Quality Requirements of the Chinese Consumer

Jacob George

Vice President and General Manager

Global Automotive Consulting

11 November 2015

2

Comparing the Chinese automotive consumer and the American automotive Consumer

Market Background Differences

Consumer Preference Differences

Other Quality Performance Observations

3

There are a few basic difference between the profile of Chinese and American consumers.

China

(2015 IQS)

US

(2015 IQS)

Gender Male 60% 61%

Average Age 33 53

Average yearly household income $28,795 $125,552

¥182,906

First, Additional or Replacement Vehicle

It REPLACES another vehicle 8% 85%

It is an ADDITIONAL vehicle to my household 9% 13%

It is the first EVER vehicle for my household 83% 2%

4

Although the average vehicle purchased is more expensive in US, the premium vehicle is more expensive in China.

$27.2

$20.8

$78.8

$30.4 $28.3

$47.8

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

Average Non-Premium Premium

China

US

in thousands

5

The China passenger vehicle sales volume overtook the US in 2010.

0.6 0.8 1.4 2.3 2.6 3.3 4.4 5.5 6.0

8.7

11.9 13.0 14.6 17.4 19.7 21.4 23.5 25.3 27.0 28.4 29.5 30.5 31.3

16.4 16.2 15.8 15.6 15.8 15.7 15.2 14.8 12.2

9.6

10.6 12.7 14.5 15.6 16.5 17.1 17.2 17.3 17.3 17.4 17.5 17.7 17.9

49 49 50 51 53 55 57 60

57 55

61 66

73 76

80 81 85

89 92

95 98

101 104

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015*2016*2017*2018*2019*2020*2021*2022*

PV

Sal

es

Vo

lum

e (m

illio

n u

nit

s)

China U.S. Global

Data source: LMC Automotive; from 2015 to 2022 is based on forecasting data

Trend of Sales Volume – 2000 to 2022

6

Number of Models sold

Data source: LMC Automotive; from 2015 to 2022 is based on forecasting data *Models with more than 100 unit sales volume per year, including domestic and imported.

542

275

0

100

200

300

400

500

600

700

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

*

20

16

*

20

17

*

20

18

*

20

19

*

20

20

*

20

21

*

20

22

*

China U.S.

In addition, there is significantly more choice in the China market.

CN Number of makes: 105

US Number of makes: 42

7

Comparing the Chinese automotive consumer and the American automotive Consumer

Market Background Differences

Consumer Preference Differences

Other Quality Performance Observations

8

We can compare Chinese consumer and US consumer preferences on product quality at three different points of the consumer lifecycle.

Customer

Car

Lifecycle

IQS

APEAL

VDS

2-6

months

1

year

2-3

years

Start

4-6

years

Consideration & Shopping

Purchase & Honeymoon

Usage & Familiarity

Service & Durability

Loyalty & Reconsideration

How much did you like each aspect of the vehicle? Scale of 1-10, weighted Score: Total Possible 1000 What initial quality problems

did you experience? Problem count

Score: Problems Per Hundred vehicles

What durability problems did you experience?

Problem count Score: Problems Per Hundred vehicles

9

Each metric is correlated to consumer decisions at that point in the lifecycle, and has an impact on financial performance.

Customer

Car

Lifecycle

IQS

APEAL

VDS

2-6

months

1

year

2-3

years

Start

4-6

years

Mean Index Score

Source: Days to Turn supplied by J.D. Power and Associates Power Information Network.

Da

ys

to

Tu

rn

Days To Turn by APEAL Score

45

3938

29

25

30

35

40

45

50

<750 750 - 774 775 - 800 >800

Mean Index ScoreSource: Gross Profit supplied by J.D. Power and Associates Power Information Network.

Gro

ss

Pro

fit

Gross Profit by APEAL Score

$918$1,006

$1,164

$1,901

$500

$1,000

$1,500

$2,000

$2,500

<750 750 - 774 775 - 800 >800

Volume and Price

Recommendations

Repurchase

10

APEAL is what a consumer requires at the beginning of the relationship. If APEAL is high, it is an indicator of PASSION.

