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Luxury Cars in 2015: Propects and Dark Horses

Date:02-16 10:02 Source:21ST CENTURY BUSINESS HERALD Authour:By He Fang, Wang Xin

Generally speaking, automakers have been quite rational in their market expectations, and sales targets are quite reasonable. It is generally predicted that the luxury car market will grow by only 5-6% this year, and by 10% at most.

On February 4 Daimler Group, the second largest premium luxury automaker in the world, released the rosiest financial statement in its history at its headquarters in Stuttgart. Thanks to better sales of passenger cars and especially to outstanding performance in the Chinese market, Mercedes-Benz created new records in units sold, turnover and EBIT by selling 2.9 million cars in total, up 12% YOY, and registered EUR13.5 billion EBIT and EUR8.9 billion net profits.

"It's easy to scale the mountain but hard to stay on top. Reality has proved 2015 a successful year for Mercedes-Benz." Dieter Zetsche, chairman of Daimler's board of directors who was asked when he would retire when the company was at a low ebb, offered this confident and cogent summary after long years of poor performance.

During his term, Mercedes-Benz have been overtaken as the world's No.1 luxury car first by BMW and then by Audi, but the company returned to second place in 2015 - although whether Zetsche will see the "2020 revival program" raise the brand back to the No. 1 spot remains to be seen.

Behind this satisfactory performance, special attention should be paid to China, which replaced the U.S. to become Mercedes-Benz's largest single marketplace in 2015 as the brand's sales here increased by 35% in the year, and by a factor of eight from 2008. In 2015, Mercedes-Benz launched 15 modified and new models here, two thirds of which are produced locally.

At the company's annual meeting, most questions to Zetsche were about China, and he remained confident about prospects in that market. "Many people have made gloomy judgments about the Chinese market, but we are confident in the Chinese auto market in 2016, and we believe the passenger car market here will maintain a growth of 8% or so." Matters worth the closest attention in the Chinese luxury car market in 2016 are the extent to which Mercedes-Benz will challenge the current structure of the tier-1 auto camp of Audi, BMW and Mercedes, the identity of the dark horse from the tier-2 camp, and whether the recession in the luxury car market will lead to fundamental changes.

Mercedes-Benz takes the lead in the top three German auto brands

Of the top three German premium and luxury car brands, Mercedes-Benz made a clean sweep in 2015. In the global market, it surpassed Audi to resume second place, and in China, it sold 363,000 cars, a sharp YOY sales growth of 35% despite the reduced growth rate in the general luxury car market here; China therefore surpassed the U.S. to become its largest single marketplace worldwide.

If the Chinese luxury car market had continued its robust growth of earlier years, Mercedes-Benz's growth would not have attracted quite so much attention, but this segment experienced a sharp fall in growth in 2015. In consequence, Mercedes-Benz's performance became especially eye-catching in comparison with its old competitors Audi and BMW, the former registering its first sales decline of 1.4% in 26 years, and the latter registering minor growth of 1.7% YOY. "Mercedes-Benz's aggressive progress now isn't attributable to a 'magical' management team, but because it has reached peak product performance after 3-4 years of poor results. It feels like all the conditions are in its favor right now," a luxury car brand dealer told 21st Century Business Herald.

In 2016, in the tier-1 camp of China's luxury car market we wait to see to what extent Mercedes-Benz will challenge the existing order. In 2015, Audi, BMW and Mercedes-Benz sold 570,000, 460,000 and 360,000 cars in China respectively, a difference of about 100,000 cars between each. Even if Mercedes-Benz registered another sharp increase in 2016, it would still struggle to surpass BMW.

But Mercedes-Benz's growth rate is not to be underestimated and it will get closer to BMW. At present, Mercedes-Benz's main sales contributors include the C, GLC and GLA series, all of which are in the early or middle stage of their life cycle and will maintain robust growth momentum in 2016. Nicholas Speeks, president and CEO of Beijing Mercedes-Benz Sales Service (MBSS), announced at Mercedes-Benz's annual meeting that the all-new Mercedes-Benz E Class will be launched in China in the coming fall.

"If the new-generation E Class can succeed and reach annual sales of 100,000 units in China, Mercedes-Benz will be back in the saddle in the real sense," an expert familiar with the luxury car market told our journalist. But the company still has a long way to go before it truly leads the field.

BMW still has the best sales balance in the global market, and it has occupied the first position worldwide for many years without being No.1 in either the German or Chinese markets. In contrast, Audi firmly occupies the first position in the German and Chinese markets, but is relatively weak in the American market, and the extent to which VW's emissions test rigging will affect Audi is yet to be seen.

When will Mercedes-Benz surpass its competitors in China and resume the first place in the global market? Hubertus Troska, member of Daimler board of directors and head of Greater China, told 21st Century Business Herald that "for Mercedes-Benz to become the world's No.1 again in 2020, the Chinese market is very important, but whether we'll be No.1 here doesn't affect whether we'll become No.1 in the world."

