By: Peter Wittwer
China is seeing a huge increase in demand for SUV’s and crossover SUV’s. This bodes extremely well for Detroit auto manufacturers, who historically are notorious for specializing in the production of bigger cars. As Henry Ford put it, “Bigger cars means bigger profits,” and this motto has traveled U.S. car companies over the past few decades. The U.S. big 3 is not known for producing reliable small cars in comparison with Europe and Japan, so the increasing demand for SUV’s in China is great news for U.S. auto companies. Since 2000, the percentage of SUV’s represented in the car market of China has risen from 4% to 19%. This rise in demand for bigger cars is probably due to the development of China’s economy. More people are rising out of poverty, and bigger cars can serve as a status symbol. Even last year 60% of Chinese people purchasing their first car, decided to purchase a SUV.
It will be interesting to see how U.S. car companies fair versus other foreign auto producers in the Chinese market. Other car companies such Audi, Lexus, and Hyundai came out with new SUV models to compete with the U.S. 3 in the Chinese market. However, the production of SUV’s has been the specialty of Detroit auto manufacturers, which gives them a leg up on the competition. Hopefully, the new demand for bigger cars in China will be a blessing for American auto manufacturers and help them regain their dominance in the global car market.
http://www.autonews.com/article/20140427/GLOBAL03/304289977/detroit-3-rush-to-expand-suv-lineups-in-china
Discussion Questions:
What Cultural reasons could be attributed to the recent and rapid increase in demand for SUV’s in China?
Do the Chinese command enough of the automobile market that their preferences and demands could change the whole car industry? Will the industry shift from more producing sedans and smaller cars to producing bigger SUV and crossover type cars?
I think American SUVs will sell better in smaller cities in China. The largest three cities in China (Beijing, Shanghai, Guangzhou) all have serious traffic congestions, and SUVs will not fit well in these cities. If US auto firms want to increase their market share in China SUV market, they should corporate with more dealers in smaller cities (Toyota has done a great job in selling products in smaller cities). Also, China has a much higher tax rate for vehicles with large engines (3.0L or more). Therefore, since most American SUVs have large engines (3.0L or more), American SUVs in China are selling at a much higher price than the price they sell in US.
Well, why put efforts into a small car if Americans won’t buy it? It’s not just the Detroit Three, it’s also Honda, Toyota and Nissan. In the US, VW doesn’t sell anything smaller than a New Beetle, right? – not true of Europe! Meanwhile, the Ford Focus and Fiesta really are good cars but the market for the latter does not really include the US, as noted few Americans are interested in anything that small. That doesn’t mean that Ford doesn’t produce good small cars, it just means we in the US overlook them.
As to Kuangdi’s comment, Buick redesigned its vehicles for China with much smaller engines than comparable vehicles have in the US. If vehicles cost more, it’s because of price discrimination: Chinese demand is less elastic so firms rationally charge more for comparable vehicles than in the US.