Luxury Auto Market in China Remains Robust

Investor Conference Call, April 27, 2012
Coleman Research Group is hosting a conference call to evaluate the outlook for the Chinese Luxury Auto Market. We’ll evaluate growth strategies for the German OEM leaders, market size, competitive forces, key brands and dealership dynamics.
To register or for more information please contact Carla Sison at csison@colemanrg.com.
Luxury Auto Market in China Remains Robust
Premium Vehicle (PV) Segment Appears Immune to Market Dynamics        
Call Date:
CRG Host:
Michael Cohen
CRG Expert:
William Russo
Founder and President
Synergistics Ltd.

About The Call
  • The Chinese luxury vehicle segment is expected to grow at a rapid pace with Audi, BMW and Mercedes-Benz commanding more than 70% of market share. That said, after ten years of hyper-growth, the overall PV segment is anticipated to grow more slowly in 2012. As the ranks of Chinese millionaires swell with a cultural preference for high-end goods, will China’s PV market continue to outpace overall vehicle sales?       
  • With our expert, Bill Russo, we’ll evaluate growth rate expectations for theluxury & ultra-luxury PV market. We’ll explore the increasing middle class population and how this group will drive the demand for luxury PVs in next 5 years. We’ll consider Audi, BMW and Mercedes-Benz’s dominant positions in the segment and the attractive long-term partnerships they offer for luxury dealerships. We’ll appraise news from the Beijing Auto Show and conclude with an outlook for 2012.
Vice President
Global Research Intelligence
Global Research Intelligence
Research Manager
Global Research Intelligence

Coleman Research Group's expert is prohibited from disclosing any proprietary, confidential, or material non-public information, and will decline to answer any question that may lead to the disclosure of such information. The information in the GRI event series does not constitute advice as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Furthermore, neither members of the GRI team nor Coleman Research Group is acting as an investment adviser, and no information contained in the series should be construed as investment advice.

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China local brands brace for onslaught from abroad

Reuters, April 27, 2012

China's homegrown car makers unveiled a host of new models amid glitzy lights and blaring music at the Beijing auto show this week - but also under growing uncertainty about their future.

