Luxury car brands see downturn in China

China’s car market, the largest in the world, was so hot a couple of years ago that someone looking to buy a BMW 5-Series sedan had to pay as much as one-fifth more than the listed price.  But a sharp slowdown in sales growth since last year has left a supply glut, hurting luxury brands as well as mainstream nameplates, both foreign and Chinese. Economic growth in China cooled to a three-year low of 7.6 percent in the second quarter.

BMW dealership China

Interviews with several car industry officials, as well as executives at three midsize and large dealer groups, including one that operates more than 100 dealerships across China, helped gauge how the slowing economy is affecting the industry. The dealers did not want to be named for fear of upsetting the automakers they work with. Car company executives declined to be named because inventory and discounting information is not public, as it is considered competitive and speaks directly to how much money they are making or losing.

BMW dealerships in Guangdong Province, an export hub in southern China that has been hurt by the euro zone debt crisis, have as much as 90 days’ worth of stock, more than double normal, and the 5-series now carries a discount of 25,000 renminbi, or $3,900 — 5 percent of list price, dealers say.

For dealers that sell Mercedes-Benz, a rival German luxury brand, there is similar pain. “Our parking lots are full to the gills with unsold cars,” said a senior executive for a chain of Mercedes dealers. “We cannot go on like this.” He said that many Mercedes dealers across China had 75 to 105 days’ worth of stock and that his dealerships had to offer discounts of almost 30 percent to tempt customers to buy the flagship S-Class 300 sedan.

Declines in profitability have meant carmakers and dealers are scrambling to diversify their revenue sources. Some are invading rivals’ territory to try to take market share. Others are developing used-car markets and high-margin services like custom parts and maintenance and repair.

The inventory problem is in many ways a turning point for a market where carmakers and dealers were able for much of the past decade to make as much as 90 percent of their profit from the sale of new cars. And in time, the car market may become more like that in the United States, where most of the money is made in financing, insurance and maintenance.

Chinese brands began hurting last year, when industrywide car sales volume growth sputtered to 2.5 percent, compared with 32 percent in 2010 and 46 percent in 2009, when tax and other government incentives bolstered demand. Most of the incentives have now been canceled.

Sales weakened for upscale foreign brands this year. In some cases, the inventory problems seem to have been exacerbated by aggressive sales goals, industry executives say. BMW, for example, is aiming to increase its annual sales volume in China 25 percent to 30 percent this year.

Asked about the inventory levels cited by some of its China dealers, BMW said its average inventory levels were in a reasonable range, although the situation might be different at some dealers. Mercedes-Benz, which also has double-digit sales targets for this year, said its inventory throughout China was on target and that generally discounts did not go beyond a target range.

Some luxury brands are at a disadvantage because they lack domestic production. The Nissan Infiniti, for example, faces import taxes, as well as unfavorable currency rates because of the strong yen. “At least the Germans locally produce some of their cars in China, and they have a cheap euro,” said a Nissan executive in Tokyo. “For us, we lose money with most products every time we make a sale.” This is likely to remain the case until Nissan begins production of some Infiniti cars in China in 2014, the executive said. He declined to be identified, as inventory and profitability levels are not usually made public.

Nissan’s recent plan for a $785 million manufacturing plant in the northeastern port city of Dalian is a case in point — it would be in direct competition with Volkswagen and Toyota, which also have factories in that area. The move is a tit-for-tat response to Volkswagen’s attempts to expand sales in southern China, where Nissan and other Japanese automakers are strong.  Nissan and Daimler, the parent of Mercedes, are also putting much effort into developing used-car businesses, which so far have had little input from automakers in China.

adapted from New York Times