Customer

Car

Lifecycle

IQS

APEAL

VDS

2-6

months

1

year

2-3

years

Start

4-6

years

Consideration & Shopping

Purchase & Honeymoon

Usage & Familiarity

Service & Durability

Loyalty & Reconsideration

11

What excites passion the most in both Chinese and US consumers are styling and exterior design.

2014 China APEAL Score 2015 US APEAL Score

Front-end styling 8.3 Appearance of exterior paint 8.6

Side-profile styling/appearance 8.3 Feeling of safety when driving

vehicle 8.4

Ease of getting in/ out of vehicle 8.2 Steering responsiveness/effort at

moderate/high speeds 8.4

Forward visibility from driver seat 8.2 Front-end styling 8.4

How well the exterior and interior

colors are coordinated 8.2 Side-profile styling/appearance 8.4

Ride smoothness in normal driving 8.2 Braking responsiveness/effort 8.4

Appearance of exterior paint 8.1 Forward visibility from driver seat 8.4

Same/Similar

Top Rated Attributes

12

So what do manufacturers need to concentrate on to get Chinese consumers to be passionate?

Focus on Styling and Appearance (like most markets)

How?

• Developing multiple styling themes and testing for “consumer passion” (not merely acceptance) during development (clinics)

• Emphasis on color and color coordination in advertising

• Showrooms that display the styling to advantage using stations with mirrors and lighting

• …

Selected Award Winners, APEAL

13

However, items that “kill passion” in China are quite different from those in US (other than poor fuel economy).

Same/Similar

2014 China APEAL Score 2015 US APEAL Score

Smell of vehicle interior 7.6 Your vehicle's fuel economy 7.0

Rating of vehicle's fuel economy 7.8 Driving range between each

refueling/recharging 7.2

Ease of operating/ adjusting rear

(2nd row) seats 7.8

Ease of using your vehicle's built-

in voice recognition 7.3

Quietness over harsh bumps 7.8 Ease of using vehicle's navigation

system 7.5

Interior materials convey an

impression of high quality 7.8 Quietness of heater/AC fan 7.6

Seating material conveys an

impression of high quality 7.8 Rear visibility from driver seat 7.7

Sound of engine/ exhaust during

rapid acceleration 7.9 Usefulness of navigation features 7.7

HVAC Controls convey an

impression of high quality 7.9

Visibility of other vehicles when

changing lanes 7.7

Lowest Rated Attributes

14

So what do manufacturers need to concentrate on to ensure Chinese consumers do not get “turned off”?

Fuel Economy (China like most markets)

Attention to sense of smell (specific to China)

• Avoid smells (including leather-like)

• Seal off from outside odors/pollutants

Attention to sense of touch and appearance, especially seats and other interior surfaces (specific to China)

• Convey impression of high quality

• Resist soil and lint

15

IQS measures the emotion customers experience if they have problems in first 2-6 months. High IQS is an indication of ANGER.

Customer

Car

Lifecycle

IQS

APEAL

VDS

2-6

months

1

year

2-3

years

Start

4-6

years

Consideration & Shopping

Purchase & Honeymoon

Usage & Familiarity

Service & Durability

Loyalty & Reconsideration

16

Top complaints in China market are different from the US market (appears to be “senses” vs “usability”).