Indigenous auto upstarts such as Chery CHERY.UL, . (0175.HK) and Great Wall (601633.SS) grew spectacularly in 2009 and 2010 but began struggling last year following the government's decision to scrap vehicle purchase incentives that favoured their small cars.
Their share of China's auto market dipped to 27.8 percent at the end of March, a drop of about 3 percentage points from the 30.9 percent peak at the end of 2010 - an all-time high, according to the China Association of Automobile Manufacturers.
A more fundamental cause of their struggle, however, is pressure from low-cost cars from global auto makers. Those cars, such as the Chevy Sail subcompact, have been designed to compete head-on with the no-frills models from China brands, priced around 60,000-70,000 yuan.
"This is not a joke. It is a top priority for us to make sure Geely doesn't fail under pressure" from the foreign rivals, said Zhejiang Geely Holding Group Co Chairman Li Shufu in an interview earlier this month. Geely needs to do everything it can, Li said, to weather the pressure, including gaining some technology from Sweden's Volvo, which Geely acquired in 2010.
Reuters Insider TV at the autoshow: reut.rs/IfSA5O
China's auto market has long been divvied up between homegrown and foreign car makers, which have both been able to thrive by serving different customers. Mostly throughout the last decade, global car makers have targeted the richer elites, while domestic makers including Chery Automobile Co, Geely, and BYD Co (1211.HK) have catered to consumers on a budget.
Those days are coming to an end. Now, in a trend that has been building for a few years, the two groups are headed for a collision in many segments as global auto makers like GM (GM.N) move in on indigenous China brands' territory: people who are just becoming affluent enough to afford their first car.
Pressure from this expansion is making some of those auto upstarts with names like Anhui Jianghuai Automobile Co (600418.SS) (also known as JAC Motors) and Great Wall Motor Co., as well as more well-known and bigger Geely, Chery and BYD vulnerable.
One source of uncertainty is an overall slowdown of China's once red-hot market. The market began softening last year after a decade of breakneck growth. Many analysts and industry executives believe annual growth rates could slow to 7-8 percent on average through 2020, compared with sales surges over the past decade by as much as 46 percent, the rate recorded in 2009.
What's worse, this slowdown is happening as more new entrants appear in the market and as existing competitors add to their offerings, making survival in China, the world's biggest auto market since 2009, even more tenuous.
"When there is enough water in the lake, the boats will float. But when the water level comes down, not all the boats will be able to float," said William Russo, head of Beijing-based consulting company Synergistics.
U.S. consulting firm Alix Partners says the number of households in China with annual income of more than 60,000 yuan - a level considered as sufficient for a family to buy a no-frills car - will likely nearly double to 65.6 million by about 2015.
GM's Chevy Sail, which was launched in 2010, sells for 56,800 yuan, while Volkswagen (VOWG_p.DE) and Nissan (7201.T) also have several models that sell in the 70,000 to 80,000 yuan range.
Further heightening the pressures on Chinese brands is China's own industrial policy.
As part of its effort to nurture domestic auto makers, the country's policymakers have been encouraging global companies and their Chinese joint-venture partners, mostly large state-owned auto makers such as SAIC Motor Corp (SAI.N) (600104.SS), to establish joint China-only brands.
In most cases, those brands that have already been launched - Baojun from GM and its partner SAIC, as well as Venucia, which is operated by Nissan and Dongfeng Motor Group Co (0489.HK) (600006.SS) - use older technology the foreign auto makers retired recently while using more Chinese-designed and -produced components to cut costs.
Use of older technology means those China-only, foreign-Chinese co-brands could sell their cars with relatively low price tags, putting further pressure on China's indigenous brands - a source of worry for many indigenous auto makers.
The Venucia D50 compact car, based on the previous-generation Nissan Tiida, sells for as little as 67,800 yuan, compared with the 100,000 yuan for the most affordable version of the redesigned Tiida.
The Baojun 630, a compact sedan built on the underpinnings of a retired GM model, is 5,000 yuan cheaper than the Venucia D50.
In the case of the Chevy Sail, GM went back to the drawing board in 2005, simplifying older vehicle underpinnings among other cost-reduction efforts and pulling from the company's global parts bin to shave costs and create a rival to cars such as Geely's King Kong, a 56,000-yuan sedan.
China brands are fighting back by investing in technology to upgrade the quality of their no-frills cars. In some cases, they're also trying to take on their global rivals with more upscale cars, but the effort has mostly been unsuccessful.
Many analysts and industry executives believe big state-owned companies such as SAIC and Dongfeng, with strong ties with foreign auto makers, are likely to fare relatively well, while those without strong backing, such as Jianghuai Auto and BYD, might struggle.
BYD's F3, for example, China's best-selling car in 2009 and 2010, has dropped out of the top-10 list, giving way to new low-cost cars like the Chevy Sail and Volkswagen's Bora, according to the China Association of Automobile Manufacturers.
Geely and others with foreign ties, meanwhile, appear well-positioned to weather the foreign assault. Geely Chairman Li, who is also chairman of Volvo, said the two companies agreed recently to share some Volvo technology with Geely.
Geely desperately needs Volvo technology, Li said, to deal with this "life or death matter".


Markenkunterbunt schadet Chinas Autobauern (Brand Image Hurts Chinese Automakers)

Financial Times Deutschland, April 26, 2012

Excerpt (translated):

But many local manufacturers want to extend beyond these less profitable entry-level segments due to rising production costs and thinner margins.  You want to reach out to middle-class consumers who are not necessarily first-time buyers and are more interested in brands and buy more foreign cars"For this, the Chinese companies must not only develop better technologiesbut must also distinguish themselves from other local companies, "says William Russo, managing director of the Beijing consulting firm Synergistics and long-time auto executive.

