When shopping for a new car last year, James Zhang considered a Mercedes and a BMW, then settled on Audi’s Q7 sport-utility vehicle because he said it suited his status.
“Audi makes people look mature and it’s more low-key,” said the construction-company executive from the Chinese port city of Tianjin. “If you drive a Benz or BMW, people may think you are one of those showy nouveau riche.”
After opening its first Chinese factory in 2006, Mercedes charged out of the gate and quickly won 22 percent of China’s luxury market. For the past two years, the company has been in a funk. Mercedes’s share today stands at 21 percent, versus 32 percent for Audi AG and 23 percent for Bayerische Motoren Werke AG, according to researcher LMC Automotive Ltd.
“I have the impression VW and BMW have put China as top priority and will for the next five to ten years,” said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler, who has a sell rating on shares of Mercedes’ parent, Daimler AG. “It’s not the impression I get at Daimler.”
In the midsize segment, China’s most popular luxury-vehicle category, deliveries of Mercedes E-Class sedans have tumbled 23 percent to 16,111 in the first five months of the year, according to data compiled by LMC. By comparison, sales of the competing Audi A6L have climbed 44 percent to 58,127 and BMW’s 5-series has gained 44 percent to 39,973.
Mercedes says the underperformance is temporary. The company is retooling its Chinese facilities for new models and a bottleneck in the production of the B-Class compact has limited deliveries.
“Some of our current models are experiencing their phase-out periods between 2011 and 2012,” Klaus Maier, CEO of Mercedes-Benz (China), said in an e-mail.
Daimler has lagged behind Audi and BMW in China because of its late entry and a limited distribution network, said Thomas Callarman, director of the Center for Automotive Research at the China Europe International Business School in Shanghai.
“With anything in China, the first mover gets more,” Callarman said. “People are just more familiar with Audi and BMW.”
Mercedes began manufacturing in China two years after BMW and 16 years after Audi. The company cranked up production in the first four years and by 2010 its market share had surged to 21 percent, just behind BMW’s 21.6 percent. Audi’s share that year tumbled 5.9 points to 31 percent, according to researcher IHS Automotive.
By 2015, Mercedes plans to double its annual production capacity in the world’s biggest automobile market to 200,000 vehicles annually, though that won’t be enough to keep up with its rivals. BMW plans to quadruple potential output to 400,000 and Audi is seeking to more than triple capacity to 700,000 by the middle of the decade, according to the companies.
Deliveries of luxury vehicles in China are on course to surge 80 percent over four years to 1.8 million by 2015 and overtake the U.S. as the top market for premium automobiles by 2017, Goldman Sachs Group Inc. estimates. China already generates the fattest profit margins for German luxury carmakers because customers in China typically purchase higher-end models than buyers in the U.S. or Europe do, Credit Suisse Group AG says.
Still, mounting competition, a slowing economy and rising fuel prices have led to a glut of cars in Chinese showrooms this year, forcing dealers to cut prices. Among luxury brands, Mercedes has been offering the steepest discounts, according to cheshi.com, a car pricing website.
During the first five months, Mercedes sales in China climbed 13 percent, lagging behind the 42 percent at Audi and 34 percent at BMW, according to monthly sales data from the companies.
With Europe’s auto market shrinking for eight consecutive months, Mercedes’s challenges aren’t isolated to China.
“Mercedes is lagging its German peers BMW and Audi on almost every metric,” Sanford Bernstein analyst Max Warburton wrote in a June 12 report.
Still, Mercedes sales in the U.S. increased 18 percent during the first five months of the year, keeping its lead there.
Daimler Chief Executive Officer Dieter Zetsche said at the Beijing auto show in April that the automaker was “on the offense in all classes” in China. The company, which began building the GLK sport-utility vehicle at its Beijing factory in December, plans to expand its SUV lineup, introduce the B-Class compact and add two refreshed E-Class variants in China. Within a few years, Mercedes aims to have dealerships in 170 Chinese cities, up from 90 now.
Status & Image
The company is also seeking to customize its designs to cater to Chinese tastes, said Olivier Boulay, head of the Mercedes design center in Beijing. For the Denza, a new electric-car brand Daimler is developing for China with BYD Co., the interior includes a tea thermos and airline-style reclining rear seats.
Mercedes also sells a long wheelbase version of its E-Class sedan in China, which gives rear-seat passengers 14 centimeters (5.5 inches) more legroom than the standard version sold in the U.S. and caters to demand for chauffeur-driven buyers.
“Status and image play a big role, so roomy and well-equipped interiors, especially the rear passenger area, are priorities,” said Boulay.
Marvin Zhu, an analyst with LMC Automotive, said he expects Daimler’s efforts to help get the company back on track in China this year.
“Everyone is rolling out new models, but it doesn’t depend on the number of models, it’s the competitiveness of these models,” Zhu said. “The start of local production of the GLK SUV will help spur the carmaker’s growth given the popularity of such vehicles.”
— With assistance by Liza Lin, and Tian Ying