BMW China Marketing Strategy: Targeting Repeat Luxury Buyers

Executive Summary

There is a significant shift underway in the Chinese luxury car market, and BMW is building a new plant to take advantage of it. The top three luxury automakers — by far — are Audi, BMW, and Mercedes. Each is very similar to the others and holds comparable market share in China. Early adopters in China were the newly wealthy, making their first luxury car purchase as a status symbol. That dynamic is shifting, and to win greater market share BMW will need to convert existing customers into repeat buyers. The problem is twofold: its marketing strategy in the country is not built around that objective, and Chinese consumers have very low brand loyalty compared with those in other nations. This report outlines the unique characteristics of the Chinese market and makes recommendations for how BMW can target the new segment — current customers — in order to meet its aggressive sales targets. The key elements of the plan concern the product, the buying experience, and the messaging.

Mission Statement: To increase brand loyalty to 30%, allowing BMW to hit its 600,000-unit sales target. This will be accomplished by delivering a superior buying experience, a product uniquely tailored to the needs of the Chinese consumer, and messaging focused on brand loyalty.

Current Marketing Situation

Market Description

BMW is headquartered in Germany, and this report focuses on the company's approach to the Chinese (PRC) market. The People's Republic of China is one of the world's largest auto markets. BMW's positioning slots in at roughly the lower end of the luxury car market, where there is a sizable global market among people who are generally well-off but not super-rich. BMW ranks fourth in its domestic market, behind Volkswagen, Mercedes, and Audi, meaning it does not hold the top position even in Germany. It commands a 7.8% share in Germany (Bekker, 2017).

The Chinese auto market has accelerated rapidly over the past fifteen to twenty years, evolving from a relatively minor market with enormous potential into a major market that still holds enormous potential as China's economy continues to grow. BMW is approaching the Chinese market aggressively, building a plant in Shenyang to increase Chinese production capacity by 50% to 450,000 vehicles (Clover & McGee, 2017). For reference, BMW sold 262,000 cars in Germany in 2016 and 313,000 in the United States, so that figure would make China the company's largest market by a considerable margin (Car Sales Base.com, 2017; Bekker, 2017).

The Chinese market is generally favorable, at least to foreign companies willing to open manufacturing facilities in the country. China has a totalitarian Communist regime, which means there is both significant corruption (Transparency International, 2016) and significant government interference in business (Heritage.org, 2017). However, private enterprises that partner with Chinese entities or create large numbers of jobs generally receive favorable treatment. Overall, China is a riskier place to do business than Western democracies.

Because the Chinese market has such potential, competition is intense. All luxury automakers want a piece of it and are investing in growing their market share. The fact that the market is growing allows all companies to compete more on the basis of establishing their brands than on fighting each other for share; building share is competitive, but not ruthlessly so, because the expanding market limits the need for zero-sum competition.

There is an interesting juxtaposition in the Chinese economy. The automobile industry grew 13.6% in 2016, but that growth was expected to slow to 5% in 2017 — still leaving the country as the world's largest auto market. The country's growing economy is one reason the auto market is booming. At the same time, the government is conflicted about the auto sector. Aware of the need to curb the country's contribution to climate change — China faces massive pollution and environmental challenges (Hsu, 2016) — it has incentivized smaller vehicles at the expense of luxury ones. However, the cross-price elasticity of demand between small vehicles and the luxury car market is minimal; the luxury segment is driven by the overall economy rather than by tax policy. The government is also instituting a complex quota system to reduce the number of gasoline- and diesel-powered vehicles on its roads (APF, 2017). This could put the success of BMW's new plant at risk.

Overall, the Chinese market remains highly lucrative. Most automakers, faced with largely mature markets in their home countries, see China as one of the major pathways to growth. They are therefore willing to tolerate the different challenges of doing business in a more difficult environment in exchange for access to the kind of growth and market scale that China offers.

Channels and Logistics Review

As a general rule, automobiles in China are sold through dealerships, not entirely unlike what is familiar in the West. This distribution model was largely brought to China by foreign automakers seeking to maintain a familiar channel for their products. There are, however, a number of different forms this takes. The distribution models found in China's retail auto market are: 4S dealerships, auto supermarkets, mega-dealerships, auto trade markets, and auto parks. Auto loans are common to help move vehicles and are governed by government-run banks (USCBC, 2010). To put the scale in perspective, the top-selling group in 2010 was the Shanghai Automotive Industry Group, which moved 2.4 million vehicles — making it alone 25% larger than Canada as an entire auto market.

