Smaller Cities,Bigger Chances
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In the new distribution map of BMW China， Huai’an， a city in the northern part of Jiangsu Province， was considered the fourth-tier market. The first BMW store in this city was opened in December 2010 and over 1，500 units had been sold in only two and a half years.
The fast developing regional economy laid the solid foundation for increasing the sales of luxury cars. Huai’an， which consists of four districts and four counties， had the GDP of RMB 192.091 billion. From 2008 to 2012， its annual growth rate was maintained at over 13%.
“The third-， fourth- and even fifth-tier cities in China have unlimited potential， and BMW has already begun to benefit from their fast development，” said Ivan Koh， President of BMW China Trading Co.， Ltd. Mercedes Benz， one of BMW’s major rivals， believed that its laggard position is caused by the deficient marketing in the third- and fourth-tier cities.
When the first- and second-tier cities are growing full of luxury cars and issuing strict rules of limiting the use of automobiles， third- and fourth-tier cities like Huai’an are gradually moving to the central part of distribution plans of BMW， Mercedes Benz and Audi. The three German luxury auto brands simultaneous consider these smaller and lesser cities as their next growth point， intensifying the competition there.
According to a research made by BMW Group into China’s luxury auto market in 2012， the market size is likely to reach 2 million units no earlier than 2014. In 2012， there were 1.2 million luxury cars sold in China. The additional 800 thousand units are going to happen in the third- and fourthtier cities of China and BMW， along with its German peers， has already noticed it.
Go to Smaller Cities
In 2008， the Chinese government initiated the campaign of promoting the sales of automobiles in rural areas. Along with the policy the third- and fourth-tier cities rose as the main force of developing the auto market of China. When the sales of cars in China for the first time met a lower growth rate in 2011， the market of West China still increased quickly against all odds. In Gansu， Shaanxi and Ningxia， the increase of sales volume even increased by 80%-100%.
Su Bo， Vice Minister of Industry and Information Technology of China， once wrote an article to analyze the status quo and development of China’s auto industry， indicating that no explosive development will occur to China’s auto industry， but in the third- and fourth-tier cities of China， as well as the rural market， the auto industry will maintain its stable growth rate for a long while.
The distribution systems of most auto-making enter-prises have already moved their centers to these places. The data from Sinotrust shows that the number of auto dealers increased from 24，510 to 26，779 （including the display halls and 4S stores） in the past one year. Very few of them were opened in Beijing， Shanghai and Tianjin， while more of them were located in Gansu， Sichuan， Qinghai， Guangxi and Hebei， where the growth rate exceeds 20%. Among them， Gansu had witnessed the largest increase 26%.
“Thanks to the continuous promotion of urbanization and the improvement of people’s livelihood， the consumption power of residents in the third- and fourth-tier cities of China is further released. The center of the demand for cars has shifted from the coastal areas to the central and western parts of China， and from the first- and second-tier cities to the third- and fourth-tier cities，” said Dong Yang， Standing Deputy Director of China Association of Automobiles.
The organization has published the data， showing that the major cities in China are taking a decreasing proportion in the new car market of China from 2008 to 2011. Concretely， it went down from 35.7% to 30.8% in 2011. In July， ACNielsen China’s vice president Yu Haixia forecasted that the proportion of third- and fourth-tier cities could reach 68% in the next year.
The rising automobile consumption in these cities pro- vides great opportunities and potentials for the luxury cars. A group of data from BMW China shows that the sales in the third-， fourth- and fifth-tier markets of China has already taken 40% or so of the total sales of BMW in this country. Ivan Koh says that the growth rate of BMW in West China hit 32% in the first seven months of 2013， higher than the average level of 18% in the whole country.
Dr. Daniel Kirchert， former senior vice president of BMW Brilliance， says that China has more than 280 cities with the population larger than 1 million. In comparison， BMW， one of the three German luxury auto brands that take 78% of the Chinese market， only covers 145 of them. Audi makes itself in 139 cities while Mercedes Benz only makes 98 cities.
BMW began to lay out its development in the third- and fourth-tier cities of China early in 2005. It established its first exclusive store in these cities in 2007， earlier than any other luxury brands. Presently， BMW has 392 dealers （including 281 4S stores and 5S stores） in China， 60% of which are located in the third-， fourth- and fifth-tier cities.
In 2012， BMW recruited 50 new dealers with only two in the first-titer cities. The others are all located in the third-， fourth- and fifth-tier cities while 38 are in the fifth-tier cities.
The data from JD Power shows that BMW’s market share in China increased by 32% to 5.43%， mostly thanks to its positive layout in the smaller and lesser cities in China. Meanwhile， Audi’s market share also increased by 17%.
The New Arena
“The earlier bird catches the worm”. That is the best description for BMW’s development in China. Thanks to its visionary plan of getting into the lesser cities of China， it is gradually and ceaselessly narrowing the gap between it and Audi. From January to July 2013， the 5-series of BMW realized the sales volume of over 10，000 units.
When BMW was soaring in the third- and fourth-tier cities， Mercedes Benz has realized its deficiency in the lesser cities. In July 2013， Nicholas Speeks， President and CEO of Beijing Mercedes Benz Sales Service Co.， Ltd， says in a press conference that the distribution network of Mercedes Benz was overly centralized in the first- and second-tier cities and now Mercedes Benz is far behind its competitors in the third- and fourth-tier cities， leading to its laggard development in the past year.
