Driving Ahead in China

The New Significance of Quality and Branding in China’s Automotive Industry

by STEFAN WEILER

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China’s auto sales increased to 23mn last year, growing nearly 7% from 2014 and extending the country’s lead as the world’s biggest car market. But despite a strong increase in Chinese auto sales last year, the domestic market share for Chinese brands continued to shrink, falling to around 38% year-on-year, a 2% decline from the year before – and a steep drop from just over 50% in 2010 according to estimates by the government-backed China Association of Automobile Manufacturers (CAAM). Chinese companies like Shanghai-based SAIC Motor Corp. Ltd. and Wuhan-headquartered Dongfeng Motor Group Co. Ltd, the nation’s top two automakers, struggled to hold their own. At the same time, Western multinationals such as Volkswagen AG and General Motors Co. (the best-selling brands in China with a combined market share of more than 30% in the passenger car segment) have thrived, primarily through joint venture agreements with large domestic auto companies. If Chinese Original Equipment Manufacturers are keen to regain market share in their domestic market in the coming years, they should concentrate on improving their product quality and branding efforts.

Knowledge is King

China wants to transfer the technical know-how of automotive manufacturers from Europe, US or Japan to its own automotive industry through its JVs. Despite this, most of the Chinese brands lag behind with respect to quality and safety tests in comparison to not only European, but also American and Japanese vehicles. One reason is that Chinese automotive manufacturers mainly focus on lower level cars, which are no longer in such high demand in the Chinese market, since many people’s income has increased significantly. Chinese cars are mainly bought because of the low price – if a Chinese consumer has more than around EUR 15,000 to spend, a ‘joint-venture car’ or foreign brand is preferred, as the Chinese generally think that the foreign product will be better than their own. In addition, the second-hand car market in China is slowly starting to evolve as well, although it is not well regulated yet. There is still a lot of cheating involved in the process – like hiding accidents, damage or manipulating the mileage – and this might be the main reason that many customers save money for a new car instead of buying used. However, in the future it is likely that Chinese clients will also turn to second-hand foreign cars in good condition rather than a new Chinese model, assuming that the image of Chinese cars does not improve significantly over the next few years.

Most Chinese car manufacturers have the strategy of focusing on quick sales, including copying design elements and components, versus investing in state-of-the-art R&D structures and processes. This results in many technology and quality issues in their cars. This behavior negatively affects their brand reputation, meaning that the Chinese do not trust their own brands with respect to safety, quality, reliability, etc. However, the situation seems to be starting to change: according to the latest J.D. Power report, some Chinese automakers have been improving the quality of their vehicles.

Professional Branding From the Earliest Stage

To be successful in the highly competitive Chinese automotive market, a company has to put a lot of effort into the branding of its new products. Chinese people like well-known brands, no matter whether they buy local or foreign cars. It is very hard for new automotive brands to establish themselves quickly and generate good sales numbers, as there are already around 100 automotive OEMs established in China. Senior executives in automotive companies in China have to be very PR- and marketing-oriented in comparison to those in Germany, where heads of car companies tend to have a technical approach and background. Two examples of new brands from different car levels make this issue clear: one is Qoros, a joint venture of Chery and Israel Corporation, which produces high quality cars (sedans, hatchbacks and city-SUVs) in China in a state-of-the-art factory with Western top management professionals. The other is Huasong, a multi-purpose vehicle (MPV) in the lower price range produced by Brilliance Automotive, a state-owned enterprise and JV partner of BMW. They compete for very different clients, but currently face the same problem of very low sales numbers, as their brand still has to be developed. Many of their cars cannot yet be seen on the streets in China. Building a brand takes time, the right strategy and consistent execution. This also means that OEMs require a large network of professionally run dealerships across China. Each dealership needs to train their staff properly in order to demonstrate their cars in an attractive way, and to be able to explain and sell the features of the vehicles to the prospective customers in a way that raises their interest.

The Crucial Lever: Improved Quality is Key to Growth

At the China Quality Conference in Beijing in September 2014, the first meeting of its kind held in China, Premier Li Keqiang called for a drive to improve the quality of Chinese products. He said that quality management has to be given greater emphasis, and stressed the importance of developing educated workers. These statements should be given weight in the automotive industry in particular, as quality is, besides price, one of the top purchasing criteria for Chinese car buyers. This is true no matter which age group the buyers are in, or whether they want to buy a Chinese or premium brand. But how can the car manufacturers be enabled to build products of much higher quality? As China used to be a very poor country, high product standards were not affordable for most of the population. People are thus used to lower standards of quality, safety, etc. – and education has not historically focused on quality and safety. In China, quality management training that takes into account the cultural and educational backgrounds of employees is essential. In quality management-related projects or new vehicle launches, it is important to train for and implement easy-to-use quality systems while paying attention to the specific mind-set and culture of Chinese clients. A system has to be established that allows workers to report defects.

To communicate quality requirements to employees it is paramount to implement systems which use pictures and visualizations – e.g. checking paths and visualizing defects on real products and in photos – and to avoid words in quality requirement checklists and descriptions. This helps to motivate operators. In order to help workers to recognize quality problems in the first place, employees should be trained on real examples, e.g. painted car bodies for identifying different kinds of surface-related defects and for creating a standardized defects catalog. Rapid response systems, like Quick Response Quality Control (QRQC), help to tackle quality and manufacturing issues, whether for a customer or a supplier. QRQC mainly deals with problems on a day-to-day basis to improve shopfloor indicators (customer concerns and internal scrap rate, OEE, accident rates, etc.). This approach is more than a problem-solving tool; it is a mind-set that leads to fast quality improvements.

Quality gates and loops along the processes, from the press shop to the final assembly and in the rework areas, are implemented to achieve transparency regarding the current top problems. Discussing and following up the results across workshops and departments and applying a structured problem-solving approach to the top problems is finally reducing the defect rate significantly. Applying the “poka-yoke” or “mistake-proofing” principle also helps to reduce errors, especially where workers with low education and qualifications are used and a high fluctuation of workers is common. When the quality management (QM) principles and processes are understood by employees, the implementation of an IT-based QM system helps to support the scalability and flexibility of the whole system. Apart from implementing QM tools and methodologies, it is also key to work with the HR department to adapt the bonus system for employees, in order to ensure that people are financially rewarded when they care for quality and show improvement.

The Road Ahead

It is hard to predict when Chinese car brands will finally be competitive outside of China. Many Chinese auto buyers today believe that developing a successful Chinese premium auto brand is within reach. In a McKinsey survey from 2013, 41% of Chinese respondents said that Chinese automakers would build a globally recognized premium car in the next 5 to 10 years, while 18% said that it would take 10 to 20 years. Successfully launching a premium auto brand will be a long journey for the handful of Chinese automakers with the aspirations and resources required for such an effort. Whenever that might happen, a strong automotive sector must start from the quality management of its products.

Further Information

Stefan Weiler has been the managing director of ROI Management Consulting Co. Ltd. in Beijing since 2012. He has more than 20 years of experience in management consulting, project management, and sales and business development, working for multinational companies like Mercedes Benz and Hewlett Packard and international consultancies. He has spent more than half of his career in Asia. Mr. Weiler’s business focus is on training & the implementation of lean manufacturing, sourcing, supply chain management, supplier evaluation and development. He holds a masters degree in mechanical engineering from the Institute of Technology of Karlsruhe in Germany with a focus on industrial engineering.

 

 

 

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