China’s Luxury Car Demand Booms; Mercedes Leads the Race

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Last year, the slump in China’s economy slowed down domestic demand, adversely impacted the growth of local companies. To put the economy back on track, Beijing undertook several measures, such as implementing interest rate and tax cuts.

China’s auto sector saw rapid growth in the post-measures period, especially in its luxury car segment. Over the past few months, demand for luxury cars has been growing significantly in the mainland, making the country a lucrative market for foreign luxury car manufacturers.

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Despite the slowdown in the world’s second-largest economy, the demand for luxury cars in January has jumped, with Mercedes taking the lead. Last month, sales of Mercedes in China soared to 42,671 vehicles, representing a rapid 52% growth year-over-year. In December 2015, the S-Class maker sold 37,771 cars in China, showing a 13% month-over-month (MoM) incline. The massive growth in sales was attributed to strong demand for the company’s premium luxury brand, S-Class Saloon.

The rapidly growing demand for luxury cars in China reflects improved purchasing power of Chinese consumers. Still, despite impressive growth in the mainland, luxury car manufacturers believe that a slowdown in the country’s economy has slightly hit demand for luxury cars.

In the first half of 2015 (1HFY15), rising competition in China stagnated growth of car manufacturers. The situation only worsened in the second half, as the economy cooled down even further, following the decline in the manufacturing sector and the mid-summer stock market crash. Last year, China’s GDP growth rate fell to 6.9% – its lowest since 1990 – owing to sluggish domestic demand in China.

Rising competition, coupled with the slump in China’s economy, decelerated growth in the world’s largest automobile market. In order to offer support to the auto sector, Beijing reduced purchase tax to 5% on engines with capacities of 1.6 liters and below. While this move helped the overall sector pick up the pace during the last quarter of 2015, it particularly assisted the small car segment, which accounts for nearly 60% of the total market.

Analysts believe that policies like these encourage consumers to buy when tax rates are relatively relaxed. They anticipate that the demand in auto sector would remain intact this year, but would decline in 2017 as policies of this kind always have certain time constraints.

In January, sales of BMW and MINI in the mainland increased to 43,441 units, indicating a modest 8.4% year-on-year (YoY) growth. However, the 7-Series maker sold 463,736 vehicles in 2015, showing an insufficient 1.7% YoY growth in China.

In 2015, Audi AG recorded a 1.4% YoY drop in sales as they came in at 570,899 vehicles. Last month, the company saw a modest growth of 6.2% YoY, as sales increased to 54,402 vehicles, driven by Audi Q5, a mid-size Sports Utility Vehicle (SUV).

Over the past few months, SUV sales have been picking up the pace as Chinese consumers now prefer bigger and higher-riding vehicles. But it is expected that in the coming months, foreign SUV makers would get hit, as local Chinese manufacturers are gearing up to launch cheaper SUVs in the Chinese market, further intensifying competition.

General Motor Company’s (NYSE:GM) Cadillac sales in China saw a decent jump of 16% YoY in January, as the automaker sold 8,337 units, making it the sixth consecutive month of recording double-digit growth. However, in December, Cadillac sales decelerated to 8% MoM, as the company sold 9,087 vehicles.

Analysts believe that the sharp increase in sales of luxury cars in China during the last quarter of 2015 might be a signal that the stock market is about to recover. During the mid-summer market crash last year, nearly $2.8 trillion were wiped off the index, squeezing investors’ capital. It is quite possible that stability in the equity market during the second half of the year has fueled demand for luxury cars in China, as investors recovered from early losses.

By: Faraz Haleem Courtesy ChinaBusinessNews.com

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