In China’s auto market, carmakers are employing a strategy that’s long been eschewed by the rest of the world: If a new model is helping you win, introduce a twin.
Take Honda Motor Co., whose namesake brand has been the fastest growing in China’s mass market this year. With its sales gaining on demand for Vezel and XR-V compact sport utility vehicles that are virtually the same, the Japanese automaker plans to sell a second version of its recently-introduced Avancier full-size SUV next year, Executive Vice President Seiji Kuraishi said in an interview.
In the U.S., such a move would be panned as badge engineering, a strategy often pointed to as one of the reasons for the downfall of General Motors Co.’s bankrupt predecessor. In contrast, Honda, Volkswagen AG and Toyota Motor Corp. are among carmakers embracing the approach in China, the world’s biggest auto market. The reason can be traced back to the country’s requirements for vehicle producers to set up joint ventures with local companies.
“In the beginning, we were doubtful whether you can really double sales just by making two versions, and thought even 1.5 times growth wouldn’t be bad,” said Kuraishi, who headed Honda’s China business from 2010 through June this year before he was promoted. “The result, especially for the Vezel and XR-V, turned out better than expected.”
The second version of the Avancier will be made by Honda’s joint venture with Dongfeng Motor Group and help boost Honda’s sales in China by more than 7 percent, Kuraishi said, which he assumes will outpace industrywide growth. The initial Avancier model, introduced in October, is produced with Guangzhou Automobile Group and is the Honda brand’s costliest in the country, starting at 270,000 yuan ($38,850).
China requires foreign carmakers to enter joint ventures with domestic companies to produce vehicles locally and allows a maximum of two partners for passenger vehicles. Manufacturers including Honda, Volkswagen and Toyota have opted to establish two ventures to boost sales and leverage local partners’ strengths, which can include setting up supply chains and manufacturing facilities and tapping government incentives.
Foreign automakers typically try to ensure both partners are supplied with popular models for sake of balance. Making slightly different versions of the same vehicle helps accomplish this with little additional development expense.
Still, badge engineering isn’t without risks. Marketing virtually the same car for two different brands probably is going to be more costly than for just one. And carmakers also face risks with cannibalization, where two dueling models erode the market share and profitability of each another.
Compared with its bigger rivals, Honda doesn’t have a lineup rich enough to satisfy two partners, so making models in pairs for the China market is the only option to keep both ventures running, said John Zeng, an analyst at LMC Automotive.
“Not all twin models are successful,” said Zeng, who’s based in Shanghai. “The market has to be big and growing, otherwise you’ll be eating into your own profits.”
Honda’s Vezel and XR-V models both come with 1.5-liter and 1.8-liter engine options, with the smaller version enjoying a lower purchase tax that’s spurred industrywide demand in China since October 2015. The pair have helped Honda post a 28 percent sales jump for the 11 months through November, outselling its bigger Japanese rivals Toyota and Nissan Motor Co. in the passenger car segment.
Apart from its two compact SUVs, Honda’s joint ventures also sell similar variants of the Odyssey minivan and the City small car. The company, along with its partners, expects to deliver 1.2 million vehicles in China this year and is planning to add shifts at existing factories to meet demand before a new plant with Dongfeng Motor starts operating in 2019, Kuraishi said.
“We are seeing positive competition between the twin models, and the joint ventures which once complained are very pleased now,” Kuraishi said. “It’s been a win-win situation.”
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