn how to monetize them

Our survey shows that consumers value advanced-driver-assistance systems (ADAS), vehicle connectivity, and the potential for autonomous driving, with over 80 percent of survey respondents stating that they are interested in these features. Willingness to pay for these features, however, varied (Exhibit 4). For instance, top ADAS features included those related to collision avoidance, adaptive cruise control, and lane-keeping assistance.

Demand from non-first-time buyers and trade-ups remains strong post-pandemic.

For any feature, OEMs should consider providing over-the-air (OTA) services, since this could create a new revenue stream. According to our survey, 69 percent of respondents think that OTA is an important way to upgrade vehicles, and 62 percent of those who considered OTA important are willing to pay for it.

A total of 67 percent of respondents stated that they will consider purchasing an autonomous feature after they buy a vehicle, suggesting the potential for additional revenue. Respondents did not show a particular preference for a payment method. Monthly subscriptions, one-off payments, and pay-per-use options each garnered the support of one-third of respondents.

OEMs can win by identifying consumers’ diverse auto needs and developing innovative business offerings

Our survey shows that convenience is still the main reason why consumers buy a vehicle. Safety is now a more critical issue than it was in the past, however, with the number of respondents stating that it is an important consideration rising from 48 percent in 2019 to 57 percent in 2021. When we asked more questions about safety, over one-third of consumers said that owning a vehicle helped protect them from public-health hazards, such as exposure to COVID-19.

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Consumers are more open to long-term vehicle rentals and leases than they were even two years ago. Fifty-two percent of respondents are willing to consider a three-year leasing model, and 57 percent are willing to consider a one-year car lease. Consumers whose monthly household income is above 48,000 renminbi are particularly interested in rentals.

Implications for automotive OEMs

To secure a strong foothold in China’s fiercely competitive auto market, OEMs must champion customer-centric principles and apply them to every aspect of the value chain, from products to customer management to omnichannel marketing. They must also create innovative business models to sustain their success. A few steps may help:

Create a differentiation strategy centered on customer experience

The mass PV market is becoming more homogenized. As consumers who are buying additional family vehicles tend to repurchase or upgrade their cars, OEMs need to design distinctive customer experiences based on a vehicle’s entire life cycle. Unique features and top-of-the-line performance will be key to gaining an advantage over competitors. For sweet spots like the 200,000 to 300,000 renminbi price range, high-end manufacturers must find a balance between lowering prices and preserving the value premium of brands. Simultaneously, they should try to strengthen their entry-level premium offerings.

Reposition brands for the modern consumer

Younger consumers’ perceptions of auto brands differ significantly from those of older generations. OEM partners—especially legacy JVs—must advance beyond past successes and be attentive to what younger consumers need today, especially with regard to NEVs and smart-vehicle features. This is a pivotal moment for JVs to decide whether they will endure in an era of automation, connectivity, electrification, and other advances.

Develop omnichannel marketing and customer operations

Consumers are curious and excited about new retail opportunities and are interested in engaging directly with OEMs. The industry should respond by improving customer operations, creating more innovative service models, or refining existing dealership networks to provide holistic and improved service solutions throughout the customer life cycle, from prepurchase to trade-up. While boosting profits and investing to enhance brand recognition, OEMs should closely monitor cost optimization and ROI.

Experiment with innovative business models

Vehicles are increasingly viewed as “smartphones on wheels” by many customers. OEMs should stay ahead of the curve by designing appropriate strategies for technology applications and go-to-market strategies. That means investing in features and configurations that truly make a difference, addressing consumer pain points, and developing pricing plans that simultaneously boost customer satisfaction and revenue.

Download The race to win: How automakers can succeed in a postpandemic China,” the full report on which this article is based (PDF-36 pages).

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