A review of the different distribution channels, along with their strengths and weaknesses, is as follows:

4S Dealerships — Strengths: comprehensive service; popular with consumers. Weaknesses: high start-up costs; most lose money; poor OEM–dealer alignment; lack of reliable dealers. Segment served: mainstream consumer market in large cities.

Auto Supermarkets — Strengths: variety of brands at a single location; consumer choice; penetration into small- and mid-sized markets. Weaknesses: brands sold alongside rivals; cost pressures. Segment served: small- and mid-sized markets.

Mega-Dealerships — Strengths: sell multiple brands; generally profitable; account for 44% of auto sales. Weaknesses: brands sold alongside rivals; poor value proposition for luxury brands. Segment served: low end/mass market.

Auto Parks — Strengths: clusters of different types of dealers; financing services on site. Weaknesses: newer model, relatively untested; only in major cities. Segment served: appears to be mass market in large cities.

Source: USCBC (2010)

Competitive Review

BMW competes against several other luxury brands in China, most notably Audi and Mercedes — two other German brands in the same attainable luxury category. Other brands in approximately the same category include Lexus, Cadillac, Land Rover, Porsche, Jaguar, Volvo, Infiniti, and the more differentiated Tesla. In China's luxury auto market, BMW, Audi, and Mercedes together account for approximately 70% of luxury auto sales (Clover & McGee, 2017). These three German companies offer similar model ranges at similar price points, which underscores the need to establish a strong base of repeat business in order to gain further market penetration. More differentiated outliers — Land Rover, Porsche, and Tesla in particular — have carved out stronger niches in the Chinese market.

Positioning

The market share leaders are all well-positioned in the Chinese luxury segment. Companies with better perceptual positioning tend to be high-end sports car brands, typically with limited production runs (e.g., Lamborghini, Ferrari). Tesla carries lower prestige in China than it does in the United States or Europe. Porsche is something of an outlier in that it arguably sells below its potential given its blend of prestige and performance. Mass-market autos sit in the lower-left quadrant of the perceptual map, well away from the luxury segment. BMW is positioned alongside Audi and Mercedes — a strong position overall, but one that offers little room for differentiation from its two closest competitors.

Market Characteristics and Potential

Market Characteristics

As noted above, China is the world's largest auto market and is growing rapidly. Sales at the low end are influenced to some extent by tax policy, but for luxury automakers the overall health of the economy is a more significant driver. Luxury cars are viewed as status symbols. The market is very competitive, but high growth rates have allowed all competitors to expand quickly. BMW has made a massive new investment in a manufacturing facility to capture more share. The Chinese auto market is estimated at approximately 29.4 million vehicles annually. At full domestic capacity, BMW would produce 450,000 cars — a 1.5% share. This is much lower than its share of the domestic German market, but would still make China its largest market by a significant margin.

Market Potential

The Chinese market's estimated 2017 growth rate is 5%. The high rate recorded in 2016 was partly illusory, driven by a tax policy that has since lapsed. Without that policy, and acknowledging that China's economy is beginning to slow, a continued 5% annual growth rate is a reasonable expectation. This delivers the following projections for the Chinese auto market:

2017: 29.4 million vehicles / $572.5 billion USD
2018: 30.9 million vehicles / $601.1 billion USD
2019: 32.4 million vehicles / $631.1 billion USD
2020: 34.0 million vehicles / $662.7 billion USD

Growth in both units and dollar value is still projected to be very strong. By 2020, BMW hopes to produce and sell 600,000 autos per year in China (Clover & McGee, 2017), which would represent a market share of 1.76%, up from 1.5% today. With current volume at approximately 300,000 units, BMW must essentially double its 2016 sales level by 2020 to capture that incremental share.

Customer Needs

There are two primary reasons people buy luxury cars: because they are excellent vehicles, and for the status that ownership conveys. The Chinese car buyer appreciates the former but also places greater weight on the latter than a typical Western buyer might. Much of this stems from the fact that many new car buyers in China are the first generation in their families able to afford a car at all, let alone a luxury vehicle. A BMW is an affirmation of having "arrived" — much as it was in the United States for many decades. Interestingly, 2016 saw the lowest levels of luxury goods purchasing in China since 2009, indicating changing tastes in which Western luxury brands are viewed less as pure conveyors of status. The major shift is from first-time buyers of luxury goods to a wealthy class that has now become composed of regular luxury buyers — a development with a clear marketing implication: the emphasis must move from attraction toward retention (Bu et al., 2017).

