Automotive & Assembly Practice
Bigger, better, broader:
A perspective on China’s
auto market in 2020
Arthur Wang
Wenkan Liao
Arnt-Philipp Hein
Automotive & Assembly Practice
Bigger, better, broader:
A perspective on China’s
auto market in 2020
Arthur Wang
Wenkan Liao
Arnt-Philipp Hein
Automotive & Assembly Practice
Bigger, better, broader: A perspective on China’s auto market in 2020
Bigger, better, broader:
A perspective on China’s auto market in 2020
China’s automotive sector grew at a compound average rate of 24 percent a year between
2005 and 2011 and, in 2010, overtook the United States as the largest single-country, newcar market. We forecast that the growth of China’s auto market will slow to an average of
8 percent a year between 2011 and 2020 – still very fast by developed-world standards.
Sales are forecast to reach 22 million in 2020, bigger than either the European or North
American markets.
As the years pass and the market matures, Chinese consumers are growing more
sophisticated about cars and their tastes are evolving. Many have already purchased a
first, entry-level car and will be ready to upgrade to newer and better models. To succeed
in this more demanding environment, automakers must better understand what their
customers want, and how their expectations differ from region to region and from autobody-type segment to segment. In this way, the Chinese car market is becoming more
like that of North American, Europe, and Japan and perhaps even more complex, given
the many regional and segment differences. To address the need for deeper insights,
McKinsey has developed detailed demand forecasts through 2020 of Chinese auto
customers by region and segment. In the analysis, we identified fundamental drivers
for demand growth such as increasing urbanization, rising household income, low car
penetration rates, and infrastructure improvements.
The following trends will shape the Chinese auto market in the next 10 years, according to
our analysis:
ƒƒ
Going bigger: Sales of sport utility vehicles (SUVs) will triple, although sedans will remain
the largest segment
ƒƒ
Trading up: There will be more second-time buyers, and they will buy more high-priced
cars
ƒƒ
High volatility: The volatile growth rates for new cars observed over the last two decades
are likely to continue
ƒƒ
Regional differences: Consumer behavior by region and car-model preference will vary
greatly
Our findings, detailed below, have significant implications for automakers. For example,
they will have to place their bets on specific market segments and decide in which city
clusters they should focus their efforts to take advantage of the “going bigger” and
“trading up” trends. They will also have to be agile and flexible to react to the market
volatility.
Where the market is headed
New car sales in China are forecast to contribute 35 percent of the world’s car-market
growth between 2011 and 2020 (Exhibit 1). Still, car penetration will reach only about 15
percent by 2020.
1
2
Exhibit 1
China became the largest single-country market
in 2010, and is expected to maintain strong
growth momentum
Million units
China will contribute ~35% of
worldwide growth from 2011 to 2020
Million units, percentage
Worldwide growth from 2011 to 2020
100% = ~33 mn units
25
~8% p.a.
20
15
China
~24% p.a.
10
ROW
34%
42%
5
0
2005
2010
China surpassed the U.S
(9.7 mn) to become the No.
1 single-country
passenger car market in
2010
2011
2015
2020
China will even exceed
North America (16.8 mn)
and Europe (19.9 mn) to
become the No. 1 area
market in 2020
10%
14%
Europe
North America
SOURCE: McKinsey GOG analysis; McKinsey Insights China; team analysis
We
observe three factors that will drive the growth of China’s auto market:
ƒƒ
The country’s economy is expected to continue to grow 7 to 8 percent a year in the next
10 years while the percentage of the population residing in urban areas is expected to
rise to 60 percent in 2020, from 51 percent in 2011. Increased urbanization will have a
profound impact on mobility demands
ƒƒ
The number of high-income urban households – those earning more than 80,000 RMB a
year -- will expand greatly, to 58 percent in 2020, from 17 percent in 2011. Higher incomes
plus low auto penetration suggest that the passenger car market has not reached the
saturation level
ƒƒ
The quality of roads has improved significantly in recent years while expansion of road
systems has continued apace; more progress is likely in both areas
But automakers must also factor in the uncertainties that may slow or disrupt market
growth. The potential developments mentioned below could further contribute to the
volatility that the Chinese car market has experienced in the past two decades, when new
car sales growth ranged from 0 to 70 percent annually (Exhibit 2). The volatility, combined
with chronic overcapacity, adds greatly to the challenges of doing business in the Chinese
market.