Li Hongpeng， Senior Vice President of Mercedes Benz Sales Service Co.， Ltd， just finished a dealers’ meeting in Hong Kong and could not wait to show his idea about Mercedes Benz’s plan of “going to smaller ciites”.
“Presently， the market potential of the third- and fourth-tier cities of China might not be that big， but it will undoubtedly help us improve our sales，” he says.
Mercedes Benz finished the integration of distribution channels in China in March 2013， which included significant changes in the introduction of products. At present， they are making explorations around the after-sale service and the distribution channels. It plans to open 75 dealers in China， 45% of which are to be in the third- and fourth-tier cities.
On July 29， Mercedes Benz established its first dealer in Tibet. Nicholas Speeks， Li Hongpeng and Hubertus Troska， Board Chairman and CEO of Daimler Greater China， are all present in the opening ceremony of this store.
Li Hongpeng delivered a speech that “at least 11 of the 75 new dealers are going to be established in West China”， and “the number of dealers in West China will also increase twofold from 28 to 55 by the end of 2014 while the total number of stores in China is going to exceed 400”.
At the end of July， Audi celebrated the completion of the 2 millionth new car. Meanwhile， it worked out the plan of“building a system with the capacity to support millions of cars”. In this system， the development of dealer network is given an unparalleled priority. At the beginning of this year， Audi planned to establish a new dealer every weak averagely， most of which was going to be in the third- and fourth-tier cities. A more ambitious plan says that Audi is going to have its dealers cover more than half of the cities with the population larger than 1 million.
According to these plans， Audi is going to have 400 dealers in China by the end of 2013. In 2030， it is going to have a powerful distribution network consisting of 700 dealers. The additional 300 dealers are mostly located in the third-， fourthand fifth-tier cities.
Zhu Tong， Director of Dealer Development at BMW Brilliance， says that there are easy-to-see benefits from recruiting dealers in the third- and fourth-tier cities. Take Chenzhou， Hunan for example： in 2008， BMW takes 23.6% of the luxury car market of this city. In 2009， it established a dealer in Chenzhou and then increased the market share to 37.5% one year later. The similar case also happened in the 46 third- and fourth-tier cities that BMW took the lead in establishing dealers among all luxury car brands.
Binding Dealers
Zhu Tong says that dealers now still put much trust into luxury auto brands and are willing to develop the third- and fourth-tier markets together. Dealers of Mercedes Benz also shows the same reflections. Li Hongpeng says that “everyone （dealers and investors） are longing to form the strategic partnership to develop the Chinese market”. The large dealers in form of groups own the network resources and contribute the sales volume accounting for 70% of Mercedes Benz in China. A dealer says that Audi has already reached an agreement with Yuntong Group and other domestic dealers to build the strategic relationship to develop the third- and fourth-tier markets of China.
Su Weiming， Vice President of Volkswagen Greater China， says that “no factories are talking about recruiting more dealers in the first- and second-tier cities”. “We must go downward. That is more than building a store， but to change the whole culture.”
In Zhu Tong’s opinion， the first thing a luxury auto company needs to do in smaller and lesser cities is provide good services for local car owners， based on which it begins to sell cars.
“A lot of difficulties stand in front of us when it comes to the distribution in the third-， fourth- and fifth-tier cities，”Zhu Tong says. He stats that it is necessary to choose a right market， which means to be responsible for partners. It is also necessary to build a uniformed service standard to answer for the consumers.
The case in Huai’an just exemplifies this. Opened in December 8， 2010， this store of BMW sold over 1，500 units in two and a half years. Before that， there were only 180 BMW cars running on the streets of Huai’an.
Cao Chaopeng， general manager of this store， says that it is a standard 4S store of BMW and did not claim back the investment in the past two years and a half， but it had already got rid of the dependence on BMW and is ready to face any business performance by itself. Presently， it is actively expanding its presence in the used car business.
Zhu Tong says that BMW does not promote the single and inflexible development pattern in the smaller and lesser cities. In order to promote the healthy and balanced development of retail business， BMW had other business spots in addition to 4S/5S stores. Presently， 101 of its 382 stores in China are not 4S/5S stores.
These include display halls， used car centers， repair centers， urban fast repair stores and town fast repair stores. According to Zhu Tong， these stores have all been accredited by BMW Brilliance and BMW China’s Network Development Department. The goal is to unify the national service standard and to support the future development of the distribution network.
He also adds that the town fast repair stores are built in the promising fourth- or fifth-tier cities whose market size is too small for 4S stores. The goal is to provide maintenance and repair services for local customers and get to know the market. These stores will be upgraded to the standard 4S stores when the conditions are met.
The past experiences of BMW show that it usually takes three years to foster and cultivate a market. From 2009 to now this German company has built 19 urban fast repair stores. Three of them have already been upgraded into 4S stores and eight are undergoing the upgrade.
Cao Chaopeng is highly confident in the future development. “Before we had a store here， the medium- and highclass cars sold very well. This means that we have a very good outlook.”
Cao Chaopeng says that only Audi and BMW respectively built a 4S store in Huai’an. Mercedes Benz just set up a urban display hall. But the auto market of this city went into heat from 2008 and lasted till now. So it is believed more 4S stores of luxury cars will be seen there in the next three years.