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Audi 20-year China Dominance Tested by BMW, Mercedes

The Audi Q5 compact
The Audi Q5 compact sport utility vehicle is unveiled in Beijing, on April 19, 2008. Photographer: Nelson Ching/Bloomberg

Audi AG’s two decades of dominance in China may end as Daimler AG and Bayerische Motoren Werke AG step up their challenge in the world’s largest auto market.

BMW and Daimler’s Mercedes-Benz this week, in a departure from their strategies elsewhere, will roll out new models at the Beijing Auto Show developed specifically for Chinese customers as they seek to steal business from Volkswagen AG’s Audi.

Audi’s market share has slumped more than 20 percentage points in the last six years in China, a country it is banking on to reach a goal of leapfrogging BMW and Mercedes to become the world’s largest luxury carmaker by 2015. China is Audi’s No. 2 market and the only country where it’s the clear leader. Mercedes is the fastest-growing luxury carmaker in China.

“Mercedes and BMW have more upside than Audi in emerging markets, so it will be difficult for Audi to achieve its target,” said Arndt Ellinghorst, a London-based automotive analyst with Credit Suisse, who has “outperform” ratings on the three carmakers. The BMW and Mercedes brands have stronger appeal to wealthy consumers and their new models should boost sales at the expense of Audi, he said.

Mercedes will debut a longer E-Class in Beijing this week, its first model developed only for China, while BMW will show an extended 5-Series, the only car in its line-up built for a specific market. The longer vehicles are meant to appeal to wealthy Chinese buyers, who are typically chauffeured. Audi sells extended versions of three sedans in China and will show a new longer A8, first introduced in 2000, in Beijing.

Declining Share

Audi’s share of the Chinese luxury market dwindled to 42 percent last year from 66 percent in 2004, according to data from Global Insight. BMW, the world’s largest luxury carmaker, gained 7 percentage points to 23 percent over the same period, while Mercedes increased to 16 percent from 9 percent.

The drop in Audi’s market share came after Daimler and Munich-based BMW established joint ventures over the last seven years to build cars locally. Audi has been present in China for more than two decades thanks to parent Volkswagen, the first overseas carmaker in the country, and is the biggest provider of government cars, accounting for 20 percent of sales. Mercedes and BMW were added to the government’s purchase list last year.

Daimler’s Chinese sales more than doubled in the first quarter, making it the fastest-growing luxury carmaker in the country. The Stuttgart, Germany-based manufacturer, currently No. 3 in China, is targeting deliveries of more than 100,000 vehicles this year, up from 70,100 in 2009.

Local Production

Ingolstadt, Germany-based Audi intends to defend its leading position and has plans to sell 200,000 cars in China in 2010, up from 159,000 last year. BMW delivered 90,500 vehicles in the country in 2009.

With so much at stake, all three carmakers plan to increase local production. BMW said today it may expand production in China to include the X1 compact sport-utility vehicle and may triple capacity to 300,000 vehicles a year.

“It is realistic that we will need the capacity in the long term,” CEO Norbert Reithofer said in a statement. “China is and remains one of the most attractive auto markets in the world.”

Daimler, the world’s second-largest luxury automaker, currently has capacity to build 100,000 C- and E-Class models at a Chinese plant. “The potential of the Chinese market remains enormous, and our targets are correspondingly ambitious,” Daimler Chief Executive Officer Dieter Zetsche said last week.

‘Competitive Edge’

Volkswagen’s Chinese joint ventures are currently producing at “maximum capacity” and plan to invest 4.4 billion euros in new models and additional production capabilities by 2012, Volkswagen CEO Martin Winterkorn said today in Hamburg, adding that Audi gives the manufacturer “a key competitive edge.”

As the three German rivals slug it out, Volvo Car Corp.’s plans to grow in China with the help of new owner Zhejiang Geely Holding Co. may lead to price slashing for high-end cars in China, a market luxury carmakers count on to boost profit.

“If Volvo chooses China as its second home market, that’s probably going to trigger a price war in the premium segment,”, said John Zeng, an IHS Global Insight analyst in Shanghai, who says cars can sell for 50 percent more in China than in the U.S.

BMW’s 7-Series, with a 1,355,000 yuan ($198,500) base price, costs nearly three times the price of the U.S. version. Audi’s A4 in China is 39 percent more expensive than the U.S. starting price, while Mercedes C-Class begins at 348,000 yuan ($51,000), making it 51 percent more expensive than in the U.S., according to the carmakers’ Web sites.

Low Incentives

“In China a rather high pricing level is maintained due to consistently high levels of demand,” Audi spokeswoman Esther Bahne said, declining to comment in detail on Chinese plans ahead of Volkswagen’s full first-quarter earnings report. “Incentive levels throughout the premium market are low.

Geely agreed to buy Volvo for $1.8 billion from Ford Motor Co. on March 28. The Chinese automaker plans to invest $900 million as part of a turnaround of the unprofitable Gothenburg, Sweden-based brand. The expansion includes Volvo’s first Chinese factory and a target to sell 200,000 cars in the country within five years. Volvo now has 6 percent of Chinese luxury sales, according to Global Insight.

‘‘For many brands, achieving their profit aspirations in China in the coming years will be far more challenging’’ because of ‘‘hyper-competition’’ as automakers expand in the market, John Humphrey, senior vice president for auto operations at J.D. Power & Associates.

The research firm estimates that Chinese car factories will be producing at 66 percent of capacity by 2015, below the 80 percent level traditionally required to cover fixed costs.

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