Sunday, December 9, 2012

Kayla Hedman Final

Beamer, Benz or Bentley:

Marketing of Luxury Automobiles in 21st Century China

     As the United States is a “nation of nations,” 21st Century China is a huge “market of markets” (Bergstrom 28). The country of 1.34 billion is divided into many economic segments: peasant farmers, migrant workers, burgeoning affluent youth, Communist party members, an expanding middle class, gold-collar business people, and more. These economic segments are each contributing to the world’s second largest economy. On a more expansive level, author of Postcards from Tomorrow Square: Reports from China, James Fallows lucidly discusses the economic, political, social, environmental, and cultural forces working to turn China into a world superpower at an accelerating rate. After China opened to world markets in 1979, the economy has been growing rapidly (Wei, Shang-Jin 75). Since 1979, and more recently with the alterations made as part of ‘New China,’ the result of opening China to the world for the 2008 Beijing Olympics, the influence of Western culture has produced a more materialistic China. With this, the higher production rates and over population in China has inherently caused an increase in pollution that is now an international concern. Unfortunately, the appeal of individualism and materialism under a Communist government outweighs environmental concerns. For example, the demand for luxury items, defined as internationally renowned brands, and automobiles for personal use in China are more alluring, attracting tens of thousands of people per month in Beijing alone to apply for their license to drive.  Having a personal automobile in China, especially a luxury car, symbolizes success and boosts the economy, but exacerbates environmental problems in a country that may not be able to afford the trade offs.
        To elaborate on the topic of China’s growth, in Fallows’ chapter “China Makes, the World Takes” Fallows recounts a memorable anecdote from fellow author Susan Shirk, where she called China a “fragile superpower.” Shirk said when she talks about her book in America, people ask: “What do you mean ‘fragile’?” But when she talks about her book in China, people ask: “What do you mean ‘superpower’?” (142).  Americans are unaware of how behind China actually is on many facets. “Many people I have spoken with say that the climb will be slow for Chinese industries, because they have so far to go in brining their design, management and branding efforts up to world standards,” writes Fallows (102). China’s companies are numerous but small, so Americans need not be hostile toward China's rise, but they should be wary about its eventual effects. The United States is the only nation with the scale and power to try to set the terms of its interaction with China rather than just succumb. So starting now, Americans need to consider the economic, environmental, political, and social goals they care about defending as China’s influence grows (Fallows 70-1).
        Modern China’s own economic, political, environmental, and social goals are increasingly influencing one of its own markets – the automobile industry. Although the country is currently dominating this market, its domestic cars are not yet contenders in the global market, which is five or more years behind other markets worldwide (Lemoine). For the past few decades, automobiles have been a top product category in mainland China (Cheng 47), and because of China’s large population, gradual de-socialization of the economy, and government incentives, China is the number one car market in the world. Even so, with the growing car market, China still has barely one-thirtieth as many per capita as the United States (Fallows 68). Studies show that in recent years, China’s car market is in fact decelerating again, with the exception of the luxury auto market (Harjani). There is a growing market of Chinese able to afford luxury (Cheng 55), called the world’s newest class of wealthy consumers. The demand for luxury and premium cars in China is on the rise, and Chinese domestic as well as international automobile companies need to adapt their market to this increasing high-end buyer’s market. For many social and personal appeals, the market of individually owned cars in China is accelerating, especially the market of luxury automobiles.