Same/Similar

2015 China IQS Score 2015 US IQS Score

Unpleasant Interior Smell/Odor 14.2 Voice Recognition Frequently Doesn't

Recognize Commands 8.7

Excessive Fuel Consumption 5.0 Bluetooth/Phone Connectivity Issues 5.5

Excessive Road Noise 4.5 Materials Scuff/Soil Easily 3.2

Engine Loses Power When A/C is On 3.6 Excessive Wind Noise 2.8

Excessive Wind Noise 3.5 Navigation System - DTU/Poor

Location 2.7

Materials Scuffs/Soil Easily 2.7 Paint Imperfection 2.5

Headlights Not Bright Enough 2.6 Automatic Transmission - Hesitation 2.4

Fan/Blower Excessive Noise 2.3 Media Device Ports - DTU/Poor

Location 2.4

Abnormal Engine Noises 2.3 Center Console Storage – DTU 2.2

Brakes are Noisy 2.3 Cup Holders – DTU 2.0

Top IQS Issues

DTU: Difficult to Use/Understand

17

Chinese consumers are vociferous about unpleasant smells in their vehicles.

Verbatim of Leather Smell Verbatim of Plastic Smell

Complaint Reasons

• New vehicles give out strong/pungent leather or plastic smells

• These smells last even after driving for 2 or 3 months or even longer

• Sometimes consumers indicate they feel physically uncomfortable with the smell or even ill

• Public comments/media could make consumers think that the smell is harmful

• Due to air pollution, consumers seldom open windows, which could make smell last longer

“The smell of leather inside the car is too strong”

“Interior leather smell is very strong. I have headache if I stay inside the vehicle for a long time”

“It must be leather smell. The smell still exists long after delivery and I don't know how to handle it. There is strong smell of leather on seats, especially when you hand over the car, you will feel dizzy after driving for one or two hours”

“There is volatile smell of leather, my eyes are not comfortable with tears and feel hurt when I drive for more than 20 min, and I will feel uncomfortable if I drive for more than 1 hour”

“There is still very strong plastic smell inside the vehicle in nearly three months after delivery. I have used charcoal package, air purifier and fruits, but the effect is not ideal”

“It seems like plastic smell. It still has this smell after driving half a year”

“When turning on the air conditioning, a smell of plastic burning can be felt, and I thought it to be the abnormal smell for the new car at first; but the vehicle has been used for almost half a year and the situation remains the same, especially the outer circulation”

18

The “smell” issue is markedly different from Western countries.

A “new car” smell that is valued in Western markets is viewed with suspicion and found unacceptable.

PPH of Different Complained Parts According to Club Study and Pilot

1

Seat

2

Instrument panel and center console

4 Door

3

Other plastic parts

During Consumer Day (3.15) in 2013, consumers complained a lot about smells in premium cars

19

Volvo has recognized Chinese consumer preferences and responded.

Volvo advertises a series of new air cleaning technologies:

• Volvo air quality solution (I.C.E): I.C.E. is the abbreviation for the Volvo air quality system (IAQS), Cabin Clean, the harmful gas emissions (Emission).

• IAQS system: the IAQS system consists of composite activated carbon filter and air sensor, through filtering outside air to get a good inside air source.

• Clean cabin technology: clean cabin technology is through strict control of interior materials, volatiles, avoiding contact allergens and odor detection, to provide clean driving cabin.

• Emission: Volvo uses three-way catalytic converter with oxygen sensors to control emissions.

20

Chinese customers are unhappy when there are a lot of noise related issues.

There are 4 noise issues within the top 10 IQS problems

• Brakes are noisy

• Excessive wind noise

• Abnormal engine noise

• Tire – excessive road noise

刹车噪音

21

Consumers Day (3.15) is sometimes a channel for consumers to demonstrate their anger.

22

What makes consumers in China angry are “sense”-related problems; what makes consumers in US angry are “usability”-related problems.

