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No price wars: Toyota’s successful China sales strategy

At a small farewell party in honor of a few Japanese colleagues in Beijing in mid-December 2006, executives of FAW Toyota Motor Sales Co. (FTMS) talked excitedly about the fact that company sales for the year had exceeded 220,000 units. Everyone felt proud that the company had sold over 500,000 cars in the short time since it came into existence in 2003.
 
FTMS sold only 53,000 and 85,000 cars in China in 2003 and 2004, respectively. Sales jumped to 157,000 units in 2005. Last year saw a miracle of sorts when sales jumped by 60 percent over the previous year. What is remarkable is that FTMS achieved phenomenal growth in sales without cutting the prices of its cars. Naturally, profits for both the carmaker and its dealers have grown, too.
 
“What is most exciting to us is not only the sales increase but also the fact that our cooperative partners have been profitable,” said Satoru Mori, president of FTMS. “The profit level of our dealerships should be the highest in the country.”
 
FTMS experienced sales difficulties from June to August 2005. The Chinese market seemed to become sluggish all of a sudden, just as happened in 2004. But this time the sales company and its dealership network remained calm and successfully weathered the quiet period.
 
Said Dong Haiyang, vice-president of FTMS, “It is normal for the market to go up and down, but we wo’t join in a price war when the market cools. What we do is a good job of basic marketing.  We think this is the best marketing strategy, though it may not look very sophisticated.”
 
Price is determined by product value
 
On February 17, 2006, the Reiz, FAW Toyota’s medium sedan, was crash-tested to C-NCAP standards at the China Automotive Technology and Research Center (CATARC) in Tianjin. In a fraction of a second, the new car became a complete wreck. But applause went up when its doors were easily opened. Pictures of the test were later shown in 12 cities around the country.
 
One reason why cars from FAW Toyota sell so well is the popular perception that its cars are safe. Crash tests like the one involving the Reiz let customers see the real value of the cars, while involvement in price wars would only hurt the image of related products, explained Dong.
 
Said Wang Fachang, executive vice president of FTMS, “It is not a bad thing if people complain that we do’t cut prices. We tell them that if they want to buy a car from us, they should do it now. It’s no use waiting, we wo’t change the price.”
 
“Would you be happy if the car you bought yesterday was ¥3,000 ($385) cheaper today? Some of our competitors fight price wars to win market share, but this is tantamount to quenching the thirst by drinking poison,” said Wang.
 
Contrary to what people believe, the value concept, or emphasizing product value over low price in the marketing of autos, comes from Wang rather than Toyota. Having withstood years of marketing storms in China, Wang the veteran marketer proposed the strategy of: “waging a war of values instead of prices.” According to the concept, car prices should be determined by their real-world value. The value of a car consists of its performance-price ratio, reliability, cost of ownership, residual value and services.
 
“When Chinese customers are not mature enough to make a sound judgment, we help them to appreciate the value of a product rather than just looking at the price. They should see the inner quality of a product rather than just its packaging,” Wang said.  
 
“The value concept reflects Toyota’s marketing strategy in China, which aims to win customer trust by providing higher-value commodities and better services,” Wang said.
 
The result of the Reiz crash test is an indicator of the car’s value. The manager of an FTMS dealership in Chengdu said, “Usually we would present such information to customers before talking about the price, and then they would more easily accept cars from FAW Toyota.”
 
Wang said, “What we are most proud of is that in the last three years we’ve kept prices stable amid the chaos of price wars. In this way we have demonstrated our responsibility toward customers.” 

Creating an environment for fair competition

In the words of Wang, FTMS applies this policy to its dealers: “I wo’t let you cut prices (of cars), but I will let you make money.”
 
But the no-price-cut policy has not always been heeded.
 
In the past, with FTMS’s previous ordering system, dealers were supposed to place “ideal-size” orders for cars. But, in fact, a correctly-sized order could never really exist because of the changes in the market during the two months between order placement and actual delivery of the cars. As a consequence, unsold cars were stockpiled at some dealers, whereas others were short of supplies, said Wang.
 
