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Winning the race: China’s auto market shifts gears

To succeed in the market’s new era, players in the region will need to shift their strategies in response to five characteristics.

Over the last decade, China’s automotive industry has been in overdrive, growing at an average 15 percent each year, and accounting for 70 percent of global growth during this period. By 2012, China surpassed the United States as the world’s largest auto market.

By 2018, however, China’s cooling economy put the brakes on the auto market, pushing sales growth into negative territory, a trend that persisted through 2019. As China’s auto market enters an entirely new phase of its development—which we call the “2.0 era”—automakers are faced with a host of new challenges as well opportunities.

In this article, we highlight the five main characteristics that define this new era and pose a series of questions automakers must answer if they hope to thrive in a time of slower growth.

1. Competition is spurring consolidation

Many weaker players shielded by the sustained and rapid growth of the past decades simply won’t survive the ongoing downturn. Already, the performance of automotive companies in China has splintered. In the last two years, a large profitability gap has opened between the leading players and their low-end rivals.

Consider the case of a joint venture, which just two years ago enjoyed annual sales of one million units. In the first half of this year, it sold fewer than 100,000 cars. Over the next few years, brands like these are likely to exit the Chinese market if they do nothing to arrest their decline. Strong branding will be crucial. McKinsey research shows that Chinese consumers’ automobile brand loyalty, measured by their willingness to buy their existing brand of car again, increased from 12 percent two years ago to 31 percent this year.

Companies selling cars in the midprice range (100,000-200,000 renminbi) will face particular challenges, with pressure coming from opposite ends of the price spectrum. At the top, premium brands are making their cars more affordable to appeal to consumers seeking to trade up. At the bottom, independent brands are launching increasingly appealing and competitive vehicles in the 100,000-plus renminbi price range.

2. ACES investment needs are intensifying

Leading international automotive manufacturers typically spend as much as 50 to 100 billion renminbi a year on research and development (R&D). In China’s auto 2.0 era, much of this money, and more, will need to be redirected toward the four trends redefining not just the automobile itself but the whole experience of auto travel: autonomous driving, connected vehicles, electric vehicles, and shared mobility (ACES). In China, consumers’ acceptance level for autonomous vehicles is 80 percent, double that of Germany and the United States. With the Chinese government expected to double down on support for autonomous vehicles as part of the 14th Five-Year Plan, China is likely to be at the forefront of autonomous vehicle development. The considerable costs of keeping pace with these trends is forcing consolidation and collaboration among rivals. BMW and Mercedes-Benz, for instance, have forged a partnership focused on the next generation of mobility. Volkswagen and Ford have also teamed up to develop autonomous and electric vehicles, in a further example of a trend we expect to see more of in future.

3. New automotive retail models are emerging

The days of consumers purchasing their cars exclusively through dealers are numbered. For a start, China’s dealership industry is highly fragmented, with the top 100 dealerships groups constituting only 30 percent of total sales, making them vulnerable to downturn pressure. Recently, dealers’ profit margins have been feeling the squeeze, with 30 percent of dealers operating at a loss and new dealer inventory reaching an average of 1.5 months. Tesla, for example, has focused on selling cars online directly to the consumer, Chinese electric start-up NIO has succeeded with online-only sales, and Daimler launched Mercedes me, a system that allows drivers to track and control their vehicle.

4. Operational resilience is back in focus

During the global automotive industry’s previous recession in the wake of the financial crisis, our research shows that the most resilient companies adjusted their costs and reduced their breakeven point to 60 percent of revenue. Companies that performed poorly had a breakeven point of 84 percent of revenue, with negative earnings before interest and tax. Automotive companies must achieve efficiency gains on a par with the most resilient global performers if they are to survive the current downturn. This means rationalizing their major cost items, including promotion and marketing expenses, material costs, and fixed costs. It also means adjusting business models to account for digital innovations and driving efficiency gains through organizational transformation.

5. Innovation and agility are paramount

Vehicle connectivity platforms, along with digital devices like smartphones and tablets, have made it easier for companies to interact directly with consumers. Automakers can now directly understand consumer needs and obtain precise product feedback. It is essential that automakers invest in talent, including data scientists and translators, that can interpret these insights and convert them into customer-driven product innovation. This requires an overhaul of talent management models and a repositioning of human resources departments as drivers of organizational agility. It also requires that companies continue to move closer to the China market by building additional innovation and research centers in China itself.

In a market with decreasing tolerance for error, only companies that embark upon often painful transformations will succeed. It will fall to automotive company leaders to drive these transitions within their organizations.

Before they begin, we suggest they address the following critical questions:

  1. What can we do to put customers at the heart of our retail models, production, and marketing?
  2. How do we best incentivize the adoption and use of new technologies?
  3. How can we reform across talent, culture, organization, and business model to capture the opportunities created by new mobility trends?
  4. How can we build agile organizations with the flexibility to adapt to rapid changes in the China market?
  5. How can we build efficient decision-making mechanisms to quickly and effectively respond to crises?

In this McKinsey China Auto CEO Quarterly, we will explore the five major characteristics of the new era of China's automotive market and analyze the major choices the industry faces across five chapters: Market Insights, The Future of ACES, Commercial Excellence, Operational Excellence, and Agility and Transformation.

Download the full anthology for further insight (PDF–4MB).

About the author(s)

Frank Chu is a partner in McKinsey’s Taipei office; Paul Gao is a senior partner in the Hong Kong office, where Bill Peng and Arthur Wang are partners; and Mingyu Guan and Ting Wu are partners in the Shenzhen office.

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