The main needs of the Chinese luxury market today are: brand status, high product quality, a luxury buying experience, exclusivity, and high brand visibility. The marketing plan must account for all of these. They can be further refined by segmenting on first-time versus repeat buyers; the buyer journey differs considerably between these two groups even when their demographic and psychographic characteristics are broadly similar.

Company Review

BMW's market compatibility is high. The company is already a major player in the Chinese luxury auto market and has achieved a strong level of penetration. The marketing plan here pertains primarily to meeting the company's need to approximately double its unit turnover over the next four years. BMW's features and benefits align well with market needs: it is a high-status, high-quality, highly visible brand with moderate exclusivity and a luxury buying experience.

The most significant area of misalignment is exclusivity. BMW has never positioned itself as the pinnacle of exclusivity, but rather as an attainable luxury. This positioning allows the company to move large volumes, and it must maintain this stance in China in order to reach its target of 600,000 units per year by 2020.

Marketing Strategy

Overview

There are several keys to success in the Chinese market given BMW's growth ambitions. First, the company must continue attracting new customers at a high rate. The broader German luxury segment generally drives this, but BMW needs to do its part without undercutting the collective reputation of German automakers — the vitality of that shared heritage is the rising tide that floats all ships. Second, retention will be critical. The Chinese luxury market is shifting away from first-time buyers toward repeat business (Bu et al., 2017), and BMW must focus on keeping existing customers when they purchase their next vehicle. Reducing switching is a key success factor. Third, BMW must maintain exclusivity while reaching consumers it has not yet captured — in emerging middle-class areas or newly wealthy cities.

Targeting

This marketing plan is targeted at the return buyer — the existing customer looking for another vehicle or a replacement vehicle. The demographics are similar to those of new buyers, but this customer has already been identified as a buyer and is already in the marketing system. What is needed is a remarketing strategy. At a certain point, BMW will need to re-engage this existing customer to convince them to purchase another vehicle or replace their current one. Both strategies — selling an additional vehicle and encouraging a replacement purchase — should be pursued, as both are viable for this group.

Similarity to the Domestic Market and Required Changes

The German and Chinese markets are not meaningfully alike, and since BMW already sells more cars in China than in Germany, whatever strategies it employs domestically are largely irrelevant here. The key is to identify the similarities and differences between first-time and repeat buyers in China, as the latter represents an essentially new target for the company in this market.

Both groups share broadly similar demographics: middle-aged men in business or government, typically in relatively senior positions. They are not among China's elite 1%, but they are among the more prosperous segments of the population. They are not always formally educated, but they are almost always well-connected. They enjoy spending their wealth and do so freely on other luxury goods, domestic travel, and increasingly on international travel. They typically have families and often aspire for their children to study abroad.

Beyond those similarities, there are meaningful differences. The repeat buyer has had their wealth for longer — perhaps having purchased their first BMW three, five, or ten years ago. The BMW may be their daily driver, and they may own a second luxury vehicle. This buyer is likely wealthier in absolute terms, having "arrived" earlier. For the repeat buyer, the product itself is more important because their status in society is already established. They have little left to prove on that front, so the quality of the buying experience and of the product carry greater weight.

This has several implications. BMW is building the Shenyang factory because it sees the market as strong enough to support significant growth for both target groups. The shift toward repeat buyers is more consistent with the company's approach in other markets, so management will have some relevant experience to draw upon — an advantage as the company begins to differentiate its messaging between the two groups.

Positioning

Differentiation is a genuine challenge for BMW in China. The three market leaders are the major German luxury brands, and distinguishing BMW from the others is difficult. National origin, product quality, and price point are all broadly equivalent. Brand prestige is built over long periods of time and offers little short-term differentiation. There are, however, some meaningful avenues.

First is the buying experience. Luxury car buyers expect a commensurate level of luxury during the purchase process. They should not have to visit a large auto supermarket to buy their BMW, and some may actively reject the brand if their purchase experience fails to convey at least a degree of prestige. Second is the product line itself. While BMW's lineup is similar to that of its close competitors, any differentiation it can achieve — in vehicle type, design, or luxury features — is an asset. Having its own plant in China will allow BMW to design and build cars specifically with the Chinese consumer in mind. This may create a competitive advantage if the company becomes more attuned to the detailed preferences of Chinese buyers than its rivals. A product-driven differentiation strategy is most likely to succeed, given how difficult it is to change brand perceptions and given that any improvements BMW makes to the buying experience can be easily replicated by competitors.

The core value proposition should remain consistent with the global brand position. The positioning statement should not change for the Chinese market. These elements should be carried over as they are, or aligned with the domestic market approach; there is no logic in localizing them.

