Domestic carmakers feel the pinch

Some 3.4 million passenger vehicles were sold in the first quarter of 2012, up about 2 percent compared to the same period in 2011, sluggish growth attributed to a cooling economy and higher gasoline prices nationwide.

Slowing economic growth has affected domestic demand in a range of sectors including property and automobiles. In mid-March the government lowered the country's 2012 GDP target to 7.5 percent, the smallest increase since 1999.

Rising gasoline prices came through a double blow. Prices at the pump were increased twice in the first quarter of the year to bring them to a level 20 percent higher than the average price in the United States.

While the first quarter's performance no doubt worries some in the industry, it's not time to hit the panic button just yet.

Many automakers and industry experts say they expect full-year sales to rise 8 to 10 percent over 2011, which would set another record with 13.1 million passenger vehicles sold.

The reasons behind the optimism: A slew of new models are scheduled to be launched this year that are expected to entice buyers to make a purchase, plus the market's tendency to heat up in the second half of the year.

What's interesting about slowing sales in the first quarter is that all segments and brands were not affected equally.

While one might expect sluggish sales of luxury vehicles in a slowing economy, the exact opposite was true in China.

According to industry data, luxury sales increased more than 20 percent in the first quarter, far outpacing the industry average. International luxury brands Audi and BMW were the main beneficiaries of the trend. Moreover, two other segments that made big gains in the first quarter were sports cars - up more than 40 percent - and SUVs - up nearly 20 percent.

Entry-level vehicles

Conversely, entry-level vehicles that compete in the lower range of the pricing spectrum - including mini-cars, subcompacts and compacts - all registered year-on-year declines in the first quarter.

Industry data indicates mini-car sales declined 29 percent in the first quarter, while subcompacts came in 10 percent lower than the previous year and sales of compact cars fell 0.1 percent.

It should be noted that the sales decline in those segments can be partly attributed to elimination of government incentives on the purchase of small vehicles.

Combined numbers in the three segments typically account for 55 to 60 percent of passenger vehicles sold each year, so their decline can have a serious impact on the overall market.

And it can also have a serious impact on individual automotive brands.

While some international brands competing in entry-level segments performed well in the first quarter, - especially Nissan, Kia and Volkswagen - most managed to deliver results that were flat.

Different story

When we examine some China's leading domestic brands, however, we see quite a different story in the first quarter.

Chery was down 23 percent while FAW, Chang'an, JAC, Zhonghua, Haima and Roewe were all down between 20 and 25 percent and BYD sales dropped 4 percent. Only Dongfeng Liuzhou and Dongfeng Passenger Vehicle - which were up 60 percent, but from a small base - and Great Wall and Geely - both flat for the first quarter - managed to escape the broad-based domestic brand downturn.

Why did Chinese domestic brands experience such a significant decline in the first quarter? There are likely several contributing factors.

First, Chinese domestic brands compete for the most part in China's entry-level segments, and these were the segments that experienced the greatest slowdown in the first quarter.

Naturally, brands that compete almost exclusively in these segments will experience the slowest sales.

But this does not completely explain the significant drop in sales of domestic brands. After all, the majority of them experienced sales declines far greater than the entry-level segments in which they compete.

That brings us to the second possible contributing factor to the decline in domestic Chinese brands: quality and after-sales services.

Vehicle quality is among the top factors for a Chinese consumer in their choice, as JD Power's studies indicate. As consumers continue to mature and become more sophisticated, vehicle quality has become a prerequisite, even an eliminating factor.

According to JD Power research based on feedback from consumers, domestic auto brands as a whole have made tremendous improvement in initial quality - measured by the number of problems experienced during the first 90 days of ownership - over the last decade.

In 2000, Chinese consumers reported an average of 8.34 problems per vehicle on domestic vehicles, compared to an average of 4.38 problems per vehicle for international brands.

By 2011, however, average number of problems per domestic vehicle dropped to 2.32, compared to an average of 1.31 for international brands. Clearly, in the minds of consumers, the gap between domestic brands and international brands has closed considerably.

Specific areas that Chinese consumers say China's domestic brands need improvement are with manual transmission smoothness, eliminating the reduced engine power that often occurs when the air conditioning unit is engaged, and noisy brakes.

With continued engineering improvements and work with component suppliers, these are areas that can be overcome without too much difficulty.

After-sales services

In terms of after-sales customer services - vehicle maintenance and repairs at authorized dealers - China's domestic brands in general also lag behind international brands.

With the exception of a few domestic brands, such as Roewe and Chery, which compete favorably with some international brands, this is an area that is improving at a slower pace.

For many consumers, knowing that they can rely on their dealer to repair their vehicle quickly and correctly the first time is a key consideration when buying a new car.

Time will tell if China's vehicle sales pick up the pace for the remainder of the year. In the meantime, all automakers - domestic and international brands - can help their competitive position by focusing on what all consumers want most: A quality product backed by superior customer service.