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BMW, Mercedes Outpace Rivals as China Clamps Down on ‘Hedonism’

Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI) are increasing their sales growth in China at more than nine times the pace of the wider industry, defying the nation’s attempts to unclog its roads and discourage “lavish lifestyles.”

The world’s two biggest luxury-car brands sold a combined 102,497 vehicles during the first quarter in the world’s largest auto market, an increase of 76 percent from a year earlier. Industrywide growth slowed to 8.1 percent, the weakest performance since the first quarter of 2009.

Sales of models including BMW’s 296,000-yuan ($45,300), 3- series sedan surged even after China ended tax breaks and subsidies that supported car-buying, and Shanghai and Beijing restricted vehicle licenses to ease congestion. Beijing banned outdoor advertisements promoting “hedonism, lavishness and the worship of foreign things” starting April 15.

“We see an emerging wealthy and upper middle-class population,” said Ray Tsang, a Shanghai-based analyst at consultant Bain & Co. “They are optimistic about their future, willing to spend more on buying such cars.”

Luxury-car sales in China will rise 20 percent this year after surging 48 percent to 459,000 vehicles last year, according to industry researcher J.D. Power & Associates. Growth in the overall passenger-vehicle market may slow to about 12 percent from 37 percent, it estimates. Automakers are set to showcase their models at the Shanghai auto show, which opens to the media tomorrow.

Demand Outstrips Supply

“Demand outstrips supply for our vehicles,” said Klaus Maier, president and chief executive officer at Daimler’s Mercedes-Benz business in China. “With our factories at full swing in Germany, we are increasing production capacity here.”

The rising numbers of wealthy Chinese are helping high-end automakers boost sales even as overall vehicle deliveries may miss an initial target of 10 to 15 percent growth, compared with a 32 percent increase in 2010, the China Association of Automobile Manufacturers said April 10.

The nation’s economy grew 10.3 percent in 2010, the fastest pace in three years, as rising exports and consumption helped it outstrip growth in other big car markets such as the U.S. and Japan. China’s economy is expected to grow 9.6 percent this year, the Asian Development Bank said on April 6.

China’s Gini coefficient, a measure of income distribution, has climbed to almost 0.5 from less than 0.3 a quarter century ago, indicating the nation’s wealth gap is widening, according to Li Shi, a professor at the School of Economics and Business at Beijing Normal University.

’Too Powerful’

“Driving a Benz reflects a buyer’s personal success and taste,” said Wang Jun, a 42-year-old Beijing-based businessman, who drives a Mercedes Benz S-Class 320 sedan. “The brand is too powerful to resist.”

Mercedes sales surged 86 percent in the first quarter to 43,991 vehicles, the company said. The Stuttgart, Germany-based automaker will unveil its A-Class concept model at the Shanghai auto show, which opens to the public on April 21.

Munich-based BMW increased vehicle sales in China 71 percent to 58,506 during the same period. Volkswagen AG (VOW)’s Audi, the biggest premium brand in China, delivered 64,122 cars, an increase of 25 percent, according to the company.

The three German brands may beat forecasts for 2011. Audi has said it expects sales to rise 11 percent to 280,000 in China this year, while Mercedes projects growth of 15 percent. BMW predicts a “double-digit” increase in 2011.

China will start curbing vehicle ownership in cities with more than 10 million people from 2011 to 2015 to ease congestion, China’s Economic Observer reported March 31. The government has also passed a new law requiring vehicles with larger engines to pay more taxes, starting next year.

‘Aristocratic Lifestyles’

Beijing’s government said Dec. 23 it would set a monthly quota of 20,000 new vehicle licenses in the Chinese capital.

The city’s ban on advertisements such as posters for automakers or LVMH Moet Hennessy Louis Vuitton SA handbags won’t slow growth, said Yale Zhang, managing director at AutoForesight (Shanghai) Co., an automotive consultant.

Beijing’s Administration for Industry and Commerce said in a statement on its website in March that the ban would also cover ads that are in “poor taste,” advocate “aristocratic lifestyles” or contain vulgar language.

“Advertising helps competitors eat into each other’s market share, but it doesn’t hurt the overall market demand,” Zhang said. “Car demand depends on people’s needs and wants.”

Higher inflation and the end of subsidies for smaller models in January are having a greater impact on the auto industry as a whole than measures designed to slow sales of more expensive vehicles, Zhang said.

Wealth Gap

“If the economy keeps growing, China will soon overtake the U.S. as the world’s largest luxury car market,” Zhang said.

Sales of luxury items in China may more than double in five years to 180 billion yuan in 2015 as demand increases for brands including Louis Vuitton, Hermes and Prada, McKinsey & Co. wrote in a March report.

Among cheaper brands, sales at Chinese automakers that benefited the most from government subsidies are falling. Deliveries at BYD Co., the Shenzhen-based automaker backed by Warren Buffett’s Berkshire Hathaway Inc., fell 28 percent through March. Its 56,800 yuan F3 sedan was the best-selling passenger car in China last year.

Deliveries of Geely cars climbed 14 percent in the first quarter to 117,698, Zhejiang Geely Holding Group Co. said on April 12.

General Motors, Toyota

General Motors Co. (GM), the biggest foreign automaker in China, raised sales in the nation 10 percent in the first quarter. GM is aiming for growth of 10 to 15 percent this year, Kevin Wale, head of the Detroit-based company’s Chinese business, has said.

Toyota Motor Corp. (7203), the world’s largest carmaker, sold 207,800 vehicles in the first quarter, an increase of 16 percent.

Audi, which will introduce the new Q3 compact sport-utility vehicle at Shanghai show that runs until next week, is “very confident” it will maintain its market leadership in China, Dietmar Voggenreiter, president at the carmaker’s China venture, said in an e-mail this month. The Ingolstadt, Germany-based brand’s early entry into the mainland and its status as the choice sedan for government officials helped it gain the biggest share of the local luxury-car market.

BMW will unveil a China-made plug-in hybrid version of its 5-series sedan and a new 2-door sports car at the Shanghai show, it said.

Kobe Bryant

To maintain their sales growth in China, the German luxury- car brands are also introducing smaller new models aimed at luring younger buyers.

Daimler hired National Basketball Association star Kobe Bryant in February to promote its Smart brand small cars. While the typical Mercedes buyer in China is about 40 years old, its smaller A-, B- and C-class sedans that tend to be bought by younger drivers accounted for more than a third of its sales last year, the company said.

BMW introduced its smallest 1-series to the company’s lineup in China last year, and Toyota’s Lexus marque is targeting younger drivers with its CT200h hybrid, which it will add in China later this year.

“The luxury portion of the China car market is steadily growing and we’ve invested a lot in promoting the brand and improving after sales service in the past years,” Wu Xiao, chairman of Brilliance Automotive Holdings Ltd., BMW’s Chinese partner, said in Hong Kong last month. “I expect our growth to far exceed our competitors.”

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net

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