        In a deeply divided China, where peasants, who made up 70.8 percent of the national population in 1998, only consumed 35.1 percent of national goods (Wang 3), there was an estimated 250 million Chinese people who would be able to afford luxury goods and become the dominant high-end buyers’ market by 2010 (Cheng 55). In a population of 1.34 billion, 250 million Chinese is a small percentage, but purchases a majority of the nation’s luxury goods. These statistics are exceptionally significant, supporting the 80/20 rule of marketing (or Pareto principle), where 80 percent of revenue is obtained by 20 percent of a business’ customers. This could also be true for a nation’s economy: 80 percent of luxury purchases are made by 20 percent of a nation’s population. China is now a buyer’s economy; there is a consumer boom going on in all cities large and small where one can buy anything that is available in the West. The problem is that most people do not have access to the consumer boom. It is hard to move up the economic latter because in China you need power to get money, where the reverse is true in the States (Gifford 14-5). Brand New China author Jing Wang refers to the citizens who don’t have access to the consumer boom as aspirers, whom aspire to own specific brands but do not have the resources to do so (Wang 10). It was estimated that by 2015, China’s middle class would be 400 million strong (Cheng 55) and would have access to a range of “middle-class lifestyle goods.” These middle-class Chinese lifestyle goods are divided into four categories: necessity electric appliances (including color TVs, refrigerators, and washing machines), medium-level consumer goods (i.e., telephones, mobile phones, CD players, microwaves, and air conditioners), luxury goods (such as computers, camcorders, pianos, and motorcycles), and lastly, the final category is the ownership of an automobile (Wang 191). The more affluent group, known as the gold-collar segment (jinling), are the primary consumers of luxury goods. In 2006, only about one million people fell in this segment (Wang 10). These financial demographics show what people can afford in China, and who would be the manufacturers’ and government’s potential market for various segments of automobiles.
        In China’s economy, the government makes the rules for and competes in the auto industry (Dunne). For example, General Motors has the city of Shanghai on its side, as a business partner and a competitor. The Chinese government wants to keep as much manufacturing in the country as possible, so they pair with auto companies to compete with other global and Chinese carmakers for the demanding Chinese customers within the world’s newest class of wealthy consumers.
        Not only does the government partner with domestic car manufacturers, but also offers purchase incentives for personal car owners. In Country Driving, the account of Peter Hessler’s automobile journeys through China, he shares how the automobile and improved roads transformed China by promoting tourism and growing the economy. Without saying it outright, Hessler tells how the automobile market is far beyond the purchase of personal cars; it also involves the service of cars, insurance, driver’s education, rental cars, gas, and much more. The post-purchase service charges associated with a car help boost the economy and aid the government. It is no wonder the Chinese government has offered incentives such as tax rebates and subsidies for car buyers.
        The Chinese government “walks the walk and talks the talk” when it comes to supporting their domestic manufacturers. The government’s push for premium vehicles stems from within the government fleet of transportation. The government fleet only allows premium brands like Mercedes, BMW, and Audi, which are built within the country. In the book Elite China: Luxury Consumer Behavior in China, author Pierre Xiao Lu explains why the Audi A6 is much more present on the streets of Beijing than any other up-market brand’s model. Lu says that some 10 years ago, Audi began to manufacture the A6 in China for the Chinese market. For that reason, it soon became the only available luxury limousine that government officials could use. As a result, the black A6 became the official government vehicle in Beijing and was thus associated with power, influence, and status, spiking their sales in the general market (Lu 29).
        In recent years, the government has still had a major role in marketing personal cars, but has retracted most of the major stimulus tax incentives they once offered. They have also put restrictions on car and license purchases in various urban areas. This is due mainly to recent negative press about pollution, energy shortages, and the ever-increasing problem of traffic congestion (Hays). In the past decade China has surpassed the United States as the biggest carbon emitting country on the planet, and cars are the primary culprit (Fallows 68). Data shows that millions of new automobiles hit the road each year, about one thousand cars join Beijing’s traffic each day, and between 2000 and 2006, the number of vehicles on Beijing’s roads doubled, totaling three million cars on the city’s roads (Fallows 195). Automobiles, in addition to plants and heavy-industry facilities, are contributing to excessive air pollution in China. To promote clean energy and attempt to reverse damage already done, the Chinese government is retracting general car-buying incentives and reviving incentives on electric cars to boost the slumping car market (Wei).