Automotive & Assembly Practice
Bigger, better, broader: A perspective on China’s auto
3
Exhibit 2
Annual car sales growth rate (and GDP growth rates)
Percent
Historical sales
development
Today
Historical GDP
development
Dips
70
60
50
40
30
20
10
0
1995 96
97
98
99 2000 01
02
5 years
03
04
05
06
4 years
07
08
09
10
11
12 2013
3 years
SOURCE: IHS Global Insight (for 1995-2009)
ƒƒ
The current global economic uncertainties will likely have a negative impact on China’s
prospects, and may also lead to a slowdown in the pace of urbanization, as fewer jobs
would be created in the cities.
ƒƒ
Governments could introduce policies that might restrict car use in big cities because of
worsening traffic conditions and environmental concerns such as air pollution. Beijing,
Guangzhou, and Shanghai, where car density has reached a burdensome 250 vehicles
per kilometer of roads, have already introduced restrictions. We estimate that by 2020,
another 20 Chinese cities will exceed this car-density threshold, perhaps prompting
officials to implement similar restrictions.
ƒƒ
Emerging urban alternatives to new car ownership such as improved public
transportation and increased availability of car rentals and sharing could alter consumer
behavior, as already seen in Western cities such as Berlin.
ƒƒ
The used-car market in China is growing, a development that could cannibalize new car
sales, especially in the lower price segment.
ƒƒ
Consumers put increasing weight on quality and safety. Sales of domestically developed
cars could suffer if automakers fail to address these concerns, although there are signs of
improvement.
ƒƒ
The Chinese automotive landscape faces major disruption if, as expected, the industry
consolidates as a result of increasing competition.
4
Where the growth will come from
Two trends will drive growth of the Chinese auto market, our analysis found: consumers
will increasingly choose to buy bigger and more expensive cars.
Going bigger
Sales of SUVs are forecast to rise 13 percent, compounded annually, from 2011 to 2020,
exceeding the growth rate of all other segments. Overall, we expect annual SUV sales to
triple in the next 10 years, as the number of wealthy consumers increases. Our research
found that wealthy consumers are more likely to consider buying SUVs than the rest of
the market. Purchasing an SUV would allow them not only to satisfy their driving needs,
but also to show off their personal taste and lifestyles, the research suggests. Also,
Chinese consumers consider buying SUV an upgrade from a sedan (Exhibit 3). Despite the
expected high growth, the forecasted market share of SUVs in 2020 -- about 20 percent
-- will be significantly lower than the 35-percent market share found in the United States in
2011.
Exhibit 3
Body type mix comparison
Million units, percentage
Sedan
SUV
China car demand forecast
2005
100% = 3.0 mn
5% 6%
MPV
2011
SUV size
100% = 11.1 mn
5%
15%
1.6 mn
80%
88%
~3x
2015
100% = 16.4 mn
2020
100% = 22.2 mn
5%
5%
19%
76%
22%
4.9 mn
73%
SOURCE: McKinsey GOG analysis; McKinsey Insights China; McKinsey 2011 auto survey ; Global insight; team analysis
Sedans will still command 70 percent of the total car market by 2020. Within the sedan
segment, the “C” model will remain the main choice for many Chinese consumers looking
Automotive & Assembly Practice
Bigger, better, broader: A perspective on China’s auto
5
to buy a car for the first time and will account for 55 percent of the market by 20201 (Exhibit
4).
Exhibit 4
E&F
Sedan body type mix comparison
Million units, percentage
A
D
B
C
China sedan demand forecast
2005
2011
100% = 2.7 mn
20
2020
100% = 12.4 mn
100% = 16.2 mn
5 6
4 12
21
44
100% = 8.9 mn
2015
18
17
14
54
6 6
58
8
16
5
16
14
56
SOURCE: McKinsey GOG analysis; McKinsey Insights China; Global Insight; team analysis
Preference for bigger cars will increase the market share of E and F models while
squeezing A and B’s share. The A and B models, as a share of the total sedan market, will
shrink to 19 percent, from 23 percent, while the E and F models will increase to 8 percent,
from 5 percent. The Chinese consumer will choose a bigger car, as long as he or she can
afford it. Even in the budget segment, we expect consumers increasingly to choose larger
cars, especially as Chinese-multinational joint ventures aggressively enter the market with
C models. Local automakers currently dominate the budget car segment, especially the A
model.
