Automotive & Assembly Practice

Bigger, better, broader: China’s auto market in 2020

February 2013 | By Arthur Wang, Wenkan Liao and Arnt-Philipp Hein

In a country where bicycles were once the primary form of transport, the car is quickly becoming king. China is now the world’s largest single-country, new-car market, with sales expected to contribute 35 percent of global market growth between 2011 and 2020.

As the market matures, Chinese consumers are becoming increasingly sophisticated about cars and their tastes are evolving. Many have already purchased a first, entry-level car and will be ready to upgrade to bigger, higher-priced models. In this way, the Chinese car market is becoming more like that of North America, Europe, and Japan, although perhaps it is even more complex, given the many regional and segment differences in China.

To succeed in this more demanding environment, automakers must better understand what their customers want, and how their expectations differ from region to region, and from auto-body-type segment to segment. To address the need for deeper insights, McKinsey has developed detailed demand forecasts (going out to 2020) of Chinese auto customers by region and segment. In the analysis, we identified fundamental drivers for demand growth such as increasing urbanization, rising household income, low car penetration rates, and infrastructure improvements.

According to our analysis, the following trends will shape the Chinese auto market in the next 10 years:

Going bigger: Sales of sport utility vehicles (SUVs) will triple in the next ten years, as the number of wealthy consumers increases. Although sedans will remain the largest segment.

Trading up: Our study suggests that Chinese consumers will be much more likely to purchase high-priced cars (250,000 to 800,000 RMB) in the next decade than in the past. Incentive to do so will come not only from higher incomes but also from more aggressive marketing and sales activities of premium brands, as car owners look to replace their entry-level vehicles.

High volatility: The volatile growth rates for new cars observed over the last two decades are likely to continue.

Regional differences: Consumer behavior by region and car-model preference will vary greatly. For example, consumers in Hangzhou and Shandong say they care about attractive external styling, while their counterparts in Shanghai and Fujian are less concerned with exterior appearance and more sensitive to price.

The findings in this report will have significant implications for automakers. For example, they will have to place their bets on specific market segments and decide in which city clusters they should focus their efforts to take advantage of the “going bigger” and “trading up” trends. They will also have to be agile and flexible to react to the market volatility.

To read the rest of this report, download “Bigger, better, broader: A perspective on China’s auto market in 2020,” (PDF–609 KB).