2012 04-26 FT Germany


Traffic Jam in China's Auto Market

The Wall Street Journal, April 23, 2012


With so many car makers accelerating into China, the risk of a pile-up is growing.
The Beijing auto show, which opens its doors on Monday, has become the biggest extravaganza in the biggest car market in the world. Victoria Beckham—the artist formerly known as Posh Spice—is in town to promote the Range Rover Evoque. Maserati is showcasing a SUV.
China's massive population, rising wealth, and growing demand for autos make the excitement easy to understand. From 2008 to 2011, unit sales increased 98%. Analysts speak breathlessly about demand's taking off when gross domestic product hits $10,000 per capita, measured in purchasing-power-parity terms. China is projected to cross that threshold in 2013.
But amid the sound of auto makers revving their engines in unison, there are reasons for caution.
Excess capacity is a risk. Bill Russo, an expert in China's auto sector at Synergistics, estimates that production capacity in China in 2015 could be as high as 28 million units. With sales at 18.5 million in 2011, producers are betting on a lot of demand growth.
On the recent evidence, they might be riding for a fall. Unit sales rose just 2.5% in 2011. The excuse then was that the end of tax incentives to buy cars had dented sales. But the bad news has continued in the first quarter of 2012, with sales down 3.9% from a year earlier.
Competition at the luxury end of the market, where margins are highest, is especially intense. The Maserati SUV, slated for production in 2014, will jostle for position with offerings from Porsche, BMW BMW.XE -4.34% and Mercedes DAI.XE -4.22% . Ford is planning to bring new SUV models to the China market. In the budget-passenger segment, margins are lower, and domestic players are also grasping for market share.
Auto makers can't pass up the opportunity to get into the China fast lane, and there will be some winners. Audi grew its greater China sales 37% in 2011. But the road to higher profits is looking a little jammed.

China reintroduces historic car brands

The Financial Times, April 22, 2012

China reintroduces historic car brands - FT.com

Several of China’s leading carmakers are relaunching brands from the past, including Mao Zedong’s famous Red Flag limousine, in a bid to capitalise on nostalgia for an era when China made very few cars – but those they made were grand ones.

But there is scant evidence that Chinese car buyers are hankering for the good old days when state-owned manufacturers made cars named after Beijing, Shanghai, or the red flag of communism. China may be the world’s largest car market, but China has yet to build a car industry to be proud of. Foreign carmakers dominate the market, and the local industry is losing more market share all the time.

Chinese manufacturers are hoping to reverse that trend by unveiling a range of bigger, glitzier, sportier and more innovative models at the Beijing auto show, which opens on Monday. Analysts say it could be a critical moment for the Chinese industry, which has less than 30 per cent of the local market share.

Three decades after Beijing set out to build a world class car industry – signing landmark joint venture agreements with Volkswagen and General Motors to partner state-owned manufacturers – brands owned by VW and GM still dominate, while Chinese brands remain stuck in the hyper-competitive low end of the market. In general, foreign branded cars are seen as more reliable, more stylish, more impressive, and better all-round value for money than Chinese branded models, which continue to compete almost entirely on price.

In the past year, Beijing has taken several steps to reverse the decline, banning most official fleet purchases of foreign brands and forcing overseas makers like GM and VW to develop indigenous brands with their joint venture partners in a bid to ensure a more rapid transfer of technology. Nissan will launch Venucia, its own brand with joint venture partner Dongfeng Motors, at the Beijing auto show, for example. But most industry analysts say those measures are likely to provide only a small boost to local carmakers’ market share – or could depress it even further.

Klaus Paur, car industry analyst at Ipsos in Shanghai, says: “In the past few years we have seen a dramatic loss of market share for Chinese branded vehicles, while international carmakers have done a very good job of penetrating the lower end of the market.

“Sometimes international car manufacturers understand Chinese consumers better than Chinese manufacturers do,” he adds.

Western carmakers are increasingly adapting their cars for the Chinese market: BMW, for example, will launch a new long-wheelbase version of its ever-popular 3 series, especially for the China market where many cars are chauffeur driven. Chinese carmakers like Geely, Great Wall and SAIC – the three strongest – are working hard to enter the middle to upper segments of the market, and many are launching sports utility vehicles to capture a trend toward more individualistic purchases by younger buyers. “But they are always running a little bit late,” says Mr Paur.

Ivo Naumann, head of Alix Partners in Shanghai, says: “The product still has to improve to be really on par with international brands.

“At the end of the day, I think it’s a question of scale. None of the independent Chinese carmakers has a scale that could truly compete with large global carmakers,” he adds, noting that even Geely – which also owns Volvo – produces less than 1m cars a year while the global market leaders produce several multiples of that.

