2010-06-28 11:43

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What is an automaker to do in this situation? Investment in production capacity is basically sunk cost - there is no way to get that money back. But there are things that an automaker can do to drive sales and reduce costs in other areas:

Build the highest quality vehicles possible, even if this requires an increase in cost to achieve this goal. Delivering quality vehicles - even at higher cost - delivers many benefits.

We see in markets throughout the world that vehicle models ranking among the highest in quality typically enjoy the highest sales volumes, are sold at higher premiums, and have higher margins. Consumers generally are happy to pay a premium for quality. Quality vehicles also enjoy higher repeat purchases from consumers, and provide higher rates of positive word-of-mouth referrals to potential customers.

Focus on building and selling a limited number of models. Focusing on a limited number of models - especially for start-up Chinese domestic automakers - allows an automaker's best design and engineering resources to be dedicated to a limited number of products. This reduces overall development costs, raises quality, and increases the likelihood of achieving manufacturing efficiency and scale.

Focus on marketing a limited number of brands, rather than multiple brands. Positive brand reputations are expensive to create and maintain - there are enormous advertising, marketing, logistical and other associated costs associated with supporting a brand.

China has more automotive brands from which to choose than any market in the world, so standing out from the crowd is imperative. Channeling a company's financial and human resources to support one or two brands can achieve tremendous economies of scale and reductions in costs.

Deliver a superior customer retail experience. While superior vehicle quality and brand reputation frequently trump the customer retail experience in terms of influencing what vehicle a customer will buy, the importance of customer satisfaction cannot to be underestimated.

With the number of new car dealerships in China growing at a rate of more than 1,000 new stores annually, customers have more choices than ever before about where to buy their vehicle. If they do not receive superior service at one dealership, there is little to prevent them from moving on to another dealer - even of the same brand - in the same or nearby vicinity.

China's anticipated economic growth is a given which means rising sales in China's automotive market are assured. But this does not assure a profitable future for all automakers, as competition is fierce, and getting tougher. Focusing on these fundamentals, simplifying one's business, and understanding the expectations of customers, are a proven path to long-term viability.

The author is the director of Asia Pacific Market Intelligence at JD Power and Associates.