Mercedes Faces The Audi Challenge In China’s Compact Luxury Car Market – Forbes

Posted: Wednesday, May 21, 2014

Daimler AG‘s Mercedes-Benz unit aims to take back the global luxury sales crown from BMW, which it lost in 2005, by the end of this decade. In this respect, China will be crucial to the German automaker’s ambitions. The country, which constituted around 15% of Mercedes’ unit sales last year, saw volumes rise by 52% in the first quarter. China leads the global passenger car market, accounting for 28.6% of all passenger car registrations or sales last year. However, the rapidly growing economy still trails the U.S. in terms of luxury vehicle volumes. The premium vehicle market in China is expected to grow at a CAGR of 12% till 2020, outpacing the 8% annual anticipated growth in the country’s overall passenger vehicle market. This means that China will surpass the U.S. as early as 2016 in luxury vehicle volumes, and cross the 3 million annual sales mark by 2020.

According to our estimates, the luxury segment constituted around 7% of the overall vehicle industry in China in 2013, wheres the corresponding figure in the U.S. stood at around 10-11%. Increasing disposable incomes and rising proportion of high net worth individuals in China are expected to drive growth in its luxury automotive market. Demand for lower range premium vehicles in particular could increase at a rapid rate, as Chinese consumers are considered typically more price-sensitive than their western counterparts. The compact segment is expected to constitute 20% of the luxury vehicle market in China by 2015, up from around 11% in 2012. Mercedes will aim to grab a majority of this growth, in order to narrow its gap with the global luxury leader BMW. However, the biggest competitor for Mercedes in China is its other German compatriot Audi, which presently leads China’s premium sales.

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Audi’s China Dominance Could Continue With A3 Launch

Volkswagen’s Audi is the crowned leader in China, despite trailing BMW in terms of global sales. While Audi sold nearly 492,000 vehicles in the country last year, BMW and Mercedes-Benz managed 391,700 and 218,045 unit sales respectively. Audi also outpaced its competitors in terms of year-over-year volume growth. The automaker has gained from its acceptance as the official mode of transport for China’s top politicians. Although the government recently called for the use of home-grown vehicles for official purposes, Audi is already an established brand in the country. Sales might not be significantly hurt by this announcement also as around 90% of Audi’s sales are to private customers. The mid-size model A6L has been the best selling car for Audi in China, but the automaker is also eyeing further expansion into the smaller compact segment in the country’s luxury automotive market. Compacts are expected to grow by an impressive 50% this year, more than the luxury market and the overall passenger vehicle market in China, according to IHS Automotive.

The locally produced longer wheelbase compact saloon A4 is the second highest selling model for Audi in China, constituting one-fourth of China volumes for the automaker. What bodes well for the company’s ambitions in the lower-end premium segment is the introduction of the A3, a compact executive car, in the country. The locally manufactured A3 Sportback started selling in China in March, for which a new assembly plant at Foshan was built last year. The sedan version of the A3 will also be launched in the next few months. Audi’s production of both the A3 and A4 models in China itself will help evade the 25% import taxes, in addition to the value added tax and consumption tax, prompting a decline in model prices. The automaker also aims to increase the number of dealerships to 500 by 2017, up from 341 in 2013. While Audi remains the highest seller of luxury vehicles in China, its sales growth in the country lagged the growth rates of both BMW and Mercedes-Benz in the first quarter. But with the A3 models adding incremental sales from March onward, we expect the automaker to retain its lead in China and possibly sell around 540,000 vehicles this year in the country.

Mercedes Aims To Compete With Audi And BMW In China

Although Audi sold more than double the vehicles sold by Mercedes-Benz in China last year, the latter narrowed the gap in the first quarter. While Audi’s sales increased by 21% to nearly 125,000 units, Mercedes volumes surged 43% to almost 72,000. In November, Daimler had acquired a 12% stake in BAIC Motor, the passenger car division of its China partner the Beijing Automotive Group, to further its business in the Chinese automotive industry. Together with BAIC Motor, Daimler will invest around $5.5 billion in China through 2015, one-fourth of which would be dedicated to capacity expansion and opening new engine production facilities. Presently, just over half of the vehicles sold in the country are locally produced, and Daimler aims to increase this proportion in the coming years. Within the next five months, domestic production of the longer wheelbase C-Class, made specifically for the Chinese market, will begin in the country. The last generation C-Class, the strongest selling model series for Mercedes, was also locally produced in China. The new C-Class follows the launch of the compact CLA-Class last year. High demand for the new CLA-Class rose compact car sales (including A-, B- and CLA-Class) by 18% year-over-year to 93,700 worldwide in Q1 for Mercedes-Benz.

Daimler had around 260 dealerships in China a year ago, whereas both Audi and BMW had over 300 dealerships. Since then, Daimler added around 75 dealerships last year and aims to open around 100 new dealerships in China this year. These new dealerships will mostly be in Tier 3, 4, and 5 cities, in order to cater to the potential consumer base seated deep into the country. With comparable number of dealerships to that of Audi’s, coupled with increased local production and introduction of China specific models, Mercedes now aims to improve reach and availability, and compete with Audi on a pricing front in China. In particular, a stronger dealership network will help Mercedes reach a wider consumer base in low-tier cities, where demand for the cheaper compact luxury cars could be high and growing, supported by a rising number of high income households. Over 50% of additional growth in the number of mainstream households in China will be contributed by lower-tier cities, according to McKinsey. Mainstream households consist of potential luxury item buyers, which are most likely to purchase lower-ranged premium vehicles.

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