Product Strategy

BMW produces luxury cars — the luxury elements, design quality, and craftsmanship are core product features that need no further elaboration. More interesting are the modifications required for the Chinese market. Branding should remain globally consistent; consumers of this product travel and are globally minded, and it is essential that the vast majority of branding elements remain unchanged. Individual vehicle names should also remain the same. Automakers often localize car names, but for luxury vehicles, their foreign origin is part of the appeal — maintaining foreign model names reinforces that cachet. At most, a subtle adaptation signaling that a particular variant is tailored for the Chinese market may be appropriate, where genuine product differences exist.

Now that BMW has established its presence in China, it should invest substantially in market research to determine what product differences, if any, resonate with Chinese buyers. Language has already been accommodated; the stronger opportunity lies in product features that Chinese consumers value differently from buyers in Germany or the United States. For example, Chinese consumers rank safety as the most important vehicle attribute — uniquely so among major markets globally — and they place a high premium on digital connectivity (Nylander, 2016). Full connectivity is essentially a baseline requirement in the luxury segment, but there are still opportunities for BMW to get ahead of its competitors in this area (Baan et al., 2017).

Chinese auto buyers are notoriously fickle with respect to brand loyalty, though at the luxury end they exhibit more loyalty than in other segments (Baan et al., 2017). The product lifecycle strategy must maintain a strong relationship between the brand and the consumer. There should be incentives for consumers to choose BMW again with their next purchase. This probably will not take the form of price discounts, but could include added luxuries or special perks for customers who purchase a second or third BMW. Tactics should focus on strengthening the relationship post-sale — an area that many auto marketers neglect.

Distribution Strategy

The distribution strategy must address the fact that Chinese buyers are dissatisfied with the typical dealer experience, and that luxury buyers in particular want a differentiated sales environment. This means offering product customization options, locating dealerships in wealthy areas away from large auto malls or supermarkets, and investing heavily in a well-trained sales team capable of building relationships rather than simply closing transactions.

Distribution intensity should be substantial. As Baan et al. (2017) note, the top 17 urban clusters account for 50% of China's population but 90% of its GDP. These clusters are where BMW should intensify its distribution. Setting up dedicated dealerships — potentially a greater number of smaller locations to provide an intimate experience — is the recommended pathway to maintaining brand visibility while delivering the buying experience Chinese luxury consumers want. Locating these dealerships in wealthier areas will also reinforce the brand's exclusivity. A high level of saturation of such dealerships in the major urban clusters is the recommended approach for the upcoming expansion.

While the majority of Chinese car buyers purchase from large dealerships, supermarkets, or auto parks, luxury car buyers actively seek a different experience. The BMW consumer is drawn to a more personal, relationship-based buying environment. This implies that BMW should take control of its distribution and operate smaller, purpose-built dealerships in wealthier locations. Other channels should be avoided, as they do not align with the BMW brand image or with the expectations of the Chinese luxury buyer. This may represent a deliberate departure from the distribution approach used in other countries.

Pricing Strategy

Chinese luxury car buyers pay relatively high prices (Nylander, 2016). Part of this reflects taxation, but part of it reflects the fact that luxury buyers still associate their chosen brands with prestige. Being able to afford a BMW carries a status signal that the buyer values — the nouveau riche still wish to display their success. BMW should therefore aim to maintain its margins, accounting for high import taxes, while keeping prices broadly in line with direct competitors. There is no strategic value in undercutting Mercedes and Audi; consumers would simply view BMW as an inferior product if it priced below the other German brands. Consistent with this approach, there will be no promotional price discounts.

Messaging Strategy

The messaging strategy will focus on relationship building, reinforcing status, and communicating BMW's value proposition. Given that competitors offer similar status and value, messaging must emphasize the brand itself. Relationship-focused messaging is effective both for driving new sales and for allowing BMW to convey the strength of its differentiated buying experience and the prestige associated with purchasing a second or third BMW. One important guideline: messaging should never acknowledge the existence of competitors or imply that switching is a possibility. It should convey instead that switching is simply not a relevant option — that there are no true alternatives.

BMW already makes substantial use of mass media, and this should continue. It should be complemented by a strong social media presence and inbound marketing. Inbound content should emphasize user stories, making the brand more relatable through lifestyle elements that convey the value of BMW ownership. Paid advertising can introduce the theme of buying again. Social media should prioritize engagement, which is what the Chinese audience expects and responds to. The shift toward marketing to existing customers should be reflected throughout the messaging: campaigns targeting repeat buyers should generally assume that consumers are already deeply familiar with the brand — because they are.