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China starts driving in style

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Interesting Article:)

Wayne Shen wants his next set of wheels to turn heads. That means he wants a car that's an engineering marvel and snazzy enough to convince others that he's a man of discerning taste.

The 25-year-old Beijing advertising copywriter is quick to acknowledge that the Volkswagen Santana he has been driving doesn't quite fit the bill. So now he's looking to upgrade his image with a BMW 530.

The $80,000 sedan offers innovations such as variable valve timing and GPS navigation. And its sleek design is sure to let people know Shen has arrived. "Both the quality and appearance are great," says the fashion-minded Shen. "BMW is a famous brand that makes me feel excellent while driving."

Chinese customers such as Shen are making BMW and its luxury rivals feel pretty excellent these days, too. The mainland economy continues to expand ferociously -- first-quarter gross domestic product growth hit an annual rate of 11.1% -- as do incomes, especially in prosperous cities such as Beijing, Shanghai, Guangzhou, and Shenzhen.

Status-conscious young professionals and entrepreneurs are feeling flush (Shen plans to pay cash for his bimmer) and are ready to spend big for high-performance engineering, brand power, and design.

Blanketing the Country

The urge to splurge on luxury represents a new phase for China's car industry. While overall auto sales in China are surging, the high end of the market is expanding twice as fast as the industry average. For foreign automakers with prestige brands, that offers some respite from the ferocious price competition sweeping the industry.

China is the world's second-largest -- and most dynamic -- auto market. The 20 biggest car companies now have production facilities on the mainland, and last year passenger car sales surged 30%, to 5.1 million units, as locals and foreigners together released more than 100 new models. Citigroup forecasts growth of 25%-plus this year as an estimated 60 new models hit the market.

But all that competition has put pressure on profit margins. They have fallen by more than half, to 5%, in recent years, according to the Beijing-based State Council Development Research Center.

Mainland automakers such as Chery, Geely, and Dongfeng have announced price cuts ranging from 4% to 10% on compacts and sedans during the first quarter of 2007. Average vehicle prices fell about 7% last year, and that trend is continuing.

Money in My Pocket

Margins for luxury-branded offerings continue to run more than 10% for many models. Luxury car prices, meanwhile, held steady in 2006, and foreign players such as Volkswagen, General Motors, Toyota Motor, and Honda Motors are counting on high-end models to keep earnings robust.

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It's no surprise, then, that a caravan of new luxury nameplates is arriving. Wealthier consumers are in a buying mood, and there's continuing sizable demand from China's political elite and executives at state-owned enterprises. Spend any time in Beijing, and you'll likely see a black A6 from Audi, the country's best-selling luxury brand, ferrying a government bigwig to his or her next appointment.

How far can the market grow? Sales of luxury vehicles, both domestic and imported, will likely explode from about 177,000 this year to 800,000 in 2014, or roughly 6.5% of the overall market, says John Bonnell, an analyst with Automotive Resources Asia, a division of J.D. Power & Associates.

Driving that growth is the increasing sophistication of affluent Chinese car enthusiasts.

"They want to buy the very best prestige luxury brands," Bonnell says.

Limo-Size Me

One of the most aggressive of the foreigners is General Motors. The U.S. company has had big success in China -- in contrast to its woes at home -- and expects to nearly double its production there by 2010.

Key to GM's push is its fabled Cadillac brand, which made its mainland debut in 2004 with the CTS sedan ($51,652), the XLR sports roadster ($166,000), and the SRX sport-utility vehicle ($80,204). Its $140,000 Escalade SUV arrived in 2006, and this year a locally produced version of its SLS will join the mix. China is expected to become Caddy's No. 2 market outside the U.S. within a few years.

Cadillac's 34 dealerships in China aren't just trying to introduce consumers to the brand. The outlets are "an opportunity to experience the luxury lifestyle," says Karen Rafferty, Cadillac brand director in China. "We have wine and cigar bars in all of our dealers."

GM has also modified its SLS for unique quirks in the market. Chinese luxury buyers typically have drivers, so they prefer longer versions of high-end cars, which allow for a roomier back seat. The SLS, which has been stretched 10cm, comes with video screens, massage seats, and heating controls for passengers in the back.

Like GM, DaimlerChrysler has ambitious plans for its Mercedes-Benz brand, which already is a big winner. In early April, Mercedes started selling its high-performance AMG lineup on the mainland.

These monsters, which come with powerful engines, aren't cheap. The S65 AMG is a high-octane production extension from the Mercedes S-Class and costs about $385,000 in China. For luxury buyers interested in a muscular V-8 engine and off-road capabilities, there is the Mercedes-Benz G 55 AMG ($245,000) and the ML63 AMG, an SUV that starts at about $220,000.

Japan Jumping In

The company's China push is paying off. The mainland is the No. 2 market for Mercedes' best-selling S-Class. And Ulrich Walker, DaimlerChrysler's chief executive for Northeast Asia, thinks sales will stay strong, given the "increasing desire for individuality and personal expressiveness" among well-off mainland buyers.

Walker is encouraged that the average Mercedes customer in China is in his 40s, vs. the typical 50-plus in Europe and the U.S. Chinese buyers also tend to pay in cash, though Daimler has started to offer financing.

Japanese manufacturers are jumping in, too. Last fall, Honda introduced its Acura RL and TL sedans to China, while Toyota is importing Lexus ES350 and IS300 high-end vehicles.

In July, Nissan will launch its Infiniti luxury brand with the G35 sedan. Nissan plans to open about 10 Infiniti dealerships by yearend, starting with showrooms in Shanghai, Beijing, and Shenzhen.

Nissan sees a growing sophistication among Chinese buyers. "China's emerging affluent classes have quite a similar profile to Infiniti customers in Russia or the U.S.," says Nissan Pice-President Simon Sproule. "They tend to be more design-driven."

Other prestige foreign brands are on a joy ride in China. Volkswagen's Bentley Motors forecasts that sales will double in 2007, to 246 units. Porsche, which showcased eight models at the recent Shanghai Auto Show, has seen its annual sales roughly triple since 2005. And Rolls-Royce is enjoying a growth spurt.

Some wealthy businesspeople have taken to ordering customized versions of the Rolls-Royce Phantom sedan with extras such as drink coolers and backseat DVD players. These extras, together with China's high import duties, drive the cost to well over $1 million for buyers. Even so, Rolls-Royce sales shot up 60% in 2006.

Look Who's Going Premium

Even automakers that don't yet have a luxury brand are hoping to establish themselves as high-end players. Hyundai, for instance, is already one of the top five foreign brands in China, thanks to its Elantra and Sonata sedans and the Tucson compact SUV.

Now the company hopes to take its game into the premium segment. In February, Hyundai began selling the imported Veracruz sport-utility vehicle. The $52,000 SUV is fitted with a V-6 engine and a six-speed automatic transmission.

Next year the Korean company plans to start selling its first rear-wheel-drive sedan, code named BH, which it hopes will compete with the BMW 5 Series, Lexus ES, and Mercedes-Benz E-Class. The BH will be followed by a sports car and other luxury vehicles, and Hyundai plans to increase its dealerships from 31 to 44.

"We see a huge chance to establish ourselves as a premium brand in China," says Koo Young Key, chief representative at Hyundai's sales and marketing operation in China. With so many Chinese looking to buy high-end cars, those new dealerships ought to be plenty busy
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