Although “going bigger” is clearly a trend, there are still strong sales opportunities in the
small car segment, especially as a new urban lifestyle emerges. The premium small-car
price segment, such as Smart, represented only 2 percent of the A model market in 2011.
Our study suggests, however, that this niche will reach 8 percent of the total segment in
1 A,B,C,D,E, and F are model-size segmentations for a sedan. We apply the segmentation definition from
Global Insight. A is the utility/city class, which is an inexpensive, entry-level small passenger city car, mostly
three-door hatchbacks but five-door models increasingly common. B is the supermini class, typically a
small three- or five- door hatchback. C is medium-sized five-door hatchback, while D is an upper mediumsized or executive passenger car. E and F are further defined by price, which are large and luxury or super
luxury class.
6
2020, when more urban residents buy a second car for commuting (Exhibit 5). The
trend is consistent with the market development of Germany and the United States,
where a large share of the small-car segment have high price tags. Meantime, electric
vehicles (EVs) are expected to grow in the A model segment, with higher public
environmental awareness and more government policy incentives expected.
Exhibit 5
‘A’ model sales evolution in China
Thousand units, percentage
100% = 535
2%
>80k RMB
668
4%
804
8%
100% = 1,143
Premium
12
model
186
25
38
<80k RMB
98%
96%
92%
Low priced
model
100
88
62
‘A’ segment share
of sedans
2011
2015
2020
Japan
20111
Germany
20111
0
US
20111
6%
6%
5%
45%
8%
0.4%
SOURCE: McKinsey GOG analysis; McKinsey Insights China; Global Insight; team analysis
Trading up
Our study suggests that Chinese consumers will be much more likely to purchase
high-priced cars (250,000 to 800,000 RMB) in the next decade than in the past.
Incentive to do so will come not only from higher incomes but also from more
aggressive marketing and sales activities of premium brands, as car owners look to
replace their entry-level vehicles. But the 80,000 to 250,000 RMB range will remain
the dominant price segment, with 60 percent of the market in 2020. Rising household
income and higher demand from small and medium-size cities will underpin demand
in this price segment (Exhibit 6).
Automotive & Assembly Practice
Bigger, better, broader: A perspective on China’s auto
7
Exhibit 6
Price segment1 share (Sedan and SUV combined) in China
Million units, RMB, percentage
100% =
4
11
16
33
29
21
25
Segment
06-11 CAGR 11-15 CAGR 15-20 CAGR
Percent
Percent
Percent
<80K
16%
7%
3%
80-150K
29%
13%
7%
150-250K
25%
10%
8%
250-400K
31%
11%
9%
400-600K
49%
12%
9%
>600K
42%
12%
10%
45
42
37
41
30
19
19
6
6
20
18
4
1
2006
1 3 2
2011
3
7
3
2015
3
3
2020
1 Excludes the impact of inflation
SOURCE: McKinsey GOG analysis; McKinsey Insights China; team analysis
There’s another important factor for automakers to consider besides the “going bigger”
and “trading up” trends. China’s passenger car market has experienced significant price
erosion, ranging from 4 to 6 percent, compounded annually, over the past decade, and
prices are expected to continue to fall over the next five to 10 years.
The geographical imperative
Similar to the trend of urbanization, China’s car market has strong regional characteristics.
Take city tiers2 : China’s smaller cities are accounting for more and more automotive sales.
From 2002 to 2011, for example, tier three and four cities contributed about 40 percent of
total new car sales in China. We project that the contribution to growth of new car sales of
these smaller cities will reach almost 60 percent between now and 2020. New car sales
in tier three and four cities are forecast to grow at about 10 percent a year, compounded
annually, from 2011 to 2020, compared with four percent for tier one cities and 6 percent
for tier two cities.
2 City tiers are defined by 2010 nominal urban GDP: Tier 1> 932 billion RMB, Tier 2 >120 billion RMB, Tier 3
>22 billion RMB and Tier 4 <22 billion RMB
8
However, city tiers alone are not sufficient to describe geographical differences in car
sales. Drilling down into the country’s geographic growth patterns, we identified 25
distinct clusters comprising 815 cities (Exhibit 7). Each cluster displays unique consumer
attributes.
