German luxury brands offer big discounts to maintain sales
China is turning into a buyer's market for luxury cars as dealers for BMW AG, Daimler AG and Audi AG offer discounts to maintain sales.
In Beijing, BMW dealerships are giving markdowns of as much as 19 percent on a 3-series car, while some Mercedes dealers are selling the C-class Elegance model at 20 percent less than the suggested retail price, according to cheshi.com, a pricing guide tracking more than 3,000 dealers in the country.
BMW, Daimler and Audi, the three largest luxury carmakers, face slowing sales growth and falling prices as some Chinese cities impose driving curbs and the central bank tightens lending. The growth in demand for high-end vehicles cooled to 29 percent the first eight months of this year from 48 percent in 2010, according to researcher J.D. Power & Associates.
"We're in a cycle of dropping prices," said Scott Laprise, a Beijing-based analyst at CLSA Asia Pacific Markets. "Dealers are worried about sales slowing and are cutting selectively in the luxury segment. They see where the overall market is going. They want to be preventive and keep their sales going."
A tightening Chinese economy may cause "aspirational" buyers, such as those in mid- to upper-level management jobs, to rethink or delay luxury purchases, Laprise said.
China's central bank raised interest rates five times in the past year to curb inflation, and the city of Beijing started restricting the number of license plates available beginning in January to fight pollution and congestion. The measures are contributing to slowing car demand, according to analysts at CLSA, J.D. Power and Booz & Co.
BMW, Daimler and Audi are targeting record sales in 2011 on growing wealth in China, which overtook Germany to become Audi's largest market this year. Rising affluence has helped luxury brands outperform growth in the overall auto market, which the China Association of Automobile Manufacturers forecasts will slow to 5 percent this year from 32 percent in 2010.
Even so, high inventory levels for luxury brands are pressuring Chinese dealers to cut prices, J.D. Power said in a Sept. 11 report.
"While we expect luxury to outperform the sector, we are seeing early cracks in sales slowing and discounting," CLSA's Laprise said.
Audi's A6L, China's most popular premium sedan last year, sells for as much as 16 percent below the suggested retail price in Beijing's Fengtai district, according to cheshi.com, which started tracking car prices in 1999 and says it has provided consumers data for as many as 7 million cars.
Competition in the local passenger vehicle market reached its fiercest level this year since J.D. Power first started tracking sentiment in 2003, the researcher said on Sept. 29. Chinese buyers can choose from 471 models across 94 brands, and two in three consider more than one model before making their purchase, it said.
Softening demand has cut or eliminated waiting times for high-end models, and the biggest discounts are offered in large cities such as Shanghai and Beijing, according to cheshi.com. In September 2010, customers waited about three months for entry-level luxury sedans such as a BMW 3-series or Mercedes C-Class, according to the vehicle pricing guide. Now, there is no wait for these models.
"Competition in the industry is stiff, and the automakers are bringing in more vehicles," said He Guo Chang, a 50-year-old artist in Jiangsu, China, during a visit to a Mercedes dealership in Shanghai, where he was shopping for an SUV. "Luxury cars are cheaper, and there are vehicles readily available."
Nine years ago, He had to wait two months for his first luxury car, a 480,000 yuan ($75,000)Mercedes-Benz E-Class sedan, even after paying 80,000 yuan on top of the sticker price to speed up its delivery.
Price cuts have gotten steeper in the past year. Consumers can drive away with a C-Class sedan for 7,000 yuan less than a year ago, data from cheshi.com shows, even after Daimler introduced a revamped version in July.
"The market has slowed, but last year's huge rise was unsustainable," said Leon Tang, a 32-year-old executive general manager at BMW dealer Shanghai Baozen Auto Sales & Service Co. Even if growth may have peaked, luxury carmakers say they expect to reach their sales targets this year.
Daimler is on track to meet its goal and expects "considerable" market growth to continue, said Arnd Minne, a Beijing-based spokesman for the Stuttgart, Germany-based company.
"Mercedes-Benz has maintained its strong growth momentum during the first eight months of 2011 through sales of 123,590 units, an increase of 41 percent," Minne said in an e-mail. "For most of our key models, pricing has remained stable and consistent."
Martin Kuehl, a spokesman for Audi in China, said the carmaker doesn't have "substantial incentive programs" in the country. In the first eight months of 2011, the Ingolstadt, Germany-based company sold 196,534 cars in China, up 29 percent from a year earlier, he said.
Audi expects China deliveries this year to top 300,000, exceeding those of Daimler's Mercedes-Benz.
BMW is confident it will achieve record sales in China this year, said Lu Yi, vice president of sales at its local unit. "It is predictable that the Chinese car market will keep growing at a comparatively lower rate," Lu said in an e-mail. "BMW has maintained a strong and sustainable growth."
The Munich-based company raised its 2011 profit and sales forecasts on July 12, citing demand for its vehicles in markets including China. Sales figures for August nonetheless indicate a slowdown for the high-end carmakers.
BMW increased deliveries 6 percent for the month, compared with a 67 percent surge to 169,058 vehicles during the first eight months of the year, London-based Credit Suisse AG analysts Arndt Ellinghorst, Erich Hauser and George Galliers wrote in a Sept. 5 report.
Mercedes-Benz sales in China and Hong Kong grew 12.7 percent year-on-year in September, down from its 32.8 percent increase in the first nine months. Audi sales in China and Hong Kong rose 26 percent in August, according to the company, compared with the 29 percent rate for the first eight months.
Luxury vehicle makers will need to expand into less developed cities to tap the next wave of demand, as wealth in those regions grow and more developed cities restrict driving, said Bill Russo, a senior adviser at Booz.
"Luxury brands concentrated in areas where they have historic strength, not in the areas that are growing the fastest," Beijing-based Russo said. "If you look forward in time, you have to look to the lower-tier cities for growth."