Chinese Hit Brakes On Luxury Cars
Sexy pictures of concept cars are filling the headlines this week as China’s biggest annual auto show revs up in Shanghai, but the bigger story at this year’s event is a sudden and dramatic slowdown in the nation’s luxury auto market. The newspapers have been brimming these last 2 days with reports from the show that opened on Sunday, including copious pictures of all the new car models that will soon hit the roads of the world’s largest car market. But interviews with executives from the big luxury brands were nearly identical in their conservative tone, with most executives saying they would be satisfied to see growth this year of just 10-15 percent.So, what’s happened in a market that had names like BMW (Frankfurt: BMWG), Mercedes (Frankfurt: DAIGn) and even GM’s (NYSE: GM) Cadillac getting so excited over the last 2 years, when growth was averaging around 40 percent? None of the executives interviewed in the wide range of reports was really talking about the cause of the rapid slowdown. I suspect the main reason lies in a series of national directives that came out last year ordering government departments to curtail their luxury vehicle buying, as part of new President Xi Jinping’s broader crackdown on excessive government spending.
The Monday China Daily provides a good microcosm of the rapid and sudden slowdown, with numerous executives cited in a wide range of articles discussing the phenomenon. Leading the list was Volkswagen’s (Frankfurt: VOWG) Audi, which saw its China sales growth slow to 14 percent in the first quarter. Audi was the first foreign luxury brand to produce its cars in China, and is considered the leader that others are trying to catch in the market. Audi’s CEO Rupert Stadler sounded a conservative theme for the broader luxury car market, saying 10-15 percent annual growth would be reasonable in the coming years.
BMW sounded a similarly downbeat note, with CEO Olaf Kaster trying to sound optimistic by saying his company should register double-digit growth in China this year. He goes on to tamp down expectations, saying that this year’s growth is unlikely to match the 30-40 percent rate seen in previous years. But surely this year’s rate will be above 10 percent, he adds. I don’t mean to be too sarcastic, but last time I checked 10 percent was the absolute minimum growth rate that could be qualified as “double-digit”, and Kaster’s remarks certainly seem to imply that BMW may only grow about that much this year.
BMW’s China sales rose an anemic 7.4 percent in the first quarter of 2013, a sharp slowdown from its 50 percent growth in all 2012, meaning the company would have to see some acceleration in the rest of the year to even meet its target of double-digit growth. But even BMW’s slow start to this year was better than Mercedes, which saw its China sales actually fall 11.5 percent in the first quarter.
Perhaps the most downbeat remarks came from the CEO of ultra high-end sports car maker Lamborghini, who said he was expecting his China sales to be flat this year. Stephan Winkelmann said that after steady growth in the last 2 years, the China market for super high-end cars like Lamborghini is likely to stall or even shrink in 2013.
Lamborghinin’s China sales are quite small, at about 200 cars sold last year, so it’s difficult to use the company as a barometer for the broader market. But when Winkelmann’s remarks are taken collectively with the bearish comments from other executives, the outlook certainly doesn’t seem too good for luxury cars in China in 2013. The situation could even remain bleak for the next couple of years, with improvement unlikely unless China’s economy picks up or the government relaxes its current austerity program.
Bottom line: Growth in China’s luxury car market is likely to slow sharply to about 10 percent this year, and could remain weak through 2015.
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