China's Luxury Car Market Decelerating, Not Braking

Ward's Auto World,  July 11, 2013

Although growth rates may be cooling down, the country still is the most important global market for most luxury auto makers and will remain so for the foreseeable future.

Rolls-Royce expands China range with Wraith coupe.

by Alysha Webb

CHONGQING, China – China’s economy is slowing and the Communist Party is urging restraint on conspicuous consumption. But predictions of a big hit on luxury-car sales don’t seem to be coming true.

“We are delighted to see a healthy, sustainable growth in China and we are confident it will continue in the future,” says Colin Yang, senior manager-Rolls-Royce China.

That confidence may be justified. Demand for luxury vehicles is expected to continue to rise along with incomes in China. Although growth rates may slow, the country still is the most important global market for most luxury auto makers, and will remain so for the foreseeable future.

“Whatever short-term adjustments the market may face, there is plenty more growth to come for luxury cars in the long term,” says Bill Russo, president of consultancy Synergistics and former vice president of Chrysler Northeast Asia.

Rolls-Royce doesn’t release detailed sales figures, saying only that it is not a volume manufacturer. But the auto maker does disclose China accounted for about 25% of the 3,575 luxury cars it delivered in 2012. The China Daily reports Rolls-Royce China sales rose 40% in 2012.

“We focus on the high-end buyer who buys for business purposes,” Yang tells last month’s China Auto Market Summit held here. “In China, those buyers have inelastic demands.”

Some ultra-luxury brands forecast lackluster growth in China this year. Lamborghini expected 2013 sales to be about the same as 2012, when it delivered 234 of its sleek high-performance cars in the country. 

Ferrari and Porsche also expected 2013 volumes to remain roughly at 2012 levels, but there are signs that indicate otherwise. Porsche sales, for example, rose 20% in the first six months of 2013 to 18,323 units.

Imported ultra-luxury models such as Rolls and Lamborghini are a tiny segment of China’s overall high-end market. Audi, BMW and Mercedes-Benz, all of which produce locally as well as import some of their most-expensive models, account for 75% of luxury demand.

Sales have slowed at all three, but only relatively. BMW’s China deliveries in first-half 2013 rose 15% to 182,800 units compared with 29% growth in all of 2012. Audi was up 18% through six months to 228,139 after 30% growth last year. Mercedes slipped 0.5% in the first half after inching up only 1.5% in 2012, then saw a 16% gain in June after a reorganization of its sales unit.

The segment was due for a slowdown, says Ashvin Chotai, managing director of U.K.-based Intelligence Automotive Asia. Sales of luxury vehicles in China surged from about 300,000 units in 2009 to nearly 1.2 million in 2012.

Nonetheless, Chotai says, high-end models will outperform the Chinese market overall in 2013. He forecasts luxury sales will grow 13% in 2013, compared with only 9% for the car segment as a whole.

“In a global context, growth in China's luxury-vehicle market will remain healthy in the medium and long term, but it will not be as spectacular as we saw in the period 2009-2012,” Chotai predicts.

Audi’s continued strong performance points to the limited impact of the government’s austerity policy, according to Synergistics' Russo. “Despite Audi’s image as the government’s preferred brand, sales of Audi cars have not been significantly impacted by the government austerity program since government sales are only a tiny proportion of their total,” he notes.

Any drop in government purchases could be offset by growth in other areas, such as China’s small and medium-sized cities, Chotai says, adding, “In the long run, the number of more affluent upper-middle-class and high-net-worth buyers should fuel the expansion of (the luxury segment) for many years to come.”

China’s economy is forecast to grow about 7.5% in 2013. While most countries would be happy with that number, it is a significant slowdown from recent years. But the moderation of gross domestic product growth hides rising wealth in the country and a growing appetite for luxury goods including cars.

A recent report by McKinsey & Co. says the affluent segment of Chinese households who buy premium vehicles is expected to grow at a compound annual rate of 16% between now and 2020. The consultancy predicts luxury-car sales in the country will hit 3 million units by then.

China might become the world’s largest premium-car market as early as 2016, says McKinsey. It defines premium as vehicles costing more than RMB1.25 million ($204,000 at current exchange rates).

McKinsey says 60% of those surveyed consider buying a car as important as buying an apartment and paying for their children’s education.

Auto makers are gearing to meet anticipated demand in China by expanding their product offerings.

General Motors has begun building a $1.3 billion, 160,000-unit capacity plant in Shanghai to produce Cadillacs. GM sold 30,000 units of its top-end marque in China in 2012 and aims to sell 100,000 by 2015. The strategy: Introduce one new Cadillac model a year through 2016 and expand the dealer network to 200 by the end of this year, up from 69 in 2011.

GM China expects 2013 luxury-segment expansion to be only 4%. “The luxury market is not growing at a level we expected at the start of this year, but we still feel the luxury market is going to continue to grow here in China,” says a spokeswoman for the U.S. auto maker.

Rolls-Royce introduced an extended-wheelbase version of its Phantom Series II in China last year, followed this year by the launch of its Wraith coupe.

“This year we are confident, with the Phantom Series II and the latest-model Wraith, the brand will attract (a wider range of) customers,” Yang says.

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