China's Luxury Car Market Shake-Up: Second-Tier Brands Are Gaining Ground

The first half of 2017 was an exciting time for luxury automakers in China. Sales growth remained solid, but competition heated. Audi, the long-time luxury king in China, lost its throne to Mercedes-Benz and BMW. Less popular brands, the so-called “second tier” luxury carmakers, have been catching up, reporting explosive growth and gaining larger shares of the market. As China is on track to become the largest luxury car market in a few years, the fight to capture the growth opportunities is destined to be brutal. It has been a good year so far for almost everybody. Benz, the top seller of luxury vehicles in China, sold 304,000 cars in the first six months, 34 percent more than the same period last year. BMW followed closely with 293,000 cars and an 18-percent increase. Audi was the only luxury car company that reported a drop in sales. Due to a battle with its own dealers, the company’s sales decreased 12 percent. But as the company settled the dispute, it regained the top position in June and July. The second tier brands have done even better. Cadillac, which is using Donald Trump to reinvent itself in China, reported a 71-percent sales increase, and Lincoln achieved 97-percent growth. Most other brands managed growth between 20 to 30 percent. Li Yanwei, analyst at the China Auto Dealers Association, studied the results of 12 major luxury brands and found that their sales growth averaged 18 percent in the first half of 2017, even higher than last year’s 16 percent. The total number of luxury car sales exceeded 1.2 million, accounting for about 13 percent of the entire passenger car market, the highest in the last seven years. This was impressive considering the overall passenger car market was having difficulties. For the first time in over a decade, sales of passenger cars declined in the world’s largest passenger car market. This trend has been a reflection of China’s consumption upgrade. Although the overall car market stopped expanding at a peak, many consumers are moving up. Meanwhile, luxury automakers started to build more cars in China instead of importing most of their products. The prices became more competitive. “Although less Chinese would use cars to show off their social status nowadays,” said Bao Jun, analyst at iResearch, “most consumers still consider it as one of the most important consumption decisions and tend to emphasize on quality. There is strong preference on luxury brands.” Within the luxury segment, the three giants undoubtedly dominate the market. Audi, Benz and BMW together control about 70 percent of this market. Industry insiders used to call them ABB (Audi, Benz and BMW), according to their ranking, but it became BBA this year. Ever since Audi entered China in 1988, it has held first place, until January this year. The primary reason for the decline was that Audi enraged its own dealers by bringing in new dealers and threatening their partners’ profits. But some analysts also pointed to Audi’s deeper problems: it owes its popularity to the fact that it was the preferred choice of Chinese officials. As anti-corruption campaigns got serious in the past few years, Audi has been struggling to re-position itself. It also lacks allure with younger consumers in big cities. Now that Audi has made peace with its dealers, the company got back on the throne in June and July. But with Benz and BMW on its heels, the competition among the big three has become more intriguing. For luxury automakers with less prominence in the China market, the future seems to be even more exciting. Although they share only 30 percent of the market, they’ve been seeing much faster growth and gaining more market share year over year. Last year, their market share was 27 percent. Back in 2011, it was just over 20 percent. “These brands appeal to younger consumers or entry-level premium car buyers—a fast growing group,” said Bao Jun, “so they are growing even faster.” He told Jing Daily that many brands have been seeing large demand for cars ranging from 300,000 to 50,000 yuan (46,200 to 76,900), a high price range for regular passenger cars but relatively low for luxury brands. More consumers are moving up into this segment, and prefer luxury brands over mass market brands. As strong as their growth has been, it will take a few years for these brands to really catch up with the three giants. They started with much smaller bases after all. And the big three still have a huge branding advantage. But one thing has changed: the fast-moving and ever more competitive China luxury car market is no longer as stable as it used to be. Expect to see fiercer competition.

China's Luxury Car Market Shake-Up: Second-Tier Brands Are Gaining Ground

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Published September 14, 2017

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China's Luxury Car Market Shake-Up: Second-Tier Brands Are Gaining Ground