Even when you think you’ve read it all about China, extraordinary things just keep on happening. While year-on-year sales rises of 40% and 28% for the last two months might once have been big news, they no longer are in this rapidly changing and unpredictable market, writes Glenn Brooks.

Sales patterns are at last starting to emerge as brand loyalty becomes the new target for vehicle makers. Volkswagen’s combined FAW and Shanghai JVs make it today’s clear number one. But any of up to six other makers could soon be challenging it.

The Toyota brand enjoyed a year-on-year sales rise of 110% to 193,357 units in the first three quarters of 2006. And how many cars did it have in the September top ten best-sellers list? None. There was no panic after the top-ten successes of July and August were not repeated in September. The tables below hint at the firm’s strategy. Just as it did in the USA, Japan’s number one started slowly but then moved steadily to build its Corolla and Camry locally.

What it did next was even more typically Toyota: as a price war picked up speed two months ago, it refused to play. Both cars may have dropped (just) down the sales ladder, but they’re still selling strongly. While Ford and GM continue to show modest profits from their Chinese sales, the returns certainly don’t look like those of major players in a market up by 40% (September) or 28% (October). This is the growing trap of China and one that the major makers ought to be resisting.

The latest big foreign group to lose its nerve and start hacking prices is Hyundai. In mid October, it cut 10% off the average sticker of its Accent. The Dongfeng-Yueda-Kia joint venture that builds this now 12-year-old sedan in Yancheng has had to play the discounting game. It lopped roughly CNY 7,000 from all trim level versions so that this rebadged former Hyundai Accent now costs between US$8,000 and US$10,000. Yes, it’s no doubt profitable even at those levels but is this really the right strategy to be taking when you’re trying to build a brand and profits?

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Toyota is involving neither its own brand nor that of its Dario and Daihatsu small-car makes in this discounting. It knows that’s a fast track to exactly where GM and Ford’s US operations now find themselves and where the former Daewoo Motors plummeted to only a few years ago. You don’t strive above all else for number one sales status. That comes eventually, after you’ve become the richest kid by controlling the big-money sectors and having kept your costs at bay. Right now, too many big rivals are plunging headlong into a grab for market share that will deliver only one thing: ever smaller returns.

But all is not what it seems. Toyota and Honda are playing the long game. The Chinese market Corolla, Fit, Camry and Accord are all the latest generation models with up to date safety systems, convenience features and styling. In the net age, buyers are smart and well informed. These are the people who made Kia drop its prices by cross shopping and choosing the cheaper Xiali N3, a slightly modified 1980s Daihatsu Charade. FAW has new models coming but registrations of its best selling N3 were down 6% in the first three quarters to just over 126,000 in a market with seemingly insatiable growth. Will anyone be surprised when it lowers prices or is forced to add standard equipment this month or next?

Though it has clearly decided to sacrifice short term profits and brand image, Hyundai is also doing something very interesting. It has a two-pronged strategy which resembles that of Volkswagen, and increasingly, GM. All these companies seem to have worked out that they shouldn’t be trying to compete in the longer term with the State- and privately-owned Chinese makers involved in the current discounting death-spiral. Chery, Geely, BYD and Hafei are all attacking the small car sector ever more aggressively.

Who’s going to pay a premium price for a Polo or Corsa in a year’s time, for example? For some local companies, profits are not important. Why would they be when the government keeps funding selected national champions?

The Buick Excelle may have been China’s best selling car in September and October but GM is going to get that brand out of the cheap, small car sector. Already it has rebadged the former Buick Sail (a four-door version of Europe’s 1993 Opel Corsa) as a Chevy and will do so with the Excelle when the time comes for this restyled Daewoo Lacetti to be updated.

So it is with VW. The FAW-Jetta that is its most successful model (and China’s best selling vehicle for the year to the end of October) is not the same car as its European and North American namesake. No, this is the booted version of the ancient second generation Golf from the early 1980s. And the two-pronged strategy? The Bora and Passat, also built in China, are its latest models and priced far in excess of the Jetta, while VW will also soon build a restyled version of the obsolete Golf Mk IV as a cheapish five-door hatchback (‘Bora HS’). Hyundai is doing the same thing with its locally-built Elantra (soon to be replaced by the latest Korean model), while keeping the old Kia Accent in production as an entry level model. There seem to be no plans for a direct replacement Jetta, either.

The VW brand will no doubt move out of this price sector when Jetta build eventually stops and more up to date but affordably priced products of the recently launched Skoda brand step in to replace it.

Volkswagen’s market share of 14.5% in the first three quarters (Volkswagen brand FAW-VW and Shanghai-VW combined) means it’s head and shoulders above all challengers. But it knows that maintaining this status should not be its priority if it comes at the expense of profits. Honda, Buick, Chery, FAW-Xiali, Nissan and Toyota all have between 4.8% and 7.5% shares, with Suzuki on 3.9 and Ford with 3.0%. Some of those makes have grown rapidly in the last twelve months (Ford, Chery and Toyota), others have remained more or less where they were (Buick, Honda and Nissan) while some are in a mild decline (Xiali). Chery is now a larger brand than FAW-Xiali but that is all down to new model releases and FAW’s aging line-up. The launch of the near-luxury Roewe brand is a clear sign that SAIC has woken up to the two-tier strategy of its foreign partners and rivals.

The big players in a year’s time will almost certainly be SAIC, FAW, Hyundai, Honda, Toyota, GM, Chery and VW, with Nissan, Suzuki and Ford close behind. But just imagine how busy their product planners and finance departments have suddenly become following the release of all the attractively-styled and low-priced models that Great Wall, Chery and Geely just released at the Beijing auto show. Should any of the current big players really want to be making serious money in China in five years’ time, they should look at what Toyota is doing and why it is the only big player with a profits-before-volume outlook.

Glenn Brooks

Registrations data supplied by the Chinese Association of Automobile Manufacturers (CAAM).