Differences Define Wide Gap in China, U.S. Vehicle Markets

Comparing the Chinese automotive market with the U.S. industry might be akin to comparing apples with oranges.

“While they are both fruits, they are distinctly different,” says Tim Dunne, an industry analyst with J.D. Power & Associates.

What’s missing is perspective, and a closer look at the differences is revealing.

Dunne says nearly one-third of the 12.9 million light vehicles sold in China last year were light-commercial vehicles, weighing less than 6 tons gross-vehicle weight and typically retailing for $5,000 to $12,000.

In this segment of 4.2 million LCVs, nearly 60% were micro trucks and vans retailing for only $5,000 to $6,000, all vehicles virtually unknown in the U.S.

Moreover, the average transaction price of a passenger vehicle last year was $17,500 in China compared with $27,500 in the U.S., pointing to a difference of roughly $100 billion in the value of vehicle sales.

At the end of 2009, the U.S. parc was about 250 million LVs, more than four times China’s 60 million.

Nearly 60% of China’s LCV sales are micro trucks and vans.

J.D. Power estimates it will take another 15 years before China matches the number of vehicles in operation in the U.S. and enjoys the added business benefits, which range from gasoline sales, oil changes and tune-ups to replacement tires and spare parts.

Another economic generator that will expand in China over time is the used-car business. The ratio today is four used-vehicle sales in the U.S. for every new-car sale. The inverse is true in China, where three new cars are sold for every used-car transaction.

J.D. Power Initial Quality and Appeal studies show Chinese consumers currently give a majority of China’s national brands low scores compared with foreign brands made in China.

Most national brands offer a 2-year, 18,642-mile (30,000-km) warranty, while foreign brands sold in China typically offer a minimum four years, 37,284 miles (60,000 km).

Yet, developing an automotive industry from scratch takes decades, and important changes are under way on several fronts.

“The quality and reliability of China’s national brands have improved significantly in the last 10 years – from an average of 8.3 problems per vehicle in 2000 to 2.5 PPV in 2009, based on the first 90 days of ownership,” says Dunne, citing J.D. Power studies. “That’s tremendous progress.”

China’s wide and deep talent pool is being tapped, as well. “BYD (Auto Co. Ltd.) is innovating in battery and electric-vehicle technology, and Chinese design capability is being used by foreign auto makers,” Dunne cites as examples.

With China’s annual economic growth of 8% to 9% considered likely in the next five years, vehicle demand is expected to broaden geographically, as well as expand.

“Much of the sales growth in the next five years is going to come in rural and provincial markets,” Dunne says. “There is a whole new market segment that has not been addressed, where most people have not yet reached the income level needed to afford a car. But they will in a few more years.”

The growth in vehicle demand in China the last 25 years has been explosive. In 1985, about 1,700 passenger vehicles were sold in the country. Annual sales reached 320,000 by 1995 and increased ten-fold in the next decade to 3.2 million.

While the rate of growth undoubtedly will slow, the automotive market will inexorably keep expanding in this nation of 1.34 billion people.

J.D. Power is forecasting 19.1 million LV sales in China by 2015, made up of 13.5 million passenger vehicles and 5.5 million LCVs. This compares with 16.3 million LV deliveries in the U.S., made up of 13.9 million passenger vehicles and 2.3 million LCVs forecast in the same timeframe.

As the Chinese market matures, the differences with the U.S. will narrow.

Predicts Dunne: “China will someday become the world’s largest automotive market on an apples-to-apples basis, as well as a leading global center for automotive innovation and production.”