Luxury Carmakers Look East for Profits
Makers of luxury autos are finding the mother lode in booming Asian markets, especially mainland China.
"The growth in China is unbelievable," said Ian Robertson, chairman and CEO of Rolls-Royce Motor Cars Ltd., which belongs to Germany's BMW (BMWG).
"Every time I go there—and I go there more and more—I discover new markets, big cities away from the coast, with millions of people. They would be in the first rank in other countries, and most Westerners have never heard of them," he said in an interview last month. For example, Rolls-Royce is adding its fifth showroom in China, out of only 80 worldwide, in the booming city of Chengdu, in central China.
J.D. Power & Associates expects sales for the entire Chinese market, including nonluxury brands, roughly to double in less than a decade, from about 8 million in 2007 to 16.1 million in 2014. Power forecasts luxury auto sales in China will more than double by 2014, to around 508,000. Demand for luxury cars is also growing in India, but from a much lower base, Power said. The company estimated combined sales for Audi, BMW, Mercedes-Benz, and a handful of other luxury brands in India were 3,598 in 2007, almost double 2006. (Like BusinessWeek, J.D. Power is a division of The McGraw-Hill Companies.)
In contrast, total luxury-brand sales in China were about 205,000 units in 2007, up 29% from 2006, according to the research and consulting firm based in Westlake Village, Calif.
A Boon for Buick
That luxury-brand total in China doesn't include Buick, even though consumers in China consider it a luxury brand. Buick is in decline in the U.S., but it is General Motors' (GM) best-selling brand in China, bigger even than Chevrolet.
Buick sales in China were 332,115 units in 2007, up 9% from 2006. Buick's U.S. sales were 185,791 in 2007, down 23%, according to AutoData, based in Woodcliff Lake, N.J. Buick's Chinese lineup includes the posh Buick Park Avenue, which is exclusive to China and considered big enough and prestigious enough there to be driven by a chauffeur. Parent GM Shanghai was the first foreign joint-venture automaker in China to sell more than 1 million units in a year, in 2007.
But European import brands, especially the German luxury brands, dominate the high end of the market. For instance, Audi (NSUG) sold more cars in China than in the U.S. for the first time last year. Audi has been in the China market longer than most other brands and produces locally most of the cars it sells in China. That includes the long-wheelbase A6L, another model that is exclusive to China.
Those factors gave Audi a dominating share of nearly 50% of luxury-brand sales in China in 2007, according to Power, but the competition is heating up. BMW, Bentley, Cadillac, Ferrari, Lexus, Mercedes-Benz (DAI), Porsche (PSHG), Saab, Volkswagen (VLKAY), Volvo, and other imports are also part of the growing luxury boom.
The rush in China has been on ever since the People's Republic of China joined the World Trade Organization at the end of 2001. The growth in auto sales also accelerated when the Chinese government lowered the required capital investment for new startups at the end of 2004, according to Wendy Cai, director at Chinese Services Group for Deloitte in New York. That made it much more economical to establish new-car franchises, she said.
"China's gross domestic product has doubled in the last five years. That really has propelled the whole economy," Cai says. According to the 2007 World Wealth Report from Merrill Lynch and Capgemini, China's population of "high-net-worth individuals" grew by 7.8% from 2005 to 2006, to 345,000. India's population expanded by 20.5%, to an estimated 100,000, the report said. The report defines "high net worth" as having assets of at least $1 million, not counting real estate.
Those new millionaires want to show they have arrived, Cai said. "In China, there are more domestic competitors at the entry and mid-level price points. They are coming out with some pretty decent cars. But when it comes to luxury, like Porsche, Bentley, Ferrari, it's similar to all other luxury goods. Consumers are looking for brand credibility. For that, for showing 'face' in China, for investing a lot of money, they want to own a brand that's easily recognized," she said.
Luxury sales have grown so much in China that executives from brands like Ferrari and Bentley were asked at the Detroit auto show in January (see BusinessWeek.com, 01/16/08) whether they would purposely keep their products scarce to keep them exclusive, or if they would produce more cars to meet the demand in new markets.
Amedeo Felisa, general manager of Ferrari, a division of Fiat (FIA), said Ferrari sales in 2007 grew about 8% in Europe and the U.S., vs. more than 50% in emerging markets. "What we are doing is to maintain the exclusivity of the brand. But if new people want to buy Ferraris, we have to be able to do it," he said. He looked as if he were stifling a smile at what he may have considered a naive question.
But it's a legitimate question, since Ferrari's current management has insisted for years that the brand learned its lesson in the late 1980s. The company built too many cars, and a speculative boom in prices for used Ferraris collapsed. For several years afterwards, Ferrari said it would limit production to around 4,000 cars per year, even though they could sell more. Partly to meet new demand in markets like China, the company has increased production for the last four years. In 2007, Ferrari sold about 6,400 cars worldwide.
Dr. Franz-Josef Paefgen, chairman and CEO of Bentley Motors, said he's not worried the Bentley brand could lose some of its luster as new markets come online and worldwide volumes grow. "Exclusivity is always an issue," he said in an interview in Detroit. "But you can't limit yourself to a specific number, for a very simple reason. What do you do with customers in emerging markets? Are you going to tell the Chinese or the Indian customer that they can't buy your product?" Paefgen asked.
"The biggest growth is in Asia and China. If those customers are asking for more cars, we will build them," he said.
Click here to see the best-selling Western luxury cars in China.