Three Audi models stand in a courtyard in Xintiandi, one of Shanghai's trendiest shopping areas and nightspots. Their hazard lights flash seductively as a troupe of dancers in extra-terrestrial outfits swirls around them. Two of the models – the A-8 and A-6 – are already hot sellers in China. The German carmaker hopes the other, an A-4, will follow suit.
Why choose this location, with its expensive restaurants and pricey home furnishings stores, for the gala event? "Audi is a lifestyle product, and we think this is our customers' lifestyle," says Peter Hirschfeld, senior PR and marketing manager of Volkswagen China's Audi division.
Audi has successfully tapped into a growing class of wealthy consumers in China. Sales have surged over the past three years, from 6,700 older Audi models in 1999 to 27,500 A-6 and A-8 models in the year to mid-December 2001. In 2000, Audi China imported only around 550 cars; in 2001 that surged to 1,400, "almost all of them A-8s," says Hirschfeld. The turning point for local sales was the January 2000 launch of the domestically produced A-6. China now ranks number one worldwide in sales of the Yn400,000 A-6 sedan, and number four worldwide in sales of the Yn2.1m A-8.
It can't hurt that China's president, Jiang Zemin, has an A-8. But Audis are now seen as more than just the preferred ride of the country's senior leaders. With an aggressive mar keting campaign, Audi is building a new customer base. "Audi's image in 1999 was 'Audi is the official car,?" says Hirschfeld. "Now we are a premium car for successful people."
The shift began in 1998, when Audi decided that China had huge growth potential and made it a strategic market. Until that time, Audi and other foreign automakers tended to introduce older models to the China market. It was selling locally-made A-100 and A-200s, but those models were technically 10-15 years behind models being sold in the West.
"We thought if we just bring the Audi A-6 here it would confuse the market," says Hirschfeld. This was a misperception that was corrected following customer clinics and market research. Audi found that Chinese consumers were fast becoming just as sophisticated as those in the West, and that they "wanted to be treated equally with other international customers."
However, satisfying this desire presented Audi with a problem: because they had never been introduced to the higher-end Audi models, Chinese customers did not regard the Audi as a luxury car manufacturer. Imported Mercedes Benz and BMWs were the German luxury car of choice for those who could afford them. Audi had another image problem in that locals saw it as a government officials' car. That had to change – the market was limited and the government was downsizing and cost cutting, Hirschfeld says.
For the next three years, Audi worked to develop a new customer base. In 1998-99, the company invested considerably in brand development. To convince Chinese that the Audi was a top-line car, Audi featured luxury goods like a violin and fine china in its print advertisements, coupled with men who had all the trappings of a successful businessman, like an expensive watch and top-of-the-line mobile phone.
A premium car demands a premium sales and service network, so even before the A-6 launch Audi began building an exclusive dealer network combining sales, service and spare parts. Only Audis were allowed to be shown in the showrooms, which were all built to international standards. That was an important part of the brand-building exercise, says Hirschfeld. The dealer network had to "fit the customer's expectations" that Audi was a premium car, he explains. Now, Audi has 46 dealers in 42 cities in China. Beijing and Shanghai each have more than one dealership.
Chinese consumers still tend to regard domestically-made cars as lower quality than imports, so Audi spent 2000 trying to change that perception for the A-6. Marketing efforts focused not only on selling more cars, but achieving "an image level equal to BMW and Mercedes," says Hirschfeld. Qualitywise, Audi was confident that the cars it turned out at the Changchun plant were as good as those made in Germany.
"Chinese consumers are convinced that the A-6 is the only domestic premium car," confirms Beijing-based Yale Zhang, an analyst with Automotive Resources Asia. "I think it is because of the quality of the car and the technology. If you look at domestically-made cars, no other model can compete with Audi on brand image and quality."
The only domestically-made car that even comes close is the Buick sedan that sells for Yn300,000-360,000. Introduced in late 1998, the sedans were supposed to be the car of choice for China's new wealthy class. But Buick missed the mark. "People think [the Buick sedan] is a luxury sedan mainly for commercial and government use, not really for individual use," says a Shanghai-based analyst with a European investment bank. "Private people I've talked to don't like the interior design of the Buick."
Sales of the Buick in 2000 were slightly more than 21,000 units, fewer than Shanghai General Motors anticipated. By the end of September 2001, the joint venture had sold 22,000 sedans, according to ARA, despite a marketing campaign that is "maybe number one" in China, according to Zhang.
Audi's brand-building efforts on behalf of the A-6 had a spill-over effect on its imports. When the carmaker re-launched the A-8 to the China market in May 2001, the initial allocation of 35 was sold out in 24 hours, boasts Kevin McCann, director of the Audi division at Volkswagen (China) Ltd. Previously, there were A-8s in China but imports were frowned upon by the Chinese government in favour of local production, he explains, before adding that this attitude has since changed. The main market for the A-8 is chief executives and employees of securities companies and real estate companies, says Yin Xiang, general manager of Shanghai Oriental Motors.
Around 70 percent of luxury car buyers are now individuals and private companies, compared with almost 100 percent government- owned just a few years ago. Wealthy entrepreneurs are a growing market for expensive autos. Government may take a bigger share of the pie this year, however, because luxury car purchasing quotas were abolished in late 2000 for SOEs and most government bodies below municipal level, says the analyst at the European bank.
The China luxury car market – generally defined as cars costing at least Yn300,000 for locally-made vehicles and Yn400,000 for imports – was 66,200 in 2001 including 55,700 domestically-made cars and 10,500 imports. This is a high total for a country where the average per capita income in 2001 was around Yn7,450, but "you can really feel and touch there are so many rich people in China," says Zhang. "China is a poor country, but luxury cars sell very well here."
High demand for luxury brands
BMW, one of Audi's main competitors, sold 5,742 units in China and Hong Kong last year, a rise of 51 percent on 2000. Most of that growth was on the Mainland, where it hopes to set up a production centre and expand its dealer network.
McCann expects the luxury car market to grow in line with China's economy for the next four or five years, generally believed to be in the region of 7 percent annually. Imports may rise as tariffs come down because of China's WTO entry – the current 80-100 percent level will drop to 25 percent by 2006 under WTO accords.
"Lower import tax and duties after China's recent entry into WTO will lead to lower prices and higher demand for our cars,? says Rose Cheng, senior executive in charge of communications for Mercedes- Benz China. McCann is less optimistic, predicting that non-tariff barriers will still keep import prices high. In the next fourto- five years we will still see duties,? he says. The way the technical regulations are set up still need a lot of work ?there are still technical obstacles to importing cars.?
Marketing will become even more important in the next few years as competition stiffens. France's Citroen is exporting to China a Yn400,000-plus car, and Mercedes-Benz plans to boost its after-sales service. Audi is responding with new models – in mid-November it launched the imported A-4 Cabriolet, priced at Yn500,000-600,000 and this year it will introduce a sports car, the imported Audi TT and the Quattro, an upscale sports utility car. Hirschfeld sees a big market in fashion-conscious Guangdong province for the A-4 Cabriolet, which is being marketed to "dynamic" individuals who drive themselves. "It will be a product fireworks," predicts Hirschfeld.