Inland markets attract foreign brands
Imagine Philadelphia without a full-service dealership selling General Motors' brands. That was this city before He Sei opened his Buick and Chevrolet showrooms in July at a five-brand auto mall.
This city in northeastern China is a boomtown of 2.2 million people jammed with miles of new apartments. Fushun has a larger population than every U.S. city except New York, Los Angeles, Chicago, and, depending on how you measure it, Houston, Philadelphia and Phoenix.
A newly added Cadillac dealership is a sign of He's faith in the sales outlook for his American brands: "I expect 4 percent market share by the end of the year."
Across China, enormous cities wait as virtually untapped markets for international makes. The Detroit 3 are charging hard to boost sales in those cities, a drive that could determine winners and losers in the world's biggest auto market.
"Those cities are the future and will drive growth," says Ashvin Chotai, an auto analyst at Intelligence Automotive Asia.
The march into China's interior is risky. Strategies that worked in coastal megacities don't always transfer, and Detroit brands may get burned if they don't adapt.
GM is one of the strongest foreign makers in these new battlegrounds, alongside Volkswagen AG. But latecomers, including Ford Motor Co. and Chrysler Group, are catching up fast.
The markets are somewhat misleadingly labeled Tier 3 or Tier 4 cities, implying small size. While they are small compared with Tier 1 cities such as Shanghai at roughly 14.6 million and Tier 2 counterparts such as Nanjing at 3.1 million, lower-tier Chinese cities are still huge by global standards. While there is no standard definition, populations can range into the millions.
Foreign brands salivate over the low auto ownership rates and rapid economic growth in Tier 3 and 4 cities.
GM considers Fushun a Tier 3 city. The vehicle ownership rate is 2.8 vehicles per 100 households, compared with China's average of 9.8. But every day, 140 vehicles are added to local roads.
"In the next few years, General Motors and our joint venture partners will significantly increase our presence in these areas," GM President Dan Ammann said in April at the Beijing auto show. Shanghai General Motors, GM's venture with SAIC Motor Corp., plans to open 700 dealerships in central and western China by 2017, bringing its total to 1,700 stores in those regions.
"These inner provinces are indeed an engine of growth," Ammann said. "We're expanding both our dealer network and our manufacturing footprint to make it more convenient for customers in these markets to buy and service General Motors vehicles."
Ford is doubling down on those markets, says Brett Wheatley, vice president of marketing for Asia-Pacific. "All of our growth now is going to be in [Tier] 4, 5 and 6, and in central and west," Wheatley said. "That's about where 60 percent of all our registrations are coming from now."
Jim Farley, Ford's global head of marketing, sales and the Lincoln brand, says many rivals have erred by being "overindexed" in big cities along the coast. As a latecomer to China, Ford aims to leapfrog more established brands by dialing up elsewhere.
The Ford brand, for instance, had about 57 percent of its 698 dealerships in Tier 3 or 4 cities at the end of March, according to Urban Science, an auto retailing consultancy. Likewise, about 59 percent of Chevrolet's 604 outlets are in Tier 3 or 4 cities.
Ford and Chevrolet have a bigger portion of their outlets in lower tier cities than Volkswagen, Nissan or Toyota.
Chrysler, the weakest of the Detroit 3 here, has only 40 percent of its dealerships in Tier 3 or 4 cities. But with only 167 outlets in total, Chrysler is still working to cover the top markets.
Challenging Ford and Chevy is Hyundai. The South Korean brand has 57 percent of its 755 dealerships in those cities, Urban Science says.
Automakers are learning that the Taj Mahal dealerships that worked along the coast aren't always cost effective in smaller markets. It also is harder to find quality retailers, as the few with experience are quickly snapped up, said Hamilton Gayden, managing director of Urban Science China.
"More OEMs are having trouble recruiting dealers," Gayden said. "Are they selling as many vehicles as they should? Are they as profitable as they should be? Are they retaining customers?"
Lower-tier cities' stores must be more modest to cover costs with lower volume, he said. There also are added logistics costs to keeping far-flung dealerships stocked with spare parts.
Fushun dealer He expects his $24 million investment to pay off.
His gleaming auto mall has space inside to display 10 vehicles per brand and car lots packed with 1.5 months of inventory. He sells about 50 Chevrolets and 50 Buicks a month.
The dealership has impressive glass-walled showrooms and a lot of marble.
It's all part of the effort by Detroit's carmakers to put their lower-tier markets on a higher pedestal.