China's Auto Growth Shifts to Full-Size Cars

Thanks to falling prices and rising living standards larger models are now the hottest growth segment of the China auto market.

In the first half of 2011 sales of Teana, made by Dongfeng Nissan, hit 73,000, replacing the Accord as the leader in the full-size sedan segment. That has kicked off a war in what has become the new growth segment in an auto market whose growth has otherwise slowed this year.

In a bid to return Accord to the top spot Yao Yiming, Executive Vice President of Guangqi Honda, announced 1 billion yuan ($160 million) in incentives to distributors to push the Accord.

Teana and Accord will face several new competitors that have entered the segment since the beginning of the year, including the Volkswagen Passat, Hyundai Sonata No. 8, Kia K5, domestic brand Magton and the Peugeot 508.

Traditionally China has seen the biggest sales in the mini-segment (1.0-liter and less) like the Cherry QQ and the Geely Panda and subcompacts (1.0L to 1.6L) like the Volkswagen Polo and the Hyundai Elantra. But now the growth is shifting to mid-size and full-size cars despite its maximum size of about 200 million of China’s 1.3 billion consumers.

One reason is the larger profit margin despite the rapid drop in prices in this segment to around 160,000 yuan (about $26,000) for current leaders Teana, Accord and Camry. The price drop has produced a distinct trend among carbuyers to upgrade from current subcompacts and minis to larger models. Carmakers who only targeted first-tier cities with larger models are now expanding sales networks to second- and third-tier cities. For example, now about 50 percent of Audi are located in second- and third-tier cities.

Even recently enacted local restrictions on new car registrations, like the one begun by Beijing at the beginning of 2011, are encouraging sales of larger cars as buyers strive to make the most of their limited opportunities to make an auto purchase.

The segment has been dominated by foreign brands but recently domestic makers have begun shifting their focus to tap the segment’s growth potential. In late August Huachen Auto threw a splashy launch party at the Beijing Water Cube for its new Zhonghua H530, the first product in Huachen’s 12th Five-year Plan. In early September Cherry launched its high-end Riich G6 in Beijing, joining Guangqi Trumpchi, SAIC Roewe, MG and Geely Dorsett which sold 48,769 units in the first half.

The recent entry of lower-end foreign luxury models like the BMW 1 Series, Benz B-Class and Audi A3 should intensify the competition even further.