Exhibit 7
China Auto Market Cluster Map
Hub
x
Big shot
1 Jingjinji (34)
Cluster name (# of cities1)
947 | 4.1% | 7.8%
2011 size | 2011-2020 growth | 2011 share
3 Shanghai (16)
Rising star
5
Haerbin
Changchun
760 |8.2% | 6.3%
5 Changchun-Haerbin (56)
332 | 8.3% | 2.7%
7 Guanzhong (16)
Wulumuqi
227 | 5.4% | 1.9%
17
1
Baotou Huhehaote
19 Wuhai
18
Tianjin
21
▪
▪
Total cluster market
size in 2011 = 8.4
million
Top 4 clusters
accounted for 35% of
the total China market
in 2011
Zhengzhou
Wuhan
12 Chengdu
25
Nanning
Shanghai
9
3
13 Changzhutan (27)
208 | 6.0% | 1.7%
15 Guangzhou (33)
Hangzhou
4
530 | 6.5% | 4.4%
17 Wulumuqi (18)
118 | 10.4% | 1.0%
14
19 Huhehaote (14)
Fuzhou
23
Xiamen
Guangzhou
252 | 11.5% | 2.1%
Nanjing 10
13
Guiyang
Changsha
24
11 Yangzi mid-lower (34)
Nanchang
Chongqing
Kunming
252 | 11.5% | 2.1%
2
Hefei
11
22
Dalian
Jinan
8
Xian
11 Yangzi mid-lower (34)
Qingdao
7 Yanan YulinSX
Lanzhou
208 | 6.6% | 1.7%
6
Beijing
Dongsheng
Taiyuan
20
9 Hefei (21)
Shenyang
180 | 8.8% | 1.5%
21 Chongqing (6)
157 | 9.3% | 1.3%
15
Shenzhen
16
23 Nanchang (21)
119 | 7.3% | 1.0%
2 Shandong byland (46)
797 | 7.8% | 6.6%
4 Hangzhou (32)
756 | 8.4% | 6.2%
6 Liao central south (27)
352 | 8.9% | 2.9%
8 Central (40)
371 | 6.8% | 3.3%
10 Nanjing (24)
402 | 8.9% | 3.3%
12 Chengdu (25)
326 | 8.0% | 2.7%
12 Chengdu (25)
326 | 8.0% | 2.7%
14 Xiamen-Fuzhou (30)
293 | 9.1% | 2.4%
16 Shenzhen (2)
341 | 2.6% | 2.8%
18 Taiyuan (15)
184 | 7.8% | 1.5%
20 Lan-Xi (25)
133 | 10.2% | 1.1%
22 Qianzhong (12)
89 | 5.1% | 0.7%
24 Kunming (18)
177 | 6.8% | 1.5%
25 Nanning (22)
152 | 7.4% | 1.3%
1 Dark blue - top 4 clusters with >= 6% share of the total national market; Blue - 12 clusters with a 2-6%
share of the total national market; Light blue - remaining 9 clusters with < 2% share of total national market
SOURCE: Polk data; McKinsey GOG analysis; McKinsey Insights china; team analysis
For example, Fuzhou, Hangzhou, Shandong, and Shanghai are all located along China’s
east coast, but consumers in Hangzhou and Shandong say they care about attractive
external styling while their counterparts in Shanghai and Fujian are less concerned with
exterior appearance and more sensitive to price, according to McKinsey research3.
In another example, consumers in the adjacent clusters of Guangzhou and Shenzhen
illustrate different behaviors with respect to media. Our research finds that outdoor
billboards are the most influential media in Shenzhen, but have much less impact on
consumers in Guangzhou, who are more receptive to information in newspaper ads. Also,
as a cluster with many young people, Shenzhen is much more open to up-and-coming
brands than Guangzhou, where a significant proportion of consumers say they buy only
well-known brands.
Three forces shape these clusters: local economic linkages, such as the state of
infrastructure development; local consumer preferences; and the extent to which
3 McKinsey Insights China, 2010 Annual Consumer Survey
Automotive & Assembly Practice
Bigger, better, broader: A perspective on China’s auto
automakers are physically present in a particular region through manufacturing plants or
big offices. The 25 clusters, with clear hub-and-spoke cities inside them, comprised 75
percent of China’s automotive market in 2011, or 8.4 million cars. Our research shows that
the top four clusters accounted for 36 percent of sedan sales and 31 percent of SUV sales
in 2011. Consumer attitudes in hub cities have strong influence over the spoke cities. Our
analysis of cluster dynamics found two main groups of cities within them, which we call
“big shots” and “rising stars.”
