Cars

Premium brands luxuriate in China's new wealth

(China Daily)
Updated: 2010-11-29 13:11

Audi, BMW and Mercedes-Benz all reported more than 30 percent sales growth in China last year, at the same time the nation became one of the top-three markets for super-luxury brands Rolls Royce and Bentley. [Photo / China Daily]

Consumers with penchant for prestige, deep pockets comprise a dream market

China overtook the United States as the world's largest vehicle market in 2009 and has also become the growth engine for global luxury car brands.

Sales of luxury vehicles - including luxury cars, SUVs, MPVs and sports cars - from 20 brands almost quadrupled from 2005 to 2009.

While most countries were in the midst of the global financial crisis in 2009, China became one of the top-three markets for several super-luxury brands including Rolls Royce and Bentley.

Mainstream luxury brands Audi, BMW and Mercedes-Benz all reported more than 30 percent sales growth in China last year.

The remarkable performance has encouraged them to put more resources into the highly competitive Chinese market.

One major factor driving the growth of luxury cars is the quick rise in individual wealth due to China's fast-paced economic development.

According to Capgemini's 2010 World Wealth Report, there were 477,000 high net worth individuals with at least $1 million in assets - excluding durables and primary residences - in China last year, up 31 percent from 2008 and the fourth-highest in the world.

In our research, we have found owners of luxury vehicles in China to typically be in the real estate, finance, mining and export businesses.

The unique psychology of Chinese people also plays into the hands of luxury carmakers.

Modesty is not a prominent Chinese characteristic, but confidence is, whether founded or unfounded. They are not shy about displaying their success with a propensity to show off their success through brand name possessions.

But complicating that assessment is the fact Chinese are also pragmatic.

Exciting buyers

To win over such a large group of buyers, luxury brands are undertaking various marketing efforts to excite buyers and boost purchases.

Introducing lower-priced luxury models and offering attractive financing options are two major methods.

Indeed, the launch of entry-level luxury models has lowered the price of luxury cars to below 250,000 yuan, similar to the price of some mid-sized cars in China.

Mercedes-Benz launched the 1.6-liter C-Class in 2010, further lowering the entry price through the benefits of China's sales tax cut and subsidy for energy-saving vehicles. The measures have helped some young customers afford their dream car.

Most luxury brands have brought their latest models to China, or even chosen China to debut new models.

Though auto finance is not the most important purchase consideration for buyers of super luxury cars, it is becoming more important.

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According to a JD Power China sales satisfaction study, about 17 percent of Mercedes-Benz buyers chose auto financing when purchasing their car, 2 percentage points higher than the previous year.

Luxury brands also cultivate loyalty in their customers - they are potential buyers for premium products in the future.

Dealership expansion has also contributed to the booming market to some extent.

In 2010, the number of luxury brand dealers increased 15 percent by midyear.

Luxury brands Audi, BMW and Mercedes-Benz have also set up dealerships in smaller cities across China. More aggressive plans call for dealership expansion of 50 percent this year.

Realizing the importance of dealerships, more luxury brands have established sales companies to take charge of their retail channel.

Jaguar Land Rover has set up its own sales company, while Bentley has created its first components center in Shanghai to provide better after-sales service. Bentley also plans to invest 300 million yuan to add 14 more dealers in five years.

Benefiting hugely from China's robust economic story, Chinese customers are yet to experience a recession. Consumer confidence is high with most having cash in hand to buy their next luxury car.

We believe luxury carmakers have a promising future in China and forecast volumes will exceed 1.2 million units by 2015, with the market growing in double digits over the next five years.

The author is a senior market analyst at JD Power and Associates.