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03. June 2013

China’s luxurious automotive transformation

Chinese millionaires’ appetite for ultra-luxury cars will drive China to be the largest ultraluxury car market by 2017

Global management consulting firm A.T. Kearney has conducted a China market study on ultraluxury cars with a retail price of 300,000 USD and above. While 2012 was overshadowed by a nearly 14 percent decline in sales as a result of the international and domestic economic crisis and resulting low confidence among China’s millionaires, A.T. Kearney projects China to become the largest ultra-luxury car market by 2017. The main reason behind this expected growth: The key customer group, Ultra High-Net Worth Individuals (UHNI), is expected to grow as China’s economy recovers modestly in 2013 and likely stronger beyond. UHNI are more optimistic about their future business and investment opportunities and resulting personal wealth growth.

Despite the setback in the Chinese economy in 2012, China has become the third-largest ultra-luxury car market in the world after North America and Europe due to its high annual growth of approximately 35 percent since 2005. A.T. Kearney has interviewed luxury car experts and luxury car dealerships across severalChinese cities to predict the future sales growth in this rapidlytransforming market segment. Study author Dr. Stephen Dyer remarks “In 2005, flagship models of well-known German premium brands such as Mercedes-Benz S600 L, contributed the majority to ultra-luxury car sales but since 2009 numerous luxury car brands msuch as Aston Martin, Bentley and Lamborghini entered the Chinese mmarket and were rewarded with a doubling of sales year-after-year mbefore the first major downturn came in 2012”.

Key growth driver: Ultra High-Net Worth Individuals (UHNI)

The sales growth in the Chinese ultra-luxury car market has been driven by the growth of High-Net Worth Individuals (HNI), which has tripled from 2006 to 2011 and created a total of one million potential buyers for ultra-luxury cars in 2012.

The HNI group consists of millionaires with a net worth of at least 10 mn CNY. Approximately 63,000 (6 percent) of all HNI, the so-called Ultra High-Net Worth Individuals (UNHI), are considered as the most relevant buyers of ultra-luxury cars, typically having assets of more than 100 mn CNY. Today, approximately 87 percent of all Chinese millionaires can be found in provinces and mega cities in the North, South and East of China.

A high share of HNI and UHNIs buys premium or ultra-luxury cars as a first car for themselves or family members. This is in contrast to Western countries, where a high share of millionaires prefers to remain more low key when it comes to first car purchases.

To satisfy the fast growing appetite of these “Baofahu” for luxury goods, ultra-luxury car brands are now establishing new dealerships min more remote provinces and lower tier cities where the concentration of millionaires is expected to grow. Rolls-Royce, for m,instance, recently established new dealerships in Xi’An, to serve its new customers who made their fortune mainly with mining and mconstruction businesses. In the cities Wenzhou and Ordos, both tier3 mcities with lower GDP per capita, first luxury car brand dealerships have been set up as well.

However, for the next years, the major focus for planned new dealership openings will still be on tier-2 cities min China, the provincial capital cities in China. “Today, only half of mChina’s 32 tier-2 cities has luxury car brand dealerships. Through m2015, we expect luxury car brands to open dealerships in additional m5-10 tier-2 cities such as Changchun, Jinan, Nanchang, leading to a m70-80 percent coverage of all tier-2 cities”, Andreas Graef predicts, mco-author of this study. “These cities will have surpassed the typical mthreshold indicator of 70,000 CNY GDP per capita and become mattractive candidates for luxury car brands to open new dealerships.”

Study participants expect high sales growth through 2017

The general sales expectation among automotive dealerships of luxury car brands is still pessimistic for 2013 but positive for the coming years. Graef remarks: “Our study participants forecast 2013 to be a turning point in the economy with no significant or only slightly positive sales growth depending on the vehicle segment and brand”. For the mid-term development, the interviewees expect an annual growth rate of 16 – 20 percent throughout 2017. “The key reason for the mid-term sales growth is that the UHNI segment is expected to grow by 8-30 percent depending on the region in the next years as a result of expected GDP recovery. The number of UHNI in high-GDP areas in the East, South and North of China is expected to grow by 8-12 percent, while UHNI of more remote and low-GDP areas in Southeast, Northeast and Northwest are expected to grow by 20-30 percent”, according to Dyer.

A.T. Kearney’s study participants predict a significant gain in market share for planned SUVs such as the Bentley Falcon and 4-door Coupes such as the Porsche Panamera. Graef explains: “The last years have shown that the Chinese car buyers’ taste is very similar to that of North American buyers with a preference for comfortable mand large SUV body style cars. Since premium SUV models such as mthe Audi Q5 have seen high demand with extra cash payments of mwaitlisted buyers for quicker model delivery, our study participants mbelieve the SUV body style to be the best selling body style for luxury car brands in China, once these SUVs will become available”.

Challenges for luxury car brands despite high sales potential However, to capture the high sales growth potential, luxury car brands have to master the diverging customer profiles and customer needs across geographies with the same product that will continue to be assembled in a single plant, due to necessary economies of mscale. So far, product development has focused on the established Western luxury car buyers of North America and Europe. With China mtransforming quickly into the leading global luxury car market, such a mfocus will no longer guarantee a market-leading luxury car product.

Chinese luxury car buyers are on average 5-10 years younger in comparison to Western luxury car buyers and are disproportionately female, with up to 30 percent female buyers for some luxury car brands. For the majority of first-time buyers in China, leading technology and driving performance are much less important buying mcriteria compared to their brand-loyal and technology-savvy peers in Western markets. Dyer says, “These examples are only a small part of the many challenges that luxury car brands and their dealership partners face for years to come. Luxury car brands need to find minnovative solutions for effective customer relationship management, man optimal dealer network close to China’s future millionaires and a localized product development which better fulfills Chinese  mmillionaires tastes in order to achieve a market leading position in China”.

Source:  Opens external link in new windowA.T. Kearney GmbH

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