Same/Similar

2015 China IQS Score 2015 US IQS Score

Unpleasant Interior Smell/Odor 14.2 Voice Recognition Frequently Doesn't

Recognize Commands 8.7

Excessive Fuel Consumption 5.0 Bluetooth/Phone Connectivity Issues 5.5

Excessive Road Noise 4.5 Materials Scuff/Soil Easily 3.2

Engine Loses Power When A/C is On 3.6 Excessive Wind Noise 2.8

Excessive Wind Noise 3.5 Navigation System - DTU/Poor

Location 2.7

Materials Scuffs/Soil Easily 2.7 Paint Imperfection 2.5

Headlights Not Bright Enough 2.6 Automatic Transmission - Hesitation 2.4

Fan/Blower Excessive Noise 2.3 Media Device Ports - DTU/Poor

Location 2.4

Abnormal Engine Noises 2.3 Center Console Storage – DTU 2.2

Brakes are Noisy 2.3 Cup Holders – DTU 2.0

Top IQS Issues

DTU: Difficult to Use/Understand

23

VDS measures the emotions customers experience if they have problems in first 2-3 years: typically this causes IRRITATION.

Customer

Car

Lifecycle

IQS

APEAL

VDS

2-6

months

1

year

2-3

years

Start

4-6

years

Consideration & Shopping

Purchase & Honeymoon

Usage & Familiarity

Service & Durability

Loyalty & Reconsideration

24

There is more overlap in irritating issues of durability between the two markets.

Same/Similar

2015 China VDS Score 2014 US VDS Score

Windshield Wipers/ Washers - Not

Working Properly 8.1 Excessive Wind Noise 5.6

AC Doesn't Get Cold Enough -

Fast Enough 6.8 Paint - Peeling/Fading /Chips 4.0

Brakes Are Noisy 5.7 Brakes Are Noisy 3.6

Excessive Wind Noise 4.4 Battery Failed 3.0

Engine Loses Power - A/ C ON 4.4 Brakes Vibrate/Shudder 2.8

Abnormal Engine Noises 3.9 Hands-Free Communication - Does

Not Recognize Command 2.7

Air From Vents Smells Moldy/

Stale 3.7

AC Doesn't Get Cold Enough - Fast

Enough 2.6

Excessive fuel consumption 3.2 "Check Engine" Light Indicated

Problem 2.6

Paint - Peeling/ Fading / Chips 3.2 Materials Scuffs/Soils Easily 2.6

Top 10 VDS Issues

25

Customers are irritated with the durability issues globally.

“The HVAC is just not strong enough”

“The bulb stopped working again!”

“The windshield wiper just doesn’t work any more”

“The paint is fading, cracked and worn”

26

Comparing the Chinese automotive consumer and the American automotive Consumer

Market Background Differences

Consumer Preference Differences

Other Quality Performance Observations

27

In terms of Initial Quality, the entire Chinese market has improved considerably since 2000.

514

350

293

328

265

236 231

202 207

178 168 162

146

119 104 105

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pro

ble

ms p

er

100 V

ehic

les (

PP

100)

IQS2 IQS3 IQS4

11% avg annual improvement

9% avg annual improvement

28

Q: How do domestic brands fare on quality vs international brands?

167 173

142 135 131 117

104 95 98

306 318

258

224 232 212

155 131

120

2007 2008 2009 2010 2011 2012 2013 2014 2015

International Domestic

139 145

116 89 101

95

51 36 22

Pro

ble

ms

per

10

0 V

ehic

les

(PP

10

0)

A simple extrapolation puts domestic brands at par with international brands by 2019

(one more vehicle generation).

29

Q: How does the “same” vehicle compare when built in China and other places?

29

105 102

0

20

40

60

80

100

120

2012 IQS

China U.S.

On average, if the “same” vehicle is produced in China, it seems to have approximately

the same quality

Note: Average is difficult to compare due to vehicle variations and consumer variations, but an average overall observation is

likely to be accurate.

Sold in

China

Sold in

US

Produced in: Produced in:

BMW 5 Series CN US

Buick LaCROSSE CN AU

Ford Focus CN US

Honda Civic CN US

Honda CR-V CN CA

Honda Accord CN US

Honda Fit CN JP

Honda Odyssey CN US

Hyundai Tucson CN KR

Hyundai Yuedong Elantra CN US

Kia RIO CN KR

Mazda 3 CN,JP JP

Nissan Tiida / Versa CN MX

Suzuki SX4 CN JP

Toyota Corolla CN CA

Toyota Camry CN US

Toyota Yaris CN JP

VW Magotan / Passat (B7) CN US

VW Sagitar / Jetta (A5) CN MX

Backup Slides Follow

31

In the Kano model, Delights and Differentiators are more aligned between US and CN. Requirements are not.

Delight

(Passion)

Attributes (-)

Cu

sto

mer

Sati

sfa

cti

on

Dis-satisfaction

(Anger)

Differentiators

CN: Senses vs US: Usability

Requirements

Delights

Attributes (+)

Attribute

Professor Noriaki Kano

University of Tokyo, 1970s-1980s

32

If the anger is extreme, the government has created a channel to protect the consumer with 3R SanBao rule.

33

Focusing only on luxury vehicles, the clear difference is in “design” issues noted (usability) in the US market.

68

36 31

107

28

76

3

总体PP100 故障类问题PP100 设计类问题PP100 其他问题PP100

2015 中国 IQS 2015 美国 IQS

Quality comparison of luxury vehicles in both China and US 2015 IQS study

2015 China IQS 2015 US IQS

PP100 Malfunction Design Other

Same vehicle in both 2015 China and US

IQS study

Audi A8L Lexus ES

Audi Q7 Lexus NX

BMW 1 series Lexus RX

BMW 7 series Mercedes-Benz GLA

BMW X3 Mercedes-Benz M Class

BMW X5 Mercedes-Benz S class

Cadillac SRX Porsche Cayenne

Land Rover Discovery4 Porsche Macan

Land Rover Freelander2 Volvo S60

Land Rover Evoke Volvo XC60

34

APEAL correlates with price at a segment level, and to a lesser extent, volume within each segment.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

800 805 810 815 820 825 830 835 840

R2=0.46

Compact Premium Compact

Entry Midsize

Midsize

Lower Premium Midsize

Upper Premium Midsize

Entry Luxury

Luxury

Luxury SUV

SUV

MPV

Mini Van

0

100,000

200,000

300,000

400,000

500,000

600,000

740 780 820 860 900

Overall APEAL Index Score

Vehic

le P

rice P

aid

(R

MB

): M

edia

n

Overall APEAL Index Score

(Example: Upper Premium Midsize Segment)

Vehic

le S

ale

s V

olu

me (

2013P

Y)

R2=0.92

“I really want this car!”

35

IQS issues significantly impact the net recommendation rate.

Overall IQS Problem Numbers

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 2 3 4

Net Recommendations

Net Recommendations

0 1 2-3 >4

“I would recommend this car

to friends and relatives”

36

VDS issues significantly impact the net repurchase rate.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1 2 3 4

Net Repurchase Intent

Net Repurchase Intent

“I think I will buy

this brand again”

37

Five studies are used to understand the Consumer’s Product Quality experience from a holistic standpoint.

IQS

APEAL

VDS

Customer

Car

Lifecycle

2-6

months

1

year

2-3

years

Start

4-6

years

Consideration & Shopping

Purchase & Honeymoon

Usage & Familiarity

Service & Durability

Loyalty & Reconsideration

How much did you like each aspect of the vehicle? Scale of 1-10, weighted Score: Total Possible 1000 What initial quality problems

did you experience? Problem count

Score: Problems Per Hundred vehicles

What durability problems did you experience?

Problem count Score: Problems Per Hundred vehicles SSI

How was your sales experience? Scale: Ten-point scale, weighted Score: Total Possible 1000

CSI How was your service experience at the dealership? Scale: Ten-point scale, weighted Score: Total Possible 1000

38

Both in China and US, consumers appreciate their salesperson’s handling (PEOPLE) and facility (PLACE).

2013 China SSI Score 2013 US SSI Score

Condition of vehicle 6.9 Salesperson’s courtesy 8.8

Salesperson's courtesy 6.8 Salesperson’s responsiveness 8.6

Amount of time waited to be

greeted 6.8 Condition of your vehicle 8.5

Able to deliver vehicle at promised

time 6.6 Salesperson’s honesty 8.5

Salesperson's honesty 6.6 Knowledge/expertise about

vehicles 8.3

Salesperson's attention focused on

you 6.6

Concern that you purchased the

best vehicle for your needs 8.2

Appearance of facility 6.5 Appearance of facility 8.1

Same/Similar

Highest Rated Attributes

39

Both in China and US, dealers need to attach importance to the salesperson’s professional skill.

• Provide greeting immediately and warmly

by the dealership reception

• Concern that customer purchased the

best vehicle for his needs, give

appropriate suggestions

• Provide comfortable environment to

customer, make easy for negotiation

40

In both markets, consumers are concerned about PRICE and the TIME of the negotiation and paperwork.

2013 China SSI Score 2013 US SSI Score

Ease of coming to agreement on a

final price 6.2 Variety of inventory 7.4

Fairness of price paid 6.2 Comfort of the area where

negotiated for vehicle 7.5

Variety of optional models 6.3 Timeliness of completing the final

paperwork process 7.5

Timeliness of completing

paperwork process 6.4

Ease of coming to agreement on a

final price 7.6

Thoroughness of explanations

during the delivery process 6.4 Fairness of price paid 7.6

Comfort of office where

transaction completed 6.4

Thoroughness in explaining your

vehicle's features 7.8

Same/Similar

Lowest Rated Attributes

41

To avoid losing enthusiasm for the car, OEMs need to make sure the deal is felt to be good and timely.

• Informs customer to bring the personal

material for signing the related documents

• Prepare all the documents in advance and

explain to customer clearly

• Rapid handling of paper-work.

42

In CSI, again, the “PEOPLE” (Service Advisor) and “PLACE” are appreciated by consumers in both CN and US.

2013 China CSI Score 2013 US CSI Score

Courtesy of Service Advisor 8.6 Courtesy of service advisor 8.2

Cleanliness of dealership 8.3 Cleanliness of dealership 8.2

Helpfulness of staff at pick-up 8.2 Ease of scheduling service visit 8.1

Condition/ cleanliness of vehicle

on return 8.2

Flexibility to accommodate your

schedule 8.1

Timeliness of hand over process 8.2 Helpfulness of staff at pick-up 8.0

Thoroughness of maintenance/

repair work performed 8.2

Responsiveness of service

advisor 8.0

Timeliness of the pick-up process 8.2 Timeliness of drop-off process 8.0

Ease of arranging service visit 8.1 Timeliness of pick-up process 7.9

Same/Similar

Highest Rated Attributes

43

OEMs need to make sure that service advisors represent the brand well, and the place meets their needs.

• Quick maintenance lane(s) available for customers

• Dealership operates two shifts to support increased UIO and customer convenience needs

• Valet at dealership ensures sufficient parking available for customers

• Service Advisor greets customer immediately and provide perfect need analysis

44

In CSI also, the charges and timeliness are critical areas for consumers: PRICE and TIME

2013 China CSI Score 2013 US CSI Score

Fairness of the charges 7.7 Total time required to complete

service on your vehicle 7.5

Total time required to service your

vehicle 8.0 Fairness of charges 7.8

Convenience of location 8.1 Condition of vehicle on return 7.8

Flexibility to accommodate

schedule 8.1 Thoroughness of explanation 7.8

Ease of driving in/ out of facility 8.1 Convenience of parking 7.8

Comfort of waiting area 8.1 Comfort of waiting area 7.9

Thoroughness of Service Advisor

explanations 8.1 Ease of driving in/out of the facility 7.9

Same/Similar

Lowest Rated Attributes

45

And all customers want to get high efficiency service that save time and offer value .

• The customer wants to understand the work that’s done on his car and what he has paid for—because it can be a lot

• He hopes someone can take the time to explain in very easy to understand terms the work that has been done on his car and what he is paying for

• Invoices provide the customer with value and benefit statements