Something very unusual happened in China’s passenger vehicle market in the first quarter of 2015: China’s domestic brands grew much faster than the overall market.

While the total market grew at an already rapid clip of 11%, Chinese brands such as Great Wall, Geely, BYD and Chery all grew even faster – at 24%, 56%, 22%, and 20%, respectively.  Meanwhile, joint ventures selling global brands such as VW, GM and Hyundai saw almost no growth.

Is this a blip or the start of a trend?

If it is a trend, it has certainly been slow in arriving.  For more than 20 years, China’s 5-Year Plans have promised the emergence of a world class domestic automotive industry.  Yet in a market that has grown from one million vehicles in 2000 to nearly 20 million today, the share of Chinese brands has remained stubbornly low at around 25%.

Who holds domestic share has changed.  The legacy state-owned Chinese car manufacturers hold much less share than in 2000, and younger independent car makers such as Great Wall and Chery have grown their share.

What has held Chinese brands back for so long? 

  • While there has been massive market demand, the social recognition for Chinese brands has been low, reinforced by memories of when the quality of Chinese brands was indeed much lower than international competitors. First time car buyers wanted the social status that came from driving an international brand car.
  • Domestic companies often lacked both talent and the systems to develop their own talent. They would not have been able to develop a quality vehicle themselves, and they worked poorly with global suppliers who might have been able to help them.
  • Winning in the auto business requires a long-term perspective matched to the length of vehicle lifecycles. The leaders of China’s state-owned companies are often rotated off to government appointments in less than half the lifecycle of a car, creating an enormous mismatch in timeframe between management and the needs of the business.
  • Large-scale, long-term investment in R&D was therefore not a priority, as the consequence of lower than ideal investment would only be seen after the current leadership had moved on.
  • Large profits flowing from joint ventures with global companies reduced the incentive to do anything bold, such as a massive scale up in R&D.

Several things are changing now:

  • The quality of Chinese brands in 2014 reached the level of foreign brands in 2011, according to surveys by JD Power and others. The quality gap is rapidly shrinking, domestic brands are investing in marketing to communicate this, and consumers are becoming discerning enough to move beyond the inferred social status of the vehicle brand.
  • Chinese brands such as Great Wall are now investing heavily in R&D and are collaborating much more effectively with global suppliers. Chang’an has taken the lead in developing a global network of R&D facilities from Detroit to the U.K. to Japan, and now spend an equivalent percent of revenue on R&D as the global top five car makers.
  • Chinese brands such as Great Wall have become much more sophisticated in building an understanding of consumer needs, allowing them to lead successfully in new segments of the SUV market.
  • Internationally experienced talent from global car makers are joining Chinese producers, bringing new skills including long-term project management, design and marketing.

This argues more for a trend than a blip, but the Chinese car market is not static.  New forces could yet knock domestic producers back again.  The emergence of electric vehicles at scale, of more “silicon”-intensive digital cars, of shared car services, and even of autonomous vehicles may change the game again.  Global brands face these challenges worldwide and potentially have more resources to put against the transitions.

Chinese car brands are coming ever closer to winning in the current market,   and this may be happening just as the market is about to transform again.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.