Meanwhile, prevailing winds increasingly favour global carmakers, analysts say. As China gets richer, car buyers often want to upgrade to foreign models, and as the first big wave of car buyers replaces their first car, many are increasingly willing to pay for foreign reliability, not to mention resale value. Even Beijing’s decision to force foreign carmakers to create indigenous joint venture brands could cannibalise demand for independent Chinese brands, says Bill Russo of Synergistics consultancy, who is also a former head of Chrysler in China.

Kevin Wale, head of GM in China, told the Financial Times: “It’s tough to establish a global reputation … and once you have done that it tends not to go away
“The Japanese and Koreans built up global reputations but it took them 20 or 30 or 40 years – and that still did not erode the global advantage of those that existed before. I think our reputation [in China] will last for an incredibly long time.”

GM Sees Presidential Prestige Boosting Cadillac in China

Bloomberg News, April 23, 2012

GM Sees Cadillac Chasing Audi in China With U.S. Prestige
As General Motors Co. (GM) executives celebrated the opening of a special pavilion in Beijing to woo luxury customers away from Audi, a subtle message about the brand stood on display: a scale model of Cadillac’s U.S. presidential limousine.
GM is betting Cadillac’s 110-year heritage, including its role as the president’s car, can help sell the brand in China, where sales are a 10th of market leader Volkswagen AG (VOW)’s Audi and German luxury brands dominate the premium segment.
The U.S. automaker, a year after reclaiming global sales leadership, is preparing a renewed Cadillac push in China with plans to introduce new products, increase local production and expand sales outlets as it aims to boost sales in the country at least fivefold to match U.S. deliveries by 2020. Narrowing the gap against Audi can help keep GM ahead of VW.
“Chinese may or may not like America, but they definitely like the power that’s associated with America,” said Michael Dunne, a Jakarta-based industry analyst and author. “They admire, respect and like power and America is the world’s leading superpower, so owning an American car offers an opportunity to be part of that.”
The Cadillac push in China, where the automaker mostly sells Chevrolet, Buick and Wuling models, is part of Chief Executive Officer Dan Akerson’s effort to raise profit margins and develop Cadillac as a top global brand to hedge against the risk of declining sales of high-profit trucks.

Cadillac Catch-Up

GM plans to bring a new Cadillac model to China each year through 2016, Akerson said today at the Beijing auto show. The goal is for Cadillac sales in China to reach U.S. levels by mid- decade, he said.
While Cadillac’s China sales rose 73 percent last year to 30,000, Audi increased sales by more than Cadillac’s total. Audi’s full-year tally of 308,808 made it the country’s luxury leader, according to LMC Automotive, and helped propel VW ahead of Toyota in 2011 global sales to trail only Detroit-based GM.
“Talk luxury cars in China and you’re really talking about German domination,” Dunne said. The three German high-end brands dominate China’s upscale auto market, with a combined share of more than 75 percent last year, according to figures by industry analyst LMC Automotive.
Cadillac’s pavilion in Beijing, erected in connection with the city’s auto show that begins this week, is intended to highlight the brand’s uniqueness. Influential guests will be invited to see art, such as works by pop icon Andy Warhol and contemporary Chinese artist Yue Minjun, displayed around classic and modern Cadillac cars.

Luxury Defined

“We want to create a whole story and tell customers and people here that Cadillac is different,” Kevin Chen, general manager of the Cadillac brand in China, said during an April 21 interview at the monthlong exhibit’s opening for local media. “We own the asset; nobody can replicate” Cadillac’s history, he said.
At the pavilion, GM displayed a 1927 Webster’s dictionary, opened to the entry for Cadillac: “Something that is the most outstanding or prestigious of its kind.”
Cadillac has lost some of its luster as the world’s luxury car market has grown more competitive. Akerson wants to restore the brand and push Cadillac into the top tier globally along with German competitors Bayerische Motoren Werke AG (BMW)’s BMW brand andDaimler AG (DAI)’s Mercedes-Benz. He aims to overtake Toyota Motor Corp. (7203)’s Lexus to become the fourth-best selling premium brand, people familiar with the plans have said.

