Luxury draw

If the Chinese auto market be described as cloudy, then the performance of foreign luxury cars is perhaps the silver lining amid the gloom.

With demand for luxury brands outstripping overall growth, major luxury auto brands by far outperformed the regular passenger car market in 2011. Audi AG, the premium car segment of Volkswagen, continued to lead the premium segment in 2011 with deliveries of 313,036, followed by BMW with 232,586 and Mercedes-Benz with 193,339.

Demand for luxury cars plunged in Europe and the US largely due to the economic problems, prompting premium auto brands to shift focus to China, a nation with millions of nouveau riche ready to spend money on luxury goods.

John Zeng, director of Asian Forecasting at LMC Automotive, says competition is getting fierce, especially in the entry-level luxury car segment.

"For premium consumers, tight liquidity could translate into less speculative opportunities and hence less 'spare cash' for vehicle upgrades," Hung Bin Toh, an analyst at Credit Suisse, wrote in a Dec 5, 2011 research report.

This assumption is proved by Mercedes-Benz, which says its medium-level cars, or "young models" are the superstars in its product portfolio, and account for 40 percent of the total sales.

"I believe in the next year, with rollout of our complete fleet, we will scale more heights in the Chinese market," Dieter Zetsche, chairman of the board of management of Daimler AG, said during the Geneva Auto Show.

Though the luxury car segment has been growing by 20 to 30 percent every year, companies like Mercedes achieved growth rates of over 30 percent in 2011.

In July 2011, the company decided to combine two sales channels - Mercedes-Benz China and Beijing Benz Automotive - primarily to strengthen its distribution system.

Currently, the ratio between domestically produced and imported cars is 3:7; and Zetsche is confident that the numbers will be reversed by 2015 with domestic plants contributing more products, which will translate into lower prices and less transportation costs.

Having been the dominant supplier of government cars in China for decades, Audi is now looking to tap the broader market.

Dietmar Voggenreiter, president of Audi China Business, said that China overtook Germany as the company's largest auto market in 2011. Audi expects to produce 700,000 cars every year by 2015 as its new plant in Guangdong province will be ready for operations in 2013. With this, Audi will not only be able to cater to public demand, but also change the general perception of being a "government car" in China, Reuters quoted Voggenreiter as saying.

The percentage of government purchases has dropped to less than 10 percent and currently, 80 percent of our sales comes from the public," he says.

BMW says it is getting ready to grab a bigger slice of the Chinese market in 2012, as the premium segment in China is only around 7 to 8 percent now, whereas in mature markets it is 10 to 20 percent. China is the third largest market for BMW, after Germany and the US. In 2011, sales of BMW and MINI cars in China totaled 232,586 units. "This year, our production will increase after our new plant in Shenyang starts production. A new model BMW X1 will start local production at the beginning of this year," the company says. The company has also promised to further spruce up its after-sales service. "For high-end and luxury automakers, the competition goes far beyond products, and extends to after-sales services, and ultimately brand building efforts," the company says.

Hybrid future

With China making definite moves to reduce carbon emissions, the road ahead for foreign automakers seems to be certainly in favor of more energy-efficient vehicles. Having models that are in sync with government policies will also help them gain considerable traction in a market that is still relatively unexplored, say experts.

New energy vehicles have also become a platform for companies to showcase their cutting-edge technologies, as well as financial capabilities for research and development, Lin Cheng, deputy director of the National Engineering Laboratory for Electric Vehicles in Beijing, told China Daily in a recent interview.

Since 2009, Audi has partnered with Tongji University to develop batteries for its Audi A6L BEV concept cars. At the same time, the company plans to introduce more hybrid models in China this year, as they are "more practical" than pure electric vehicles.

With the advent of the pre-electric car era, BMW is determined to take the lead in the world's biggest auto market. "We have successfully conducted the field trials for the MINI E in China last year. Later on, we will bring in the BMW Active E for field trials. Our joint venture will also develop a new brand focused on new energy vehicles," says the company.

Song Jian, executive vice-president of Tsinghua Automotive Engineering Institute, admits that in the current stage, pure electric cars are just conceptual in China due to their high sticker prices, limited charging facilities and range. "Without a real market, automakers would not be too keen to commit too much resources on production of electric vehicles. Hybrids are a more realistic option for the time being."

He cites the example of the Chevy Volt, GM's EV that was launched in 2010. "It secured 1,210 orders in the first quarter after its debut in the US. But when the model was introduced in China last year, it received a lukewarm response from the public."

However, even for hybrid models, it may be difficult to challenge the combustion models in China in the short term. Some hybrid models claim to save up to 40 percent of gasoline, which may help sales considering the rising oil prices.

Toyota, the pioneer of hybrid cars, admits that hybrid cars are not selling very well in China, but remains "confident about the market".

"It will take some time for Chinese customers to accept hybrid cars, just like the Western world did in the 1990s when the very first hybrid cars were launched," Xu Yiming, public relations director of Toyota China, said during the Guangzhou Auto Show.

One of the reasons lies in high sticker prices, the company says. Currently, most hybrid models including Camry and Prius are imported from Japan. The labor, transportation costs and tariffs all add up to stiffer prices in China. Xu says costs will be reduced significantly, after the hybrid cars are produced in China by 2015. "By then Chinese customers may find it more affordable," he says. Last year, Toyota's biggest innovation center started operation in Changshu, Jiangsu province.

Domestic threat

With China being seen as the lifeline for many ailing global automakers, the changing market dynamics may also see the emergence of more competition in the form of stronger and leaner domestic companies.

Wale from GM admits that local brands are catching up with foreign companies in China. "It's widely acknowledged that the Chinese auto market has become more rational in the recent years. I believe the performance of Chinese brands will improve steadily over time," he says.

While international brands have triumphed in the medium to higher segments, local brands have swept aside competition in the small car segment.

Though most of the domestic companies were earlier happy to play second fiddle to the bigger foreign brands in joint ventures, they are now keen to take on the big boys. Most of the Chinese companies are developing their own brands and models with the help of technologies they have learned or acquired in the past 20 years.

Earlier last year, SGMW, a joint venture between GM, SAIC, and Wuling Motors, launched its first China-born sedan Baojun, followed by Everus developed by Guangqi Honda, and Venucia from Dongfeng Nissan.

GM, however, does not foresee any immediate threat from the Chinese players. "We will continue to design, build and sell vehicles to cater to Chinese customers' needs. The cooperation with our partners helps us have a deeper understanding about Chinese market," Wale says.

Gary Tan, Asia president of Ricardo Inc, a US company focused on vehicle engineering, said in a recent interview with China Car Times that Chinese brands will catch up with their foreign competitors sooner or later.

He compares the progress of Chinese carmakers to that of Japanese and South Korean counterparