Will Chinese cars stay cheap forever?
Why do so many new vehicles sold by Chinese car brands represent such great value? The keen pricing can’t go on forever – can it?
Chinese cars have been on sale in South Africa for a decade and a half. Initially, most of them were based on (or cloned from) legacy manufacturers’ older-generation models. Cash-strapped small business owners bought bakkies imported from the Mainland and used them as cheap runabouts; they were regarded as disposable items.
But that all changed about 5 years ago. A slew of Chinese automotive brands had exited South Africa by the mid-2010s (following the global financial crisis), but the few that remained began introducing a new generation of vehicles. Most of those models were accomplished crossovers/SUVs and, importantly, they had enticing price tags.
Fledgling SUV brand Haval has been an astounding success story for Great Wall Motor (GWM) in South Africa. Even the most desirable security estates now have Havals traversing their latticework of 25 kph speed-limit paved roads. Chery has followed, with a very successful re-entry to the local market last year. One of China’s most influential automotive companies, Geely, has also re-engaged South Africans by proxy of its Proton brand. And BAIC’s X55 crossover is now available, too.
Chinese are getting better – much better
Chinese cars are edging ahead by offering engaging driving experiences at very competitive prices.
There is no arguing with the national new-vehicle sales figures… Chinese marques now rank among the top 10 best-selling brands in SA’s passenger-vehicle market.
The reasons for this surge in Chinese success aren’t complicated. Experienced – and, in many cases, acclaimed – American and European designers and engineers have been lured to ply their trades in China. And, in return for very lucrative salaries, they’ve gone on to guide the development of much-improved Chinese vehicles.
Dramatically improved product design, quality and driveability have made Chinese brands’ models comparable with equivalent products made by European, Japanese and Korean car companies. This was, frankly, unfathomable a few years ago. And then there’s the pricing. Despite being fully imported vehicles, which is to say they are burdened by government import tariffs that aren’t cushioned by local manufacturing credits, the Chinese brands offer “a lot of car” – at very reasonable asking prices.
But how long can Chinese vehicle manufacturers keep their pricing so keen in South Africa? And what is the strategy behind it? We’ll give you a teaser detail that shapes part of the answer. In October, Haval was South Africa’s 6th best-selling car brand. It sold more new vehicles than Ford, Isuzu, Renault and Kia.
Why Korean cars conquered SA – and what that means for the Chinese
A R1-million Korean SUV? Nobody would have believed you in 1998.
In the late 1990s to early 2000s, Hyundai and Kia were peripheral brands in SA; Korean-made vehicles were considered inferior to anything produced by European and Japanese marques. So, Hyundai and Kia priced their products very keenly to stimulate demand, or at least get South Africans to visit their showrooms and test drive their cars. Not to be unkind – they effectively bought market share. Once people had a positive experience with Hyundai and Kia, their brand biases were likely to change.
The Korean strategy of buying market share was allied with the promise of rapidly improving products. And when that eventually happened, by the late 2000s, there was adequate customer loyalty for Hyundai and Kia to start increasing prices. It’s why Hyundai can market a R1-million Palisade and R800 000 i30 N hot hatch in South Africa.
Have Chinese brands also opted to buy market share in the Republic? It certainly appears so. Their models undercut segment rivals on price but come loaded with features. There is every reason to believe that Chinese vehicles will continue to improve by building on their deeply impressive technical evolution over the past few years.
But when will the prices of Chinese brands’ models start to align with those of their competitors? Hyundai and Kia evolved from budget vehicles to R1-million cars in South Africa, surely their rivals from China will ultimately do something similar?
Entrenching brands with bargain price
In the space of about 5 years, Haval has become a mainstream brand in South Africa.
Chinese economic policy and business strategy can be very opaque to outsiders, but there are some fundamental challenges to maintaining a maverick pricing strategy. First of all, the South African government is unlikely to reduce its import tariff structure soon – if ever – and then there’s the exchange-rate issue.
Most distributors pay for their Chinese vehicle orders in Dollars and the American currency has rapidly strengthened throughout the past few weeks. Although some forward cover might be in place, any continued Dollar strength (and Rand weakness) will eventually manifest in steeper prices on Chinese-made vehicles.
But perhaps the most fundamental challenge to continued Chinese bargain pricing in South Africa has nothing to do with the models sold here… Chinese car companies are hugely invested in electric vehicles for their domestic market and those vehicles cost a lot more to manufacture, with limited margins and profit opportunities.
As electric vehicle production continues to scale, it has to influence Chinese car companies’ balance sheets. Batteries aren’t necessarily becoming cheaper to make at scale, as many base metals and material processes remain expensive. It is a paradox of extreme growth with a new product technology: enormous revenue growth, but diluted profits, due to increased core production costs.
Going upmarket or staying sub-R600k?
Affordable bakkies are part of the Chinese strategy in South Africa.
Chinese brands are indeed doing what the Korean car companies once did in South Africa. This gives us a strategy timeline to imagine when the Chinese pricing pattern might break – if at all. In the Koreans’ case, their first cars arrived in South Africa during the late 1990s.
There were initial issues with knock-down assembly in Botswana, but after the Hyundai and Kia businesses were restructured in Mzansi, the brands gained momentum. And one day, in the mid to late Noughties, the local importers of those brands believed they had the right products and brand image to start pricing against legacy brands.
The 2nd-generation Sportage, for example, was a breakthrough vehicle for Kia in the local market. Launched around 2005, it was an affordably priced model, which, in several aspects, authentically bested its European and Japanese rivals. Remember, that was less than a decade after the first humble Kias went on sale in South Africa.
Chinese cars have been available locally for a decade and a half, so there could be a tipping point moment for Chinese car pricing soon. Or perhaps China’s government will release some of its immense Dollar holdings to support car companies in their global pricing war to gain more market share. For consumers, that would be a win.
Suffice it to say, global automotive dominance is China’s goal and South Africa remains the most important and diverse market in Africa. In absolute terms, our local market is small, and the cost support required to conquer it is, well, insignificant. After all, Chinese companies are used to operating in enormous volumes.
History is on China’s side – and that could benefit buyers
Chinese brands are here to play the long game.
Will Chinese brands continue to undercut their legacy rivals on price in the medium to long term? Well, things are made rapidly in China, but strategy reveals itself slowly.
We know the conquest of global markets is a prerogative of China’s statehood, with the car industry acting like some form of foreign policy proxy. If you are a legacy car brand trading in South Africa, with a multitude of products priced below R600 000, that’s terrifying. For consumers, though, Chinese pricing power has unlocked real value.
One thing is for certain: South Africans are buying into the “new’”Chinese vehicle pricing and product story with abandon. And once they’ve bought a Chinese brand’s value-packed product, it’s unlikely that many of them will return to legacy car brands; it would be a repeat of what transpired with Hyundai and Kia a decade ago.
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