Auto majors rejig product lines, offer discounts to sustain demand in China

After several years of solid sales growth, the luxury auto segment appears to be heading for a slowdown in China, as growth concerns may prove to be a spanner in the works for global automobile majors.

Though most of the auto majors still anticipate growth in China, they admit that luxury car sales will never reach the dizzying heights of the last two years.

Although the premium car segment will continue to outperform the average market, it will be tough for individual companies to achieve the margins of previous years, say auto industry analysts.

But they admit that European brands will still continue to dominate the market for some time.

German carmaker Volkswagen's Audi brand sold 36,000 vehicles in China during October, a 30-percent growth over the same period in 2011, thanks to its popular models A6L and Q5. The brand has sold more than 330,000 vehicles in China from the beginning of the year.

Although Mercedes-Benz's sales volume declined by 3.9 percent in the same month to around 16,000, it still clocked a 6-percent growth in China sales during the first 10 months of the year with 160,000 deliveries.

Both these premium brands are well aware that they will never achieve the over 40-percent growth rates of the last three years. What, however, still gives them enough optimism on China is that their growth rates are still better than the anticipated annual growth rates of around 7 percent for the overall automobile industry in China.

Friedrich Eichiner, chief financial officer of BMW, told Reuters in a recent interview that although the company anticipates double-digit growth in the mid-term, it would be hard to post a growth rate of 30 percent in the long run.

During the first nine months, BMW's sales rose by 30 percent to nearly 240,000 units. Five years ago, China accounted for less than 4 percent of the total global BMW sales and has since then leapfrogged to be the single largest market for the German company.

"The Chinese market gives auto companies confidence as none of them are making money in Europe," says Ivan Hodac, secretary-general of European Automobile Manufacturers Association.

Budget models are already squeezing profit margins and gaining market share and premium cars are now slowly feeling the pinch, experts say.

Unlike previous years, there are no long lines of customers or those who are willing to pay extra money to own the vehicles.

Over the last few months, several automobile companies like Mercedes-Benz have announced hefty price cuts of over 200,000 yuan ($32,000; 25,000 euros) on their premium models to push sales.

The competition in the Chinese market is getting increasingly fierce, and as a premium car manufacturer, BMW does not want to grow market share with discounts, Eichiner says. He expects discounts will taper off in the premium segment as the market is recovering.

But the competition landscape has definitely changed for European marquee names. A decade ago, there were few premium brands in China, but now, there is virtually every known premium car brand in China.

Most of the brands, however, admit that they are lucky that China is a major market for them as the nation has been relatively immune to the effects of the global financial crisis.

Sergio Marchionne, CEO of Fiat SpA, says China is the second-largest premium market in the world now and will zoom past the US to the top slot in 2016.

Foreign brands that used to capitalize on medium-segment vehicles are trying to grasp a piece of the cake as well, as the profit margin for a premium model is much higher than a budget car.

Joe Hinrichs, group vice-president and president of Asia-Pacific and Africa, Ford Motor Co, says the company will introduce its high-end Lincoln model in the Chinese market by 2014. "We are witnessing a strong growth in SUV sales, which was not anticipated before," he says. "In the first-tier cities, we already see various restrictions on auto purchases, so the future growth will be from the second and third-tier cities."

At the same time, Chinese customers are getting fragmented among mainstream luxury cars like Audi, BMW and Mercedes-Benz, while youngsters are fueling demand for trendy, cool sports cars. Sales of super luxury cars like Porsche, Ferrari, and Rolls Royce rose by 60 percent last year.

Another significant trend in the market has been the rising sales of SUVs. In the past few years, the market share of SUVs has grown from 5 percent to 13 percent.

Guillaume Saint, senior director of TNS Automotive China, says the rising demand for SUVs offers some insights into the minds of Chinese customers.

Saint believes that besides having plenty of room and comfort, the SUV also is a success symbol in China. He cites figures from TNS that there are more than 500 auto models in China and more than 100 are SUVs.

"In Europe, the appearance and the function are equally important, but in China, the appearance is more important as it gives the owner 'face'."

Auto industry experts also feel that it could precisely be the reason why Mercedes-Benz introduced its GLK model and Audi its Q3 range in China.

A recent report from Roland Berger Strategy Consultants shows that Chinese luxury consumers are expected to account for 40 percent of the new luxury market globally between 2010 and 2015. "It is an opportunity that few can afford to miss," the report says.

It also indicates that although most of the luxury companies have opened stores in China's first and second-tier cities, buyers from third and fourth-tier cities will account for nearly 40 percent of total sales, and this proportion is expected to further increase in the future.

Affluent Chinese consumers are so important to Western automakers that they are tailoring models for customer preferences.

Dan Akerson, CEO of GM, says that he hopes the sales volume of Cadillac in China will reach the levels in the US market by 2016. The company is thinking of revising the design of its existing car model as research from the company shows that Chinese consumers feel the model is too bold and edgy.

Fernando D'Ornellas Silva, manager director of Berge Group, a major Spanish auto trade group, says companies should figure out the right strategy when introducing luxury brands in China.

"A company has to think about the profit margin. If a new foreign auto company wants to enter China, I would suggest that they start with the higher-end market, particularly SUVs, as they offer higher profit margins. If a company only considers the sales volume but not the profit margin, it can prove dangerous for survival in the long run," he says.

Xing Wenjun, honorary editor-in-chief of China Automotive Review, says that if companies start with budget cars, they will find it hard to upgrade their product lines and break away from the "cheap" stereotype.

On the contrary, if they start with a high-end model, it will be easier for them to introduce lower-end brands later.

wangchao@chinadaily.com.cn

(China Daily 11/30/2012 page6)