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Assessing the Premium Automotive Sector in China / Jeff Johns, Associate Director, Northstar Research Partners

by on February 25, 2015 in Lead Article, News you can use, Research

by Jeff Johns, Associate Director, Northstar Research Partners

What is normal for the Chinese economy – and for the Chinese consumer?  Can anyone know for sure?  On a macro level, headline GDP growth is dropping from the heady days of the mid-2000s, although this appears to represent a slow, steady shift to a more balanced economy based on greater domestic consumption.

Meanwhile, the growth of luxury products in the Chinese market continues to increase but in an ever fluctuating way.

LUXURIOUS CHALLENGES: CHANGING CHINESE TASTES

Luxury brands are facing increasing challenges and no longer does a respected, Western brand name and a big logo automatically result in big sales – as it might have in years past.  As my colleague Rhiannon Price recently noted (http://bit.ly/1CBd5oB), Chinese consumers are increasingly demanding less ostentatious bling and more subtle, personalised luxury.  The ‘sugar generation’ is starting to want more than the stereotypical hyper-branded Louis Vuitton handbag.

Additionally, these brands have been challenged by the recent crackdown on corruption amongst politicians and bureaucrats that is being overseen by President Xi Jinping.  No longer is it appropriate for local officials to show off their multiple Rolex’s or for politicians to accept the expensive gifts that might have been considered normal just a couple of years ago.  In fact, these can lead to investigations and even imprisonment.

For brands like Cartier, which have blamed a lack of sales growth in Q4 2014 on reduced Chinese demand for watches, and Burberry, which saw Hong Kong sales dropping at the end of last year, this is a huge concern.  They are facing harder to please consumers at the same time as their customer base may, in fact, be lessening.  However, there is one luxury sector seems to be more insulated from the downturn – the automotive industry.

CHINA AND THE CAR: A ROAD TRIP FOR WESTERN BRANDS

Western automotive brands are increasingly dependent on China as established markets, especially Western Europe, continue to stagnate.  IHS Automotive, a consultancy, has estimated that China contributes more than 40% of net profits for BMW and nearly 60% of profits for Volkswagen (which also owns Audi).  While brands such as Volvo or Jaguar Land Rover have come a bit later to the market, they are seeing strong sales rises.

However, growth in new car sales dropped in 2014 – and by quite a large margin.  In the first 10 months of 2014, sales grew 7% compared to the year earlier, half the growth seen during the same period in 2013.  But, similar to the drop in GDP, this overall number masks a much more complex picture.  Yes, premium automotive brands are also experiencing lower growth, but these brands – and Western brands overall – are proving highly resilient to domestic competition.

Home-grown cars simply haven’t taken off in China as many expected.  Despite expanding production, brands such as Geely, Great Wall and Chery continue to struggle with quality concerns and the overall market share of domestic brands is below 40% and actually falling.  While premium brands are seeing lower growth like the sector as a whole, sales are still increasing and there are three key reasons why this should continue.

STILL ON TRACK: REASONS FOR BRANDS TO BE HOPEFUL

First, brands such as BMW, Audi and Land Rover have been very intelligent in their model portfolio.  They have released smaller vehicles to go alongside the saloons long prized by top businessmen and thus offer a large range that can appeal to all sorts of consumers.  This has put these brands in reach of the middle class, who want to own a quality, high-end vehicle but cannot afford or socially justify a hugely expensive car.

Second, cars remain a very different segment from many other luxury areas.  While the corruption crackdown has an impact everywhere, the nature of a car purchase means it is more insulated from these compared to the buying of a Rolex.  Cars can be a necessity, not just a luxury, and the wider range of offers noted above further supports this.

Finally, the premium brands have been increasing domestic productions facilities in recent years.  Not only does this create more cost effective offers but also allows brands to make their locally produced cars more attuned to the Chinese market.  The Chinese consumer can have different priorities when it comes to a car – a strong desire for innovative storage space, for example – compared to the Western consumer, and domestic production can lead to quick market-specific features.

Against the uncertainty around the immediate future of the Chinese economy, all this indicates one key thing.  While premium automotive brands are unlikely to ever again see the huge sales growth of just a few years ago, this, as with GDP growth, represents more a maturation of the market than oncoming deterioration.  So long as they are increasingly attuned to the specific needs of the Chinese consumer, they will remain a desirable goal for consumers and a key source of revenue for the head office.  And unlikely to cause the type of headaches that Cartier or Burberry face.

 

by Jeff Johns, Associate Director, Northstar Research Partners

 

 

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