China’s market for compact cars is evolving quickly. Consumers are already differentiating among brands, often developing preferences based on emotional factors such as a manufacturer’s image or what friends think. Intangible attributes (those a customer attaches to a brand) may be even more important to car buyers than practical matters such as fuel efficiency. For automakers that can deliver on these consumer preferences, the potential is huge: by 2015, more than three million compact cars a year may be sold in China, making it the world’s largest market. Yet the opportunity has resulted in a crowded field: 7 new models were introduced in 2002 and 9 more in 2003, bringing the total number of compact cars available to 24. How can brands set themselves apart?

Our research has identified the attributes that attract Chinese consumers to particular brands. Industry leadership—the belief that a car manufacturer’s good reputation ensures safety and reliability—draws the largest group of consumers. This intangible attribute is important to more than 60 percent of them, though some bargain hunters don’t value it at all. Intangibles consistently rank highest, accounting for six out of the top ten brand attributes (Exhibit 1), which indicates that functional attributes such as superior speed do not by themselves explain consumers’ purchase preferences.¹

Although local brands such as Xiali and Geely still sell well in China, some foreign brands have built themselves strong brand perceptions in the market, as evidenced by the way consumers perceive their performance on key brand attributes. The Volkswagen Polo, for example, outperforms most competitors on 10 of the top 20 attributes, such as industry leadership and the ability to make the buyer appear to be successful. Other foreign brands, such as the GM Sail and the Toyota Vios, excel on average in 4 such attributes, while Chinese brands are not competitive.

Chinese consumers in all market segments are price sensitive, however, which is where foreign brands face challenges. Consumers who consider buying a Xiali are three times more likely to get one than those who consider buying a Polo. And in our purchase funnel analysis,² price was identified as one of the top five bottlenecks in converting consumers from people who consider purchasing new cars into people who actually purchase them. On the other hand, a manufacturer that lowers prices risks losing some intangible attributes linked to status. Setting a price that captures sufficient market share without cheapening the brand image presents a hurdle for both existing automakers and new entrants.

The good news for the automakers currently on the threshold of entering this market is that although brand preferences are in the process of developing, loyalties have yet to be formed. Fewer than 12 percent of compact-car buyers in China say that they would buy the same model again, as compared with 50 percent of such buyers in Japan (Exhibit 2), though the Chinese figure is largely attributable to consumers who plan to trade up to larger cars. How then can new entrants and existing players capture customer loyalty?

First, Chinese car buyers have strong emotional preferences, are extremely brand conscious, and place great importance on industry leadership. Therefore, automakers must develop and maintain strong emotional and intangible associations between their brands and the customer not only on the level of individual models but also on the corporate, or umbrella, brand level. Depending on the segment that automakers target, they can select from a range of key intangible attributes, such as popularity, trendiness, and an air of success.

Second, automakers should build their frontline sales capabilities. Some 80 percent of Chinese buyers are in the market for the first time, and they shop around to a much greater extent than buyers in more mature car markets. Salespeople who educate consumers to make them feel comfortable with this unfamiliar purchase are more likely to build strong relationships and to promote repeat purchases.

Third, automakers should analyze and act on the differences between the more experienced consumers in China’s biggest cities (Beijing, Shanghai, and Guangzhou) and those in the next tier. Although incomes are generally lower in smaller cities, for example, we found that consumers there were less concerned with just getting the cheapest deal—possibly because many of them are first-time buyers involved in an unfamiliar process. Typical buyers are much more concerned about the reputation and reliability of a car, since the purchase price could represent two to three years’ salary. Such differences in consumer preferences might call for separate marketing programs in these areas.

Fourth, auto manufacturers should conduct systematic and frequent market research to assess the optimum price point. They should also keep in mind that while price is important, it is not always the primary factor in a buyer’s decision.

Last, even as automakers learn the lay of the land, the scenery will change as buyers become more experienced. In mature markets, for example, the importance of feeling safe—currently a critical intangible brand attribute in China—generally diminishes as consumers come to believe that one car is about as safe as another. To be successful, carmakers will need to maintain a balance between building a consistent image and adapting to keep up with consumers’ rapidly evolving needs.