Hedging Truck Profit

Part of the reason is to make up for less profits on trucks. GM acknowledges that planned tougher U.S. mileage standards, known as corporate average fuel economy, or CAFE, may hurt sales of large pickups.
While GM benefits from high-margin, high-volume pickup sales, “Volkswagen has luxury,” Steve Girsky, GM vice chairman, said of the competitor’s Audi brand. “And if you believe the truck business, because of CAFE or whatever reason, is at risk of going down, globalizing Cadillac and getting more out of your luxury brands is a priority, and it’s a priority for us.”
Akerson is making his push to restore Cadillac first in the U.S. and in China, where the luxury auto market may grow 15 percent this year, according to LMC.
By 2020, GM anticipates half of the world’s luxury goods to be consumed in China, Don Butler, vice president of Cadillac marketing, said in an interview this month in Warren, Michigan. He spent time with Chinese luxury consumers in December and said the brand is highly esteemed, in part because its models have been used to shuttle U.S. presidents from Woodrow Wilson to Ronald ReaganBill Clinton and Barack Obama.
“We are held in essentially the same regard as BMW and Audi and Mercedes-Benz, and part of it does go back to this really fond association with America” and its image of power and success, Butler said. “It’s the car of presidents.”

Import Disadvantage

Part of Cadillac’s difficulty in China has been a lack of local production, leaving its vehicles more expensive than those made locally by competitors. The only Cadillac model now made in China is the SLS sedan.
“The premium makers are really enjoying a lot of good profitability in China, but beyond that, the efficiencies that they can gain in their global buying activity from the kind of scale that is generated from the Chinese demand is tremendous,” said Bill Russo, president of auto consultancy Synergistics Ltd.
GM plans to make the new XTS sedan in the country, Akerson said. Production may begin late this year followed by assembly of the ATS compact car in the first half of next year, said two people familiar with the matter. GM is also considering the redesigned CTS for China production, said the people, who asked not to be identified because the plans haven’t been made public. Dayna Hart, a GM spokeswoman, declined to comment on future production.
Along with adding Cadillac production in China, GM also plans to expand the dealer network. Cadillac, which had 11 stores in China at the end of 2006, now has 69 with plans to double the number over the next year, the people said.

Styling Stumbles

Cadillac has also suffered from having too few products that appeal to Chinese taste. The brand’s styling has held it back in the past, said Dunne, the analyst, who wrote a book called “American Wheels, Chinese Roads: The Story of General Motors in China.”
Some Chinese consumers, he said, have referred to the brand as “ben zhong,” which roughly translates to “dumb” and “heavy.”
GM executives such as Butler and Chen say that the new styling of the SRX sport-utility vehicle has appealed to customers and that they believe the ATS compact sedan will also help attract new buyers.

Younger Buyers

While Cadillac faces hurdles in China, it doesn’t carry the same kinds of brand baggage as in the U.S. where it has struggled to appeal to younger buyers. The average age of U.S. Cadillac buyers is 63, according to J.D. Power & Associates, while in China, GM said it’s 35.
Simon Gao, a 33-year-old entrepreneur in Shanghai, is one of those young customers. He visited a dealership in March in Shanghai to buy an SRX, which starts for 429,800 yuan, or about $68,100, 90 percent more than the beginning price in the U.S. Audi’s Q5 SUV, which is assembled in China, starts for 383,600 yuan, or about $60,800.
Gao is the kind of customer Cadillac is targeting, even if he wasn’t familiar with the brand when he began shopping.
“I knew it was an American brand, top of the range for GM, but it was the robust exterior that attracted me to it,” Gao said in an interview. “The SRX is a very manly car. There were too many Audi Q5s on the road, and the design was rather unisex. I wanted a car that was very manly, and when you look at the SRX, you instantly know a man’s going to drive it.”
At the dealership Gao visited in Shanghai, a sitting area for customers included a display of U.S. presidents, including Reagan and Obama, who have used Cadillac as their official car.
To contact Bloomberg News staff for this story: Tim Higgins in Detroit atthiggins21@bloomberg.net; Liza Lin in Shanghai at llin15@bloomberg.net
To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net