Rich in China? Buy an SUV, pay cash

Luxury auto segment – despite cooldown – from great to good

Many European and American car manufacturers – particularly BMW, Mercedes-Benz and Audi - have until now been able to compensate losses in their home markets with strong sales in China. Expensive luxury models and SUV were selling in large numbers in recent years. The growth in the luxury auto segment in China is experiencing a cool down, due to the slowing down of the economy. 

According to a report by the investment firm Deutsche Bank, premium car sales growth rates consistently outpaced the broader Chinese passenger car market in the past two years. “The three German players (Mercedes-Benz, Audi and BMW, ed.) have reported an average monthly 33 percent growth spread in 2010 and 2011. That spread has declined dramatically since April 2012, since when it has stood at just 3 percent."

As a result of the decreased demand, a pricing war has broken out between Germany's big three luxury automakers in which Chinese buyers of the top models enjoy double-digit discounts. "Since the end of last year, luxury car prices have fallen more than 10 percent across all brands," says Michael Dunne, president of Dunne & Co., a Hong Kong-based automotive business consulting firm.

300,000 millionaires

The market for expensive cars in China still large. There are more than 300,000 millionaires in U.S.-dollar terms. According to the latest ‘rich list’ made public in China, more than 500 people had assets of more than $100 million. SUV’s are still immensely popular among those who can afford one. Rich Chinese have bought around 300,000 luxury SUVs this year, at around $80,000 per car. A strong product is the imported Porsche Cayenne starting at $147,000. For the less-rich the assembled-in-China Audi Q5 is on sale for about $72,000.

Pay in cash

More than 90% of luxury SUV purchases are settled in cash, according to research conducted in 2011 by J.D, Power and Associates. Not surprisingly, nearly every luxury automaker doubled its efforts to offer more SUVs. At Mercedes-Benz, SUV sales account for one-third of total sales of its cars in China. Mercedes-Benz sold 848 SUVs in China in 2005. Last year, they sold 54,016, an increase of 84% over 2010.

Challengers like Cadillac, Lincoln, Infiniti and Lexus are working hard to get a piece of the action, inside or outside the SUV-segment. Ford Motor Company announced that it will launch the Lincoln brand in China in the second half of 2014.

Meanwhile, wealthy car buyers are ready for the next step: super luxury SUVs. Like Lamborghini’s striking concept SUV, the Urus, as shown on the Beijing Auto Show this year. At the same show, many Chinese visitors looked in awe at the new concept SUV from Bentley unveiled in Geneva last month, the EXP 9 F. Sales of luxury cars are not growing in double digits every year, but the western brands are still doing quite good. Ian Robertson, BMW’s head of sales, said: “China has definitely slowed somewhat but the market has moved from extremely strong growth to just good growth.”

What is the most striking example you have seen of ‘showing wealth’ in China?

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