        While automobile manufacturing companies in China like General Motors are accelerating electric vehicle development, other international companies are reaching out to local partners to aid in the understanding and research of the unique challenges China poses (Millikan). Nissan Motor Co., Ltd and Suzhou Automobile Research Institute at Tsinghua University have agreed to promote a cooperative effort regarding the research of future automobile technology. Nissan and other companies have seen that China has grown to become the largest automobile market in the world, and they now compete to contribute the newest ideas to help China be a sustainable mobile country. The companies are taking it upon themselves to invest time and money into the research and development, but in the future the government will be investing money for new incentives to help the environment.
        To manage the street traffic in large Chinese cities, the government has put restrictions on the purchase of cars and driver’s licenses (Li). Beijing Great Wall tour guide, Allan Li, explained in detail the driver’s license system in the city of 16 million as a lottery. Hundreds of thousands of citizens apply for their drivers license each month, and less than twenty thousand of them are accepted. With the number of people accepted over time, there would still be way too much traffic on the streets, so day by day, specific license plate numbers are permitted to drive. Based on the last digit of one’s license plate in Beijing, driving is permitted between 7 a.m. and 8 p.m. one day during each workweek (Liu). On the days where people are not allowed to use their car, they need to find alternate transportation to work or go before and after the restrictions are in place. People granted their licenses through the lottery pay more for various numbered plates; various numbers, especially nine, are most desirable. The affluent sometimes buy two cars with different plates so that they are entitled to drive every day (Li). Still, with tolls and eight-lane highways in some areas, traffic is always a game of chicken. Due to the difficulty and expense of driving, many people continue to commute using public transportation, bikes, and scooters. Imagine the traffic and pollution catastrophe there would be if 1.34 billion people were on the road in China. In August, car license plate applicants exceeded one million, and less than two percent of people would be granted a license through the lottery (Xiaodong).
        In 2009, when China surpassed the United States to become the world’s largest automobile market, 13.9 million vehicles were sold in China, compared to 10.43 million in the United States (Hays). Before this nation-wide auto boom, individuals without cars, whether affluent or impoverished, would always take public transportation like a bus or train. Ski industry businessman Lou Comeau told a story of offering to pay the small fare for a taxi for a Chinese colleague following a business meeting; this gesture was not acceptable in Chinese culture and the man, although wealthy, took public transportation home. Years later, Comeau noted, the same individual had his own Audi parked out front rather than commuting, which symbolized success. For middle and upper class Chinese citizens who can afford one, a car represents mobility, prosperity, modernity, freedom to travel more, status, and power (Hessler 5). For individuals who can afford a car, these traits outweigh personal environmental concerns and other prices of owning a personal car.
        The car market in China is dynamic and evolving at lightning speed. Buyers are extremely well informed about their options in both domestic and foreign brands (Bergstrom 28). There are countless social appeals of owning a personal car, whether luxury or retail. General Motors estimates that new car buyers tend to be new to the category; a stunning 85 percent of vehicles are sold to first-time buyers (Dunne). As Chinese citizens have more tools at their disposal, such as income, a social network (Internet and mobile phones), and confidence, the market of potential consumers expands (Bergstrom 137).
        In addition to the social appeals of car ownership, there are social appeals of owning luxury items, too. Westerners in the media influence the majority of luxury purchase behavior (Ramsey), and impact which brands the Chinese are aware of. As a result of this, Westerners in China have a role to play in order to meet the expectations of the Chinese.  “It can be embarrassing these days in China for the not so technically adept or the not so fashionably inclined Westerner,” author Rob Gifford admits. Gifford goes on to tell of the Chinese’s obsession with new technology and how nosey they can be to observe what foreigners are doing, what they’re wearing, and how advanced their technology is. He was even reprimanded for his shabby car, an old Jeep Cherokee rather than a Mercedes or Audi (Gifford 197).
        Because of the accessibility within a buyer’s economy, Western luxury brands have shown a very high rate of increase in China and Asia’s “Four Little Dragons” (South Korea, Singapore, Taiwan, and Hong Kong) in recent years (Lu). Lu confirms what Wang states in Brand New China: that Asian luxury consumers focus more on the brands than on the products themselves. The more famous the brand, especially in Western culture, the more Asian customers will buy their products and the more recognition they get from the public (Lu 6). Consumption of luxury goods is the easiest and fastest route to getting the recognition and respect Asian people want and need. It also helps the burgeoning young and affluent population, commonly males 25-35 years old, to display wealth and “make a statement” (Bergstrom 28). Having a Ferrari or Porsche is a clear display of the owner’s wealth, while owning a Rolls Royce or a Bentley not only displays wealth, but also indicates power and status. In fact, China is the number one market for Rolls Royce, globally (Hays). Chinese consumption is built on a tiered logic; for those situated lower on the hierarchy, there is no faster way of acquiring social prestige than copying the lifestyle of those higher up. This usually involves the ownership of luxury brands like Louis Vuitton, Prada, Fendi, and BMW (Wang 180). Not only are these brands socially accepted, but they also fulfill personal desires.
        Chinese citizens are drawn to the luxury segment because of growing safety and reliability concerns (Harjani). Marketers realize that consumers are also taking interest in the whole driving experience of various types of vehicles. Joan Ren, Marketing Director of Shanghai General Motors, compares America’s “nation of nations” to China’s “market of markets.” There are so many markets in China that marketing to too many consumer groups could stretch the value of a product too thin (Bergstrom 28). As stated in Wang’s Brand New China, corporate brands are recognized more than products, so marketers are advertising specific brands and endorsed sub-brands (GM’s sub-brands include Cadillac, Chevrolet, Buick, etc.) exclusively to specific segments of consumers by making an emotional connection rather than selling the features (Bergstrom). For example, Ford’s luxury sub-brand, Lincoln, is hoping to tap a niche in China where customers buy luxury products for their own personal experience, rather than for reasons of status. Lincoln plans to offer tailored services to customers as well as focus on technology and offering unique products (Perkowski).
        As experts, Wang, Bergstrom, and Lu recognized, research has been done to prove that Chinese consumers are brand aware (Lu 76). Personal buyers, especially in the market to buy a vehicle, are extremely well informed about the products, but are still easily influenced by brand advertising. One consumer claimed to be easily influenced by advertising if the company is convincing. He admitted, “...if it is a BMW, I will look at it more than others. Because I feel it is a good car, I feel it from my heart it is a good car. It is a kind of feeling.” Although luxury products and vehicles like a BMW have a high price, Chinese consumers believe that the quality should be very good, the company should be prestigious, internationally famous, and the brand preferable in the eyes of most people in the high income class (Lu 76). Although the majority of his statement supported the personal and emotional appeal of luxury items such as automobiles, buying a luxury car really is about showing status, not individuality.
        After spending a summer working for an international marketing agency in Shanghai, Sarah Ramsey, Champlain College Marketing Major Class of 2012, said that there are two up and coming market industries in China: the biggest being the car industry and the second is the luxury brand industry. Having a personal automobile in China, especially a luxury car, symbolizes success and boosts the economy. Due to the personal and social appeals of having a car, as well as government incentives to buy them, various consumer groups are using their disposable incomes to purchase cars. Many international brands are taking advantage of this growth in the luxury automobile industry in China; they are exporting assembled vehicles to the country, planting roots and building factories in China, and also adapting their marketing to the Chinese consumer. Today, most of the world’s luxury brands are already being sold in China. Audi, Buick, Mercedes-Benz, and BMW, as well as many of the leading Japanese luxury car models, are being manufactured in the country because the government fleet purchases are limited to locally produced models (Harjani). One only has to spend a day or so in Beijing, Shanghai, or any one of China’s major cities to see all of the latest Porsche, Ferrari, Lamborghini and other luxury models being driven by China’s citizens. While some of these niche models may not be manufactured in the country, they are recognizable global brands that have already gained acceptance by China’s wealthiest consumers.
