I read a great article in the Australian Financial Review a week or so ago about the Auto Shanghai motor expo. This exhibition is held every two years with the other year having a Beijing based expo.
China became the worlds largest market during the GFC and has higher margins on every sale – and sales were 20,000,000 last year. So you can see that manufacturers really want to be in this market because they will make more per car than in other established markets. The Government is aware that their economy has been growing fast and this is causing social issues with a divide between very poor and very rich people. Who would have thought that a communist based country would struggle with the same problems as the rest of the world!
The Government has started a campaign against excess – they want their citizens to reflect on the heritage and stop showing signs of greed and wealth. This is having a knock-on effect with the world’s luxury manufacturers because they have been defining a special “price” for cars to enhance the value of their marques. Several have now been caught in investigations designed to stop this pricing.
With the slow down in the economy and the sight of excesses being frowned upon, the luxury manufacturers have seen a slow down in sales such that BMW has had to hand over many millions of dollars of rebates that they were offering to dealers that could never been earned.
Others like Jaguar are active in redefining new policies for their dealer network so that they can continue to have strong sales and a strong relationship with the dealer network. Jaguar Land Rover is even opening an online store on Alibaba’s Taobao website to help with pricing and ease of purchase of parts, used cars and accessories.
With growth slowing to single digits for new car sales, some like Mercedes-Benz have opened new local plants to cater to demand and provide better pricing – more in line with the actual economy which is possible if you have more local content.
Despite the desire by the Government to slow down the visible excesses of their rich citizens, the luxury manufacturers, who are mostly European, still believe that their vehicles will still sell well against the local mid market vehicles. They expect to outperform the industry sales average for several years to come and as more people enter the market, this is quite possible.
One thing the Europeans need to do, is to keep an eye on the whole economy. They are investing heavily this year and if the economy has a hiccup, it could damage their profitability and even cause some to pull out. I think the German manufacturers will be OK like Audi, BMW and Mercedes, however the more niche cars like Ferrari, Lamborghini and others could suffer first.
The world will be looking at China over the next few years because their economy will dictate how other countries manage their own economies and a true slow down could really affect Europe, Japan and the US.