China's Car Buyers Want to Ride in Style!

India’s Tata Motors created quite a buzz recently when it unveiled the world’s most inexpensive automobile. The Nano is being billed as the cheapest new car on the planet with a “sticker price” of just $2,500 (excluding most options on the fully equipped model).

The “people’s car”, as it has also been called, is aimed squarely at the “masses” of upwardly mobile emerging market consumers. First time car buyers in most developing nations opt for small, economical economy cars. “That is how carmakers have prospered in emerging markets from Brazil to Thailand” according to a recent Financial Times article.

One very big emerging market, with the most dynamic growth potential in auto sales, is shunning economy cars and taking the high road to riding in style.

In China, consumers are losing their enthusiasm for small cars, even while auto sales are growing at a rapid pace. In fact, China is now the second larges car market in the world – growing 24% per year.

Last year however, “sales of cars with an engine size of one litre or less fell 24%” according to the article. This is in spite of sharply rising gasoline prices, and a tax policy in China that encourages smaller engines.

In fact, researchers at German automaker Volkswagen found the Chinese car buyers are willing to spend twice their annual salary on cars. That’s U.S. style conspicuous consumption at work in this emerging market economy.

There are several reasons for China’s new-found love affair with higher end automobiles. First, the Chinese government has for years maintained subsidies on fuel prices at the pump in China. Trying to keep a lid on inflation, to avoid mass protests from consumers, China’s fuel prices are artificially low by global standards. This of course eases the sticker shock of filling the tank in a big car.

More recently, officials in Beijing have allowed increases in gasoline prices, so this may finally cut into big-car sales. More significant are cultural reasons that support China’s luxury car market. In China, there is a strong “link between cars and social status.” Rising incomes among the upwardly mobile “urban elite” in China’s major cities is putting a lot of discretionary cash in people's hands, who want to buy top-quality goods.

U.S. automaker General Motors (GM) has had success in China, which hasn't been enough to offset its dismal domestic results. In fact, GM sold a record 1.03 million passenger and commercial vehicles in China last year, but growth slowed to just 17% in 2007 from 26.8% the year before. GM is locked in a market-share battle with Volkswagen over auto sales in China, with the German firm holding an 11.6% share, versus 11% for GM.

Perhaps GM should consider shifting its auto sales strategy upscale, by selling less compact cars and pushing more Cadillacs and Corvettes in China.