Big shots
Thirty cities accounted for 36 percent of car sales in 2011, or 3.8 million vehicles; these
cities will still represent 25 percent of the market in 2020, our analysis shows, despite
expected faster growth in smaller cities and more government car-use restrictions. They
are also extremely influential in new model launches, with the cumulative sales ramp-up
speed for a new model in these “big shots” cities as much as four times as high as the
national average. Our consumer survey and interviews also show the influence of hubs on
their spoke cities, whose residents are more likely to follow the consumption habits and
lifestyle preferences of their hub neighbors because of the powerful reach of local media
and word of mouth.
Rising stars
Twenty cities are expected to lead market growth in the years to come. We forecast that
sales in “rising stars” will increase 10 percent, compounded annually, from 2011 to 2020,
faster than growth nationally and for that of the “big shots.” Total new car sales of the
“rising stars” will represent 8 percent of China’s market in 2020.
Automakers can use hub cities as springboards to penetrate an entire cluster. Our
experience suggests that leading auto brands invest disproportionately in and
achieve much higher success rates in selected top cities compared with their average
performance. This point illustrates that even the most successful companies exhibit
variable performance across regions.
A basic guide for automakers
Our findings suggest a few lessons for automakers seeking to win in the emerging Chinese
automotive market:
Offer products for the growing segments of the markets: Automakers should
systematically review their product-cycle plans and identify the most favorable segments
in which they might play. Are you prepared for the strongly growing segments such as
SUVs or higher-priced vehicles (250,000 RMB and above)? Are you prepared for the
environmentally conscious consumers, such as those in the premium A or EV segments?
And how do you tailor your products and brand communications to appeal to a bipolar
consumer market comprising new and experienced consumers living in urban and rural
markets?
9
10
Balance the product portfolio: Chinese consumers want more spacious cars, but
China is imposing increasingly stringent fleet fuel-economy requirements. In response,
automakers’ product portfolios must strike a balance between the bigger cars consumers
desire and the more fuel-efficient cars and EVs that will enable OEMs to meet fuel
economy standards.
Prepare for customer upgrading – and retain existing customers: Automakers have
prioritized first-time buyers, but it’s time to re-think that strategy. More and more
consumers are ready to upgrade and trade up. Do you have the right product mix for the
upgrade? Do you have the appropriate CRM program to monitor their upgrade demand?
Do you have a used-car program to help them trade in and an attractive financing program
for the upgrade?
Look at the market through a regional and granular lens: Automakers typically think
of China as one market or a maximum of three to four markets (tier 1 to tier 4 cities). As
we have shown, Chinese consumers now exhibit much more differentiated behavior
than before, and automakers must prepare to serve those diverse needs. For example,
they should step up their games in consumer research if they are to take advantage of
the opportunities. That means gaining a better, more granular understanding of market
segments and geographical differences.
Improve agility in operations to prepare for volatility: Increasing volatility in car sales
in a slower-growing overall market could be problematic. For example, a drop in plant
utilization could also affect cash flow. How agile and flexible is your operation system to
react to the volatility? Do you have a strong dealer network and well performing suppliers
under critical market situations?
* * *
Chinese consumers are becoming increasingly sophisticated about cars, and are
developing strong preferences, following in the footsteps of consumers in Japan and the
West. Millions are preparing to upgrade to bigger, higher-priced models. At the same time,
they are displaying increasingly diverse behavior and needs. Automakers should invest in
better understanding these evolving consumer attitudes, and prepare accordingly for the
Chinese market of the future.
About the authors
Arthur Wang is a Partner in Hong Kong.
Wenkan Liao is an Associate Partner in Shanghai.
Arnt-Philipp Hein is an Associate Partner in Munich.
About the research
Our model comprises two subsystems. The first provides Chinese national-level
projections of total car demand and demand by size and price segment. The
second is a city car model. In the latter, outputs from the national model serve as
benchmarks for city-level projections to ensure consistency. Weighted adjustment
was necessary to align the sum of car segment demand with total demand. All
results should be statistically significant.
We cross-checked our results with available data sources and international
benchmarks to make sure the estimates were reasonable, and interviewed experts
to round out our understanding of specific factors such as city car-use restrictions
that might affect market development.
Acknowledgements
We would like to acknowledge the contributions to this article of Paul Gao, Sha Sha,
Joseph He ,Xiujun Lillian Li, Chaoqiong Wu, William Cheng and Yangmei Hu.
November 2012
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