The competition among the top three German auto brands is focused on the premium luxury C-Class market that includes the Audi A6, BMW 5 Series and Mercedes-Benz E-Class, which is the same as the fully competitive American luxury car market where BMW, Mercedes-Benz and Lexus joust for the top spot. In China, the advantageous position of the locally-produced Audi A6 is under threat and its competition with the BMW 5 Series is heated. What's for sure is that the launch of the new E-Class will boost competition in this segment, and the share that Mercedes-Benz can take here is critical for the brand.

Of course the competitors will not sit around waiting to be picked off. Ge Shuwen, executive vice president of FAW-VW Audi Sales Division, said earlier that Audi will redefine its brand image with the A6 family in 2016. "If we can't do this with the A6, we won't be able to change the brand positioning of the A8 because of its small sales volume." At present, the A6 is the biggest contributor to the sales of all Audi products, and close to 50% of Audi users use this model, indicating how important it is to the brand.

When asked whether Mercedes-Benz can maintain its high growth in China in 2015, Nicholas Speeks gave a cautious answer. "The 35% growth in 2015 isn't very likely to be repeated in 2016 and we have no such expectations. The new-generation E-Class will only have been on the market for 4-5 months by the end of 2016, and we believe it won't have a significant impact until next year."

However, even if Mercedes-Benz's new E-Class makes a big difference, the new Audi A4 and BMW X1, which are both major contributors, will also be launched in China this year and will significantly increase the market share of the two brands. Therefore, how the Chinese luxury car market will be shared out in 2016 remains unknown.

Who might be the dark horse from the tier-2 camp?

Unlike the relatively stable tier-1 camp in China's luxury car market, the tier-2 camp is even more competitive and the different brands in this camp are closer to each other. Data from last year show that JLR remained in fourth position despite a sharp YOY sales decline, Porsche and Infiniti registered the highest growth although their overall sales were still small, and Lexus and Volvo were relatively steady. Under the leadership of Daniel Kirchert, Infiniti's former president of the China region, the brand's force has been greatly enhanced, but its current weakness is the narrow product line which cannot compete with the big three. Besides, dealer profitability in the afterservice sector is also low because of the small base number. "Going forward, Infiniti should improve its product line on the basis of brand force and turn that into buying power." The above luxury car dealer said that Infiniti needs someone who dares to take responsibilities and make decisions after the departure of Daniel Kirchert.

The main blow for JLR last year was from the March 15 Gala, or the annual CCTV program exposing fake and problematic products and services, and the overpricing of the Evoque, which is a typical case underlining the problem of localizing the production of luxury cars. Fortunately, JLR has shown better signs early this year in the course of a profound reorganization.

"JLR took some drastic measures in 2015H2, including cutting production, adjusting prices, and setting a more rational price for the Land Rover Discovery Sport, so that with the rebates we could break even," a JLR dealer told 21st Century Business Herald. The need to stop the decline this year is critical, but it is a major challenge.

The new models that JLR plans to bring to China this year will be focused on Jaguar, but it cannot yet compete with Land Rover yet in terms of product force. "JLR's priority this year is to stop the losses on locally produced models and maintain growth on the main imported models," said the expert mentioned before.

In the tier-2 camp, Lexus deserves a special mention. On February 2, it officially announced that it had sold more than 650,000 cars around the world in 2015, that sales in China were second only to the USA, and that they had contributed 12% to the brand's global sales. Moreover, Lexus overtook Volvo to rank fifth in China in terms of market share.

In 2016, "expansion" is the keyword for Lexus in the Chinese market. On February 2, the brand announced its three major goals this year, the most important of which is to sell more than 100,000 cars in China for the first time.

Price inversion lingers

Prospects for the Chinese luxury car market in 2016 do not seem very attractive. "The overall economic situation and the macro-environment are less than favorable for the luxury car market this year. Even if automakers have set rational sales targets, they may not be able to meet them because of oversupply and the considerable slump in demand." A high-level representative of an auto dealer told 21st Century Business Herald that in such circumstances, dealer profitability remains a headache.

Generally speaking, automakers have been quite rational in their market expectations, and sales targets are quite reasonable. It is generally predicted that the luxury car market will grow by only 5-6% this year, and by 10% at most.

The fundamental problem is price inversion. In foreign markets dealers' profit margins from car sales are 1-3%, but in China the manufacturer's recommended price differs wildly from the transaction price. For instance, a luxury car priced RMB900,000 will attract a final transaction price of RMB700,000, but automakers refuse to the lower the recommended price, so dealers have no choice but sell the car at a loss and make up for it with automakers' rebates. Automakers would rather provide massive rebates than lower the recommended price because they do not believe that price reductions will increase their market share, and think they will disrupt the pricing system of their product lines, affect their newly launched models, and have a negative impact on their brand.

This gives rise to the "automaker-dealer relationship with Chinese characteristics" in the luxury car market. "This is perhaps the most fundamental problem in China's luxury car market today." The person mentioned above noted that this problem will decide the extent to which China's luxury car market can achieve solid and healthy development in the future.

Luxury Cars in 2015: Propects and Dark Horses


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