Luxury automakers face China challenge

BEIJING: Luxury automakers including Mercedes-Benz, Audi and BMW are attempting to balance increasing competitive and price pressures with the need to maintain brand equity in China.

Dealers for Mercedes-Benz, the high-end German marque, are currently offering discounts reaching 25% for vehicles like the S300 sedan, figures from Cheshi, the online automotive data source, show.

Elsewhere, BMW's seven series and the AG model made by Audi are also on sale for 20% less than the typical price. Many cars also come with incentives, from free iPhones to complimentary luxury bags.

"This year's luxury-car discounting is the most I've ever seen," Scott Laprise, an analyst at CLSA Asia Pacific, told Bloomberg. "China's luxury car price premium is eroding."

Martin Kuehl, a China representative for Audi – which has a 30% share of China's luxury car market according to Morgan Stanley – told Bloomberg that it does not give out "substantial" incentives, but does give distributors freedom to reduce prices.

Estimates from IHS Automotive, the research group, suggest that growth rates of premium vehicles in China will reach 24% in 2012, a slowdown on the 34% logged in 2011.

Similarly, Credit Suisse, the investment bank, has predicted that Audi, BMW and Mercedes-Benz will see their typical profit margin fall from the 16-18% range today to 10-12% in 2014.

"The margins they currently achieve in China are not sustainable," said Arndt Ellinghorst, an analyst at Credit Suisse. "Price competition will intensify."

Among the rival companies seeking to enhance their local presence is Jaguar, owned by Tata Group, Cadillac, part of General Motors, Lexus, made by Toyota, and Infiniti, produced by Nissan.

In responding to this trend, Ellinghorst warned that manufacturers must be careful not to surrender too much ground on cost, or else they would damage brand equity.

"You'd rather lose a customer because of pricing because that is part of your premium heritage: people can't afford it," he said. "Protecting your brand should be the most important thing."

Ivan Koh, president of BMW China Automotive Trading, informed Bloomberg that the organisation has a "stable price" model in place, which it would seek to protect.

Data sourced from Bloomberg; additional content by Warc staff, 21 March 2012

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