Foreign and Domestic SUVs to Face Off at Beijing Auto Show

The SUVs Driving China’s Car Market

With smaller engines and locally-sourced parts, China’s budget SUVs are leading the world’s largest auto market.

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SAIC-GM-Wuling Automobile’s Baojun 560 was China’s second-biggest-selling SUV in the first quarter.

SAIC-GM-Wuling Automobile’s Baojun 560 was China’s second-biggest-selling SUV in the first quarter. SAIC-GM-Wuling Automobile

The CS75, Chongqing Changan Automobile’s budget SUV, starts at around $  14,000.

The CS75, Chongqing Changan Automobile’s budget SUV, starts at around $ 14,000. Chongqing Changan Automobile

Great Wall Motor’s Haval H6 starts at under $  14,000 and was China’s top-selling SUV in the first three months of 2016.

Great Wall Motor’s Haval H6 starts at under $ 14,000 and was China’s top-selling SUV in the first three months of 2016. Great Wall Motor

Guangzhou Automobile Group’s Trumpchi GS4 was third on the list of China’s top selling SUVs in the first quarter.

Guangzhou Automobile Group’s Trumpchi GS4 was third on the list of China’s top selling SUVs in the first quarter. Guangzhou Automobile Group

The Refine S3 from Anhui Jianghuai Automobile has the lowest price of China’s biggest selling SUVs, starting at around $  10,000.

The Refine S3 from Anhui Jianghuai Automobile has the lowest price of China’s biggest selling SUVs, starting at around $ 10,000. Anhui Jianghuai Automobile

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Last summer, logistics manager Wei Bin splurged some of his savings on a sport-utility vehicle to navigate the rocky, mountainous roads of his native county in China’s southwest.

Finding foreign brands too expensive, the 35-year-old settled on a Trumpchi GS4 made by GAC Motor Co., a domestic auto maker, for around half of the cost of an equivalent made by a foreign firm: about $ 20,000. Mr. Wei paid in cash.

His GS4, he said, has a sunroof, heated seats and a GPS navigation system, adding that it “drives well” in the rugged terrain of Hechuan, which he visits each month to escape the concrete sprawl of Chongqing.

SUVs are a bright spot as growth cools in the world’s biggest auto market. Chinese brands are finding a gap in the market with cheaper alternatives that still offer fashionably spacious interiors, higher ground clearance and better off-road capabilities than sedans.

The top five best-selling SUVs in the first quarter were all made by Chinese companies, led by privately-owed Great Wall Motor Co., their vehicles appealing to budget-conscious drivers navigating an economic slowdown. Chinese manufacturers are flooding the lower end of the SUV market with cheap models containing parts sourced from domestic firms and small engines. The cheapest vehicles start at around $ 10,000.

At the other end, foreign firms such as Volkswagen AG, the biggest foreign car maker in China, have felt the sales impact of not having a stronger SUV portfolio. They will come up against their domestic counterparts when the Beijing International Automotive Exhibition opens Monday, with SUVs expected to be at the forefront of the show after their sales grew 52% year-over-year in 2015, while growth of the overall market decelerated.

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“The Beijing Motor Show will be the platform for international and domestic automakers to showcase new products, specifically SUVs in the aim to capture greater market share in China,” said Namrita Chow, an analyst with researcher IHS Automotive in a recent report.

For Mr. Wei, the rocky roads back home had taken their toll on the Ford Focus sedan that he bought five years ago, and when it came to a replacement, the allure of a foreign badge didn’t outshine that of a cheaper local option. “I don’t really care about brands. Safety is most important, followed by cost,” he said.

After China allowed foreign firms to build cars with local partners in the 1980s, international car makers usually won out in an auto market that embraced their reputations for quality and brand value. The bigger SUVs offered by foreign brands don’t compete with the small, lower-powered ones in terms of price. Ford’s Kuga is still priced above 200,000 yuan (about $ 31,000) after its launch three years ago.

But growth patterns are shifting, according to analysts, as Chinese firms increasingly highlight how their products are the result of working in alliance with international developers. Domestic firms have grown their share of the SUV segment from 40% two years ago to nearly 60%, according to the China Association of Automobile Manufacturers. Many low-end SUVs have engines small enough to qualify for a reduced purchase tax that is in effect for the rest of this year, helping spur demand.

“A big departure from a decade ago is that the growth gravity has shifted to less affluent, lower tier cities from big cities,” said Ye Sheng, research director at market analytics company Ipsos. “Customers in lower tier areas are more sensitive to prices and less conscious about brands, especially at a time when the prospects look grim amid a cooling economy.”

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Nevertheless, General Motors Co. GM 1.46 % , which has forecast low-single digit market growth in China each year up to 2020, will roll out more than 60 new or refreshed car models here in the coming five years. Around 40% of these new offerings are SUVs and multi-purpose-vehicles including the Cadillac XT5, which will be a major part of its presence at the Beijing show. Japanese automakers such as Mazda Motor Corp. 7261 0.23 % and Honda Motor Co. HMC -0.53 % are also bringing in upgrades and new SUV models.

For automakers, SUVs command higher margins than sedans. But with new supply, prices continue to fall. Great Wall and state-run Chongqing Changan Automobile Co. 000625 0.00 % both cut the prices of their flagship midsize SUVs recently. Robin Zhu, a senior analyst at research firm Bernstein, believes that the low pricing strategy could lead to SUVs losing their edge.

“The deluge of budget SUV launches will continue in 2016, and put pressure on industry pricing and profitability. We remain skeptical that these low-end vehicles could drive sustainable profit growth,” he said.

China’s passenger car sales fell three months in a row last summer, prompting Beijing to cut the purchase tax on small engine vehicles. Despite the incentive, China’s first-quarter car sales gains slowed to 6.8% from 9% in the year-earlier period.

Analysts note that the tax break has encouraged more output in an industry awash in overcapacity, and when it expires at the end of this year, demand could stall again.

Yale Zhang, managing director for analyst firm Automotive Foresight, predicts a 7% rise in China’s car market this year, thanks to the tax break but notes that this will have severe impact on future demand. “Next year we expect zero growth from the car market,” he said.


WSJ.com: US Business

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