Used Lamborghinis Linger on H.K. Lots Amid China Lull

Bloomberg Business Week, July 29, 2012

A model poses near luxury Lamborghini SpA sports cars during the Shanghai International Circuit Club Challenge, in Shanghai, China. Photographer: Qilai Shen/Bloomberg

Waiting lists for ultra-luxury cars in Hong Kong are getting shorter and used-car lots are cutting prices on Lamborghinis, Ferraris and Bentleys in the latest sign of China’s slowdown.
At first glance, the numbers are deceiving: Sales of very expensive new autos surged 47 percent in the first six months, according to industry analyst IHS Automotive. Look more deeply, however, and another picture emerges, especially in the city’s used-car lots.
Dealers of such second-hand cars say job cuts and the worsening global economic outlook are creating uncertainty among the finance-industry and expatriate professionals who make up the bulk of their buyers.Morgan Stanley (MS) (MS)Citigroup Inc. (C) (C) and Deutsche Bank AG are among firms with Asian headquarters in Hong Kong that are cutting jobs worldwide.
“The more expensive the car, the more dry the business,” said Tommy Siu at the Causeway Bay showroom of Vin’s Motors Co., the used-car dealership he founded two decades ago. Sales of ultra-luxury cars have halved in the past two or three months, he said. “A lot of bankers don’t want to spend too much money for a car now. At this moment, they don’t know if they’ll have a big bonus.”
Unlike Rolex watches, Gucci handbags and other luxury goods, Hong Kong’s car market hasn’t been distorted by the more than 28 million mainland Chinese who flocked to the city last year. Mainland shoppers spend 44 billion euros ($54 billion) on luxury goods while traveling overseas to locations such as Hong Kong and Europe, according to CLSA Asia-Pacific Markets.

‘True Look’

“In the car market, it’s not buying like watches,” said Booz & Co.’s Russo. “Here you are getting a true look at a category of product bought by Hong Kong buyers. It’s a pulse check on how Hong Kong residents view the stability of the financial system.”
The new-car figures look better because of some short-term developments. The release of the latest models from Ferrari and Lamborghini and the opening of the first Hong Kong showroom by McLaren -- maker of the 592-horsepower MP4-12C carbon-fiber coupe -- have given sales a bump. Meantime, depressed demand in Europe means a bigger allocation of new cars for Hong Kong dealers.
With the highest proportion of billionaires in the world, according to a Boston Consulting Group report released in May, Hong Kong has enough buyers unaffected by market conditions to keep new sales going, said Bill Russo, a Beijing-based senior adviser at Booz & Co.

‘Saying Something’

There were 273 new Bentleys, Lamborghinis, Rolls Royces, Ferraris, Aston Martins and McLarens sold in the six months to June 30, up from 186 in the first half of last year, according to Englewood, Colorado-based IHS. This outpaced the 23 percent gain in the U.S., the world’s richest nation, and the 40 percent jump in mainland China, the world’s biggest car market, IHS data show.
For these buyers, price isn’t an issue and settling for second-hand is not an option, Russo said.
“It’s the brand image and it says something about you,” said Russo, who was formerly Chrysler Group LLC’s China head. “Used-car buyers are more price sensitive and economic cycles will affect these shoppers more. They are paying for the cars with their income as opposed to their savings.”
The European debt crisis is slowing expansion in emerging markets including China, the International Monetary Fund said this month, when cutting its global economic growth forecast for next year to 3.9 percent from 4.1 percent.

Aspirational Buyers

Hong Kong’s economy eked out 0.4 percent growth in the first quarter, the slowest since escaping the recession caused by the 2008 global credit crisis. Average daily turnover on the city’s stock exchange, the world’s fourth biggest, was 22 percent lower in the first half than the corresponding period of 2011. Asia-Pacific takeovers have dropped 22 percent to $306 billion, according to data compiled by Bloomberg.
People shopping in the second-hand market are typically aspirational buyers who are more likely to sit it out rather than trade down when they can’t afford the brand they want.
“An uncertain economic outlook encourages consumers, particularly those without a buffer provided by sizeable financial assets, to pause on big-ticket purchases,” said Tom Rafferty, a London-based Economist Intelligence Unit analyst.
Vin’s Siu said the drop in high-end customers who typically account for 30 percent of turnover at his 300-lot business was the most important factor behind a 20 percent drop in total sales. Expatriates made up about 70 percent of customers, he said. “A lot of expats are leaving Hong Kong,” he said. “For every 10 who are leaving, two are coming.”