Under the pressure of increased inventories, dealers could hardly resist selling cars at big discounts.
 
To acquire more hot-selling models, some “over-clever” dealers inflated the size of their customer orders. When the market became sluggish they would simply cancel these orders. In 2004, according to Dong, more than a fifth of dealers did this. But at the same time, some honest dealers might have lost money because they did not have enough cars to sell. “That’s why we needed to create an environment for fair competition among our dealers by changing the ordering system,” said Dong.
 
Adopting advice from Ed Ohlin, a marketing expert, FTMS finally set up a supply system based on “ability target,” which, simply put, means the ability to sell cars. According to Ohlin, the more cars a dealer sells, the more cars it should get from the general distributor, FTMS.
 
The “ability target” is the combination of market potential and the potential of the dealer in question. Calculating the “ability target” of each dealer is a complicated process, to say the least. For example, the potential of a particular dealer is determined by such factors as its marketing ability, sales performance and its ability to raise funds. Market potential is determined by the size of a particular market served by the dealer and its share of that market.
 
With data showing the ability target of different dealers, FTMS can send cars to the places that need them most, and in so doing meet market demand.  
 
The ability target is an agreement between FTMS and a dealer and must be honored regardless of changes on the market. With the new system, the arbitrary decision by an individual on the distribution of cars no longer has any place in the procedure. Dealers selling more cars are able to obtain more cars from the general distributor and, as a result, make more money.  
 
This fair, transparent and forward-looking supply system instituted last April helped to boost sales in 2006. The top 30 dealers were encouraged to set up second shops.  
 
“FTMS and its dealers are both winners in this arrangement,” said Mori. “By setting up a second shop, our most outstanding dealers are effectively strengthening FTMS’s marketing capability.”
 
Lending assistance to dealers
 
FTMS began to establish a 4+1 assistance system for its dealers in early 2005. The system comprises four divisions: planning; operations; improvements, and training. The ‘+1’ is a regional agency that provides comprehensive assistance.
 
It is not just a change of title, from “administration” to “assistance”, but a change of the relationship between the general distributor and its dealers. The new business concept stresses: “customers first, dealers second and the manufacturer third,” said Wang.
 
FTMS gave priority assistance to the 10 worst-performing dealers in 2006, helping them to analyze profit strategies and cost structure, along with providing suggestions on management. FTMS has so far assisted 70 percent of its dealers in selecting financial products and helping them solve financial problems.
 
In assisting its dealers around the country, FTMS has prioritized the training of marketing personnel.  Wang spends the better part of each year rushing from one dealer to another, talking about how to raise marketing ability.
 
FTMS badly needs marketing personnel thanks to its fast-expanding sales network. Wang said: “When our annual sales reach 600,000 units, we will need to build an additional 400-500 dealerships, requiring some 8,000 sales people. At a loss rate of 20 percent, compared with the trade average of 40 percent, we need 1,600 sales people every year.”   
 
For this reason, FTMS has established a pyramid-shaped sales staff training system. From top to bottom, the system comprises: an in-house marketing skills contest; training of salespeople; the FAW Sales Education Program and the Toyota Technical Education Program (T-TEP). 
 
At present, a total of 150 trainees are receiving T-TEP training in five classes in Changchun, Beijing, Shanghai, Guangzhou and Chengdu. The mid-level trainees, made up of FTMS sales staff, will be ranked in three different grades according to their performance during training. The best students can serve as senior sales advisors after graduation. The marketing skills contest provides top-level training in marketing-related services. Winners will have the opportunity to study abroad in Japan and elsewhere.
 
“Professional training is a sort of benefit for employees; it is also a form of investment,” said Dong. “We do not worry about a brain drain, because our training system has brought much scope for development for talented young people.”
 
Rewritten by Witman Liao based on the author’s article published in
Qiche Shangye Pinglun (Auto Business Review)

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