Luxury Cars Headed for Overheating 豪华车市场步入过热

By newsdoug on April 23, 2012

Infiniti zooms into China's crowded luxury car market China’s luxury car sector is showing all the signs of overheating, as both domestic and foreign auto makers spend hundreds of millions of dollars to invest in a vast consumer market whose fast growth makes it increasingly vulnerable to bubbles in many areas. As the annual Beijing Auto Show begins this week, news has emerged that Nissan (Tokyo: 7201) plans to start production of its Infiniti cars in China, seeking to tap strong demand for luxury brands in the world’s largest auto market. (English article) Nissan’s plan comes just a week after US auto giant General Motors (NYSE: GM) announced a similar plan to produce its own luxury Cadillac brand in China. (previous post) Even domestic names are getting in on the act, with brands like Geely (HKEx: 175) and Chery making recent moves that indicate they want to enter the space. It’s easy to see why all the luxury brands are piling into China, where a growing number of affluent consumers are happy to pay big bucks to show off their newly wealthy status. After two years of breakneck growth fueled by government incentives, China’s broader auto market grew by an anemic 2.5 percent last year as the nation’s economy slowed due to global weakness and cooling measures by Beijing. Despite that slowdown, luxury car sales continued to boom, notching solid double-digit gains for the year. That growth has continued into the first quarter of 2012, even as the broader market contracted 3.4 percent in the same period. First-quarter sales for industry leader Audi (Frankfurt: VOWG) jumped 40 percent, while rival BMW (Frankfurt: BMW), the market’s second largest player, also notched healthy growth of 28 percent. While Cadillac and Inifiniti prepare to start local production, the existing luxury players are also all investing big money on their own expansions. Audi currently plans to more than double its annual capacity to 700,000 units per year from the current 300,000, and BMW is embarking on a similar plan that will see it spend 1 billion euros. Adding to the looming glut is Beijing, which has shown a previous inclination to protect domestic industries and to intervene in markets that appear to be overheating. Beijing showed its intentions for the luxury car space earlier this year when it published a preliminary list of approved models for purchasing by government departments – a big buyer of such vehicles for status-conscious officials. (previous post) In what came as a surprise to many, the list excluded all foreign brands, a huge exclusion for government agencies that now purchase $13 billion in cars a year. That provision was designed to help domestic automakers, but also provided a clear signal that Beijing wants to clamp down on luxury vehicle purchasing by government agencies as it seeks to address public perceptions of corruption and wasteful government spending. There’s every indication that demand won’t be able to keep up with the current breakneck expansion of capacity for the luxury car market, both due to natural limitations as well as this kind of government intervention. When that happens, the big automakers will quickly find they’ve spent hundreds of millions of dollars to build massive new capacity that could end up sitting idle for years until demand finally catches up with the current big wave of new investment.

Bottom line: China’s luxury car market is in the process of overheating, which will leave automakers with large amounts of excess capacity when the market slows over the next 2 years.

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