Mercedes Discount

To spur demand, dealers in pre-owned cars are slashing their prices -- together with how much they’re willing to pay sellers.
A yellow, 2011 Lamborghini Gallardo 550 recently listed for HK$2.88 million ($371,000) on second-hand car website 28car.com is about $830,000 cheaper than a new model -- chump change that would buy a new Mercedes E-Class Coupe to run the kids to school. A silver-gray 2011 Ferrari California with 980 kilometers (613 miles) on the clock is available for HK$2.68 million. That’s a 19 percent discount to a brand new 2012 vehicle, and HK$400,000 cheaper than a 2011 version sold by Ferrari’s official in-house used-car dealer.
“We started cutting prices at the beginning of the year to stimulate sales because the market was slow,” said Tony Chan, a director at GP Motors a short walk up the hill from Vin’s, adding that second-hand Ferraris and Bentleys are leaving the 30-lot dealership at half the speed of last year.
Someone looking to sell a 2009 Bentley Continental will have to accept HK$1.7 million, a third less than they would have received at the start of the year, Chan said.
In the basement automall beside Hong Kong’s Grand Hyatt hotel, trader Samuel Chui said he has stopped buying more cars.
“People want cash now, they don’t want the commodity,” said Chui, who reduced the number of car lots he rents from 15 to nine at the end of last year as business began to slow. “We’ve got plenty of stock and it’s not moving.”
To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


U.S. Automakers See Their Cars Zip in China

The Atlantic, July 19, 2012

Crowds swarmed the Beijing Auto Show in April but they thronged thickest around foreign-made cars, illustrating the challenge ahead for domestic Chinese manufacturers.


About 20 million new cars are expected to be sold in China this year, with sales in May up almost a quarter year-on-year. The market is projected to grow to between 30 million to 40 million by 2020 in a nation where car ownership is still low - in 2009, there were just 47 cars per thousand people compared to 802 in the US. According to these predictions, there will be more cars in China in 2030 than there were in the entire world in 2000. 

"The May results are a reflection of the fundamentally strong growth drivers that exist in China - mainly continued urbanisation and growth of the middle-class population, recovery from last year's supply chain disruptions, and pent-up premium car demand," Bill Russo, head of Synergistics auto consultancy in Beijing and a former head of Chrysler in China, told The Financial Times.

But this picture - rosy for carmakers, alarming for environmentalists - masks a deep divide that is seeing international brands eclipse their Chinese counterparts. Thirty years after China signed joint venture agreements with General Motors and Volkswagen, Chinese brands continue to occupy the competitive low-end market while high-end foreign brands dominate the soaring luxury car market.

Sales of BMW and Audi cars in China in May were up 31 percent and 44 percent respectively. To meet demand, BMW aims to quadruple mainland production capacity while Audi sales head Peter Schwarzenbauer said Audi only established dealers in 187 out of 304 Chinese cities with a population of a million or more, leaving plenty of room for expansion.

Beijing is doing its best to protect its auto firms, banning government departments from buying foreign cars for their official fleets (black Audis with tinted windows are a particular favorite of government officials)and forcing overseas makers such as GM and VW to develop indigenous brands with their joint venture partners as part of a bid to ensure a more rapid technology transfer to China.

Chinese manufacturers are also attempting to boost their brands rather than simply competing on price.

"Our focus is our product, a car that can provide a better experience, more special than other cars. Personalized services and the driving experience should be a new sales point," Wu Xinfa from Dongfeng Yulong Auto Company told China Radio International.

But persuading a Chinese population that is convinced that foreign brands in general are more stylish and reliable than Chinese brands will be a tough task.
"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," Kevin Wale, head of GM in China, told The Financial Times. "I think our reputation [in China] will last for an incredibly long time."

TOM SPENDER - Tom Spender is a journalist in Beijing, China.