By Zhang Zhaohu
At this year’s North American International Auto Show held in Detroit, speeches by senior General Motors and Ford executives could be heard almost everywhere around the Cobo Center. But most of the media trained their lenses onto the real, largely silent player: Toyota. Many are predicting that Toyota will overtake General Motors this year to become the world’s biggest automaker.
At about the same time, across the Pacific, the annual report of the China Association of Automobile Manufacturers (CAAM) indicates that Japanese automakers – led by Honda and closely followed by Toyota – have acquired a combined 25-percent share of China’s car market.
The Japanese are aiming at a far bigger share of the Chinese market. Toyota, relying on its two local joint ventures, Guangzhou Toyota and FAW Toyota, seems to be best positioned to meet the challenge. At present, Japanese, German, American and homegrown cars together take 83 percent of the fast-growing Chinese market. A fierce battle is unfolding among these four groups. Signs indicate that the key to success lies in a shifting of marketing efforts to China’s second-tier cities.
Wang Fachang, executive vice president of FAW Toyota Motor Sales Co. (FTMS), paid a visit to a Toyota dealership in California recently. “The dealership not only offers good all-around service but also sells a complete line-up of Toyota vehicles. I hope that some day Toyota will have developed to such an extent in China, too.” He means that China’s vast central and western regions could some day become a market for Toyota as vibrant as that of California.
Said Yoshimi Inaba, Toyota’s executive vice president in charge of China operations, said: “The market in the western United States lets Toyota see the future of the Chinese market. By 2020, the Chinese market could be similar to the U.S. market. It could even be more diversified. We are going to introduce a richer variety of products to China.”
But Toyota cars are not popular everywhere around the country. This may pour cold water on Toyota’s “American confidence.” According to its own 2006 analysis based on data from dealerships, people in cities along the coast of southeast China like Japanese cars, as do people in southern China. In Guangzhou, where people have recent memories of a fuel shortage, Japanese cars with a reputation for low fuel consumption are especially popular. In the north and northeast, however, owing to the long market dominance of Volkswagen cars and a relative concentration of German cars for official use, Japanese cars face a shrinking market. An executive of the Capital Taxi Corporation in Beijing, which bought 50 Toyota Crowns last year to serve the national legislature, said: “The Crowns do not have as a good reputation as the Audis do because their internal space is not as big as expected.”
Deployment in second-tier cities
In the south, while Japanese cars remain popular, competition has been intensifying and development costs have contiuned to increase. In the north, Toyota will be unlikely to beat Volkswagen and General Motors in the near future. Furthermore, it has to meet growing challenges from homegrown brands, such as Chery and BYD, and success is not assured. What is it going to do? Go westward: that is what Toyota has decided to do.
Major cities are imposing stricter emissions standards on new cars. Beginning in 2007 Beijing requires that every new car be installed with an onboard diagnostics system (OBD). A number of cars, including the Sunny from Dongfeng-Nissan and the Sail from Shanghai GM, have been withdrawn from the Beijing market. Big cities’ tougher requirements on new cars are compelling automakers to rethink their marketing strategies. And in some big cities, such as Beijing, car ownership is fast approaching saturation point. But in most second-tier cities, the number of registered vehicles has remained small. Together, they represent a big car market.
On the other hand, Toyota already enjoys some advantages in the central and western markets, where people’s purchasing power is relatively low. Toyota cars are seen as of a higher quality than Chinese independent-branded cars. And they are generally preferred to the more expensive and less fuel-efficient German and American brand cars. Toyota’s SUVs in particular, the Prado and Land Cruiser, have been used as official transportation for decades in the western regions and are highly regarded there. Given the findings, Toyota has decided to go westward, to second-tier cities in central and western regions of the country. Spearheading the westward move is Guangzhou Toyota.
Said Yuan Zhongrong, vice president of Guangzhou Toyota: “Our priority for this year is to develop the market in second-tier cities. At present we produce only one model, the Camry. In big cities, we are going to face tougher competition.” Yuan expects Guangzhou Toyota to sell a third of its cars in second-tier cities this year.
In 2006 sales of the Camry reached 60,000 units, winning it first place in single-model sales among medium-grade cars. But this year, will the Camry maintain its sales momentum? A marketer of Guangzhou Toyota said: “For us, going to second-tier markets is inevitable because in big cities we do’t have as strong a sales network as FAW-Toyota.”
Expanding the sales network
A small sales network is indeed a major constraint on Guangzhou Toyota’s ‘go west’ strategy. In 2007 the automaker expects to expand its sales network to 167 dealerships but worries about the negative effect of too fast an expansion. The marketer said: “If you set up too many dealerships, administration tends to weaken and non-standard practices could occur to disrupt the normal marketing tempo of the Camry. Besides, each dealership might not be supplied with enough cars.” In addition, as car maintenance and servicing is relatively weak in cities in central and western regions, costs would rise.
Its brethren in the north, FAW Toyota, is better positioned in this regard. Said Satoru Mori, president of FTMS: “Our expansion to second-tier cities in the central and western regions began in 2006.” Dong Haiyang, FTMS vice president, said: “Our company has all along tried to set up a second-tier service network in vast regions such as Xinjiang. We are setting up fast-maintenance shops there, for example.”
In extending their sales and service networks to the west, both joint ventures will have to face long logistics cycles. FAW Toyota, for example, has production bases in Changchun, Tianjin and Chengdu, but already struggles with cross-direction logistics: while parts made in Changchun and Tianjin are being shipped to the west, those made in Chengdu are being hauled eastward. Ultimately, it has to set up more logistics centers, especially in central regions of the country.
Significantly, Volkswagen and General Motors have also talked about a second-tier market. In turning the Chinese market into an America-like dream, Toyota is going to meet challenges in terms of marketing ability and product strength.
Marketing ability is not just VIP treatment of customers. Toyota is considering the other side of strengthening its marketing ability: how to get rid of price wars and discounting and still sell cars. Mori said: “To say that our products are not as good as European cars is a myth. This must be explained from the marketing frontline this year.” Wang Fachang said at a year-end meeting of the company: “Product strength and marketing ability are the two wheels of our vehicle. If one were smaller than the other, the vehicle would tip over.”
Rewritten by Raymond Chen based
on the author’s article published in
Zhongguo Jingying Bao (China Business)