Anthony Lau - Research Director, TNS Sinotrust

For luxury auto brands, as for almost any other type of car maker, China is starting to resemble a gold rush. Growth of 22% between 2012 and 2013 has ensured that every possible premium brand is not only present in the market, but moving to strengthen that presence – and this despite forebodings around slowing GDP growth and regulations against conspicuous consumption. As this year’s Beijing auto show demonstrated, most are putting their faith in ever-expanding product lines to retain and grow share, and ensure entry points for the next wave of first-time luxury buyers. But in an increasingly crowded market, the time is coming to apply some precision to how they manage their portfolios, and how they manage their brands.

The line-up keeps growing
China’s luxury market is currently dominated by the big three German brands, with Audi, BMW and Mercedes-Benz commanding a combined share of 75% in 2013. However, the challengers are arriving. Lexus, Land Rover, Volvo and Cadillac have already launched. The revived Red Flag introduced the L5 limousine at the Shanghai Auto Show last year, and Ford is looking to launch the Lincoln brand during 2014.

The variety of luxury models is expanding every bit as rapidly as the variety of brands. Just 20 years ago, the luxury auto market consisted almost entirely of sedan models such as the Mercedes-Benz E-Class and BMW 5 Series. Now BMW boasts a China line up with every Series number from 1 to 7, including the recently launched 2 Series and 4 Series. And that’s before we start on X Series SUVs, Z Series sports cars or electric models from its new i sub-brand. The luxury grid becomes more crowded still when we take the increasing number of localised versions of these marques, sold alongside them in dealerships and offered to buyers as an alternative choice. Localised versions of the Mercedes-Benz GLK, BMW X1, Audi Q3 and Cadillac’s XTS and ATS are already helping their manufacturers to avoid heavy import taxes whilst potentially appealing to more price-sensitive buyers.

A crowded market demands differentiation
This rapid proliferation of luxury brands seems at first glance to be a sign of a market in robust health. But it is in fact creating significant challenges for both car-makers and their customers. We see the impact in the increased consideration process for luxury auto buyers. Customers are taking significantly longer to make decisions because navigating all of the options is becoming intimidatingly complex. Luxury auto dealers meanwhile are struggling to find space in showrooms for all of the models on offer. And these challenges of distribution are only just beginning.

Manufacturers face another challenge that is arguably more significant still. The immense difficulty of differentiating a luxury brand in an increasingly crowded marketplace – especially when Chinese auto buyers’ first experience of their brand involves such a huge variety of models. Traditionally, car manufacturers have always been successful in differentiating themselves from competitors through their products. BMW had their rear-wheel drive sedans; Audi had Quattro technology; Porsche has rear-engine sports cars. However, maintaining differentiation via the product is becoming increasingly challenging as the portfolio of each manufacturer continues to grow.

Western auto brands must also recognize that their brand heritage will not translate automatically into the Chinese market. Ask a Chinese auto buyer about the type of vehicles that they associate with Porsche and they will talk about 4-seater Cayennes and Panameras rather than iconic 2-seater 911s. This is not to say that there is anything particularly inappropriate about Cayennes and Panameras in the Chinese market – but they must compete against a broad range of other powerful 4-door vehicles without the immense brand heritage advantage that comes from association with the 911.

Time for precision portfolio management
Increasingly, the success of luxury brands in the China marketplace will depend on their applying far more precision to the development of their portfolio. They must prioritize models based on the features that genuinely appeal to China’s luxury buyers, but also based on intelligent analysis of the models that will most effectively differentiate their brand position. At the same time, they must prioritize the distribution and the promotion of those vehicles that will deliver the greatest sales volume – and the greatest revenue.
How can luxury auto brands set about refining their portfolios to drive sustainable growth and protect share through brand differentiation?

Three steps for sustainable growth:

  1. Base product differentiation strategy around a full understanding of functional and emotional needs
    Brands must interrogate how the emotional needs of auto buyers align with the social image and functional benefits of their brand, and they should prioritize vehicles and product features that reinforce this connection.
  2. Prioritize on multiple levels
    To maximize resources efficiently, brands must determine which models will most effectively create brand differentiation and support the overall communications strategy, and which models will need to be present at the dealership as display or test-drive vehicles to support on-the-ground sales activities. This may involve vehicles for different roles: high-profile models to attract premium car buyers, as well as entry-level vehicles that may prove the strongest source of sales amongst China’s high proportion of first-time buyers.
  3. Catering to the tastes and preferences of Chinese customers
    Chinese car owners have different driving habits formed in a different driving environment and on different road conditions to those experienced in many other markets. For the most part, they also have significantly less experience of owning and driving vehicles. As a result, they have very different expectations and priorities when it comes to the features of a luxury car, and a different level of willingness when it comes to paying for them. Many luxury auto brands are already establishing design centers in China to understand and cater to the tastes and preferences of Chinese car buyers for both exterior and interior features. Brands such as Audi, BMW, Volvo and Land Rover have already launched long wheelbase versions of classic marques in order to appeal to Chinese drivers’ preferences.

Now the real luxury brand battle starts
In all of these areas, the manufacturers behind luxury auto brands must identify the gap between their intended global positioning and local realities. They must set clear guidelines for delivering differentiation on the ground that can generate the local positioning that they seek, and ensure that this is delivered consistently across all touch points and over time. However, these guidelines also need to be flexible enough to allow for local interpretation and adaptation. As brands battle to build new, relevant positions for the Chinese market, we are about to witness one of the most exciting phases in one of the most dynamic auto markets in history.