        Today it is not just the gold-collar market and growing middle class that make up China’s luxury automobile purchases. There are various groups of Chinese consumers with disposable incomes contributing to China’s luxury car market. China’s “post-80s” generation, as a whole, was the first to introduce the notion of personal luxury to capitalize on individualism (Bergstrom 14). This generation is status-minded and was witness to the new consumer market opening up. Mainly, the owners of luxury vehicles include post-80s burgeoning young affluent businessmen and their wives (Hays). There is also a new niche market opening up: that of young single women.
        Young single women are becoming a top market for automobiles, especially luxury brands. Today, young single women enjoy more earning and spending power and are able to afford what they want, when they want it. This is because they save money on rent and mortgages by living with their parents until marriage. Because of extremely high import and engine size taxes, ultra-luxury cars carry a price tag in China more than double of what they would be sold for in other countries, but women are still opting to step into the driver’s seat. By way of illustration, the number of women buying Ferraris in China is double the worldwide average. To further put it into perspective, three times the number of Maseratis are being sold to Chinese women than European women (Bergstrom 73).  In China, females account for 30% of Maserati sales, and as a result, this market is now expanding their color options to appeal to the increasingly feminine customer base. The large market of single successful women in their thirties is also expanding; they are known as “leftover women.” This ever-growing cosmopolitan market is targeted in an ad campaign for “Benz(as Mercedes-Benz is known in China), depicting good natured, confident, elite and healthy individuals. Single affluent women are not the only new niche market involving females. After purchasing luxury cars for themselves and their wives, men of status in China buy luxury items such as automobiles for their mistresses. Mistresses account for one third of the luxury market in China. Online “netizens” (Internet citizens) refer to Mini Coopers and the BMW 3 series cars as “mistress cars” (Bergstrom 73). The market of luxury vehicles is constantly evolving with the growth of the consumer market, and advertisers need to consider how to position the brands.
        New positioning is a great opportunity for marketers in the luxury car industry in China. Everyone knows that Chinese are brand conscious, rather than product conscious, but the benefits and disadvantages of owning a car are also notable. The high 25 percent import tax on automobiles not produced in China, a large engine tax in attempt to prevent people from buying larger cars that contribute more to pollution, luxury taxes, and post-purchase service expenses are deterrents to China’s luxury automobile consumers. Due to the luxury taxes in China, consumers are mostly predicted to buy premium goods abroad (Wang). The cost of driving, post-purchase, is about 12 cents per mile, on average. When gas runs $3/gallon in the U.S., it is close to $4 in China (Midler). These expenditures in addition to expensive tolls on China’s expressways bring the total up to $8/gallon or more. Due to the cost and the government’s concern of the worsening pollution, the government is offering incentives for electric cars, which may not be luxury, but they will save the country.
        Having a personal automobile in China, especially a luxury car, may symbolize success and boost the economy, but it contributes to existing environmental problems that China is already having trouble managing. Despite the increased feeling of independence, success, power, and control that derives from ownership of a personal luxury automobile, China as a whole may not be able to afford the trade off. Not only are the cars emitting carbon and other toxins, but also are the car-manufacturing plants that are expanding into China. Although China currently is the largest car market, the number of cars on the road in China per capita is equal to the number per capita in the United States in 1918 (Hays). Although the Chinese government is excited to have finally surpassed America, how will they choose to market a top consumer category that is destroying their culture and environment? While maintaining their title as the largest car market, the actual sales are decreasing, but luxury sales are increasing. Since this is a more segmented market, attracting about 250 million out of 1.34 billion Chinese, it is doing more good than harm by boosting the economy.  China should capitulate to the two up and coming market industries, luxury brands and automobiles, and up the commitment to the Chinese luxury market. An old Chinese proverb says that the best time to plant a tree was twenty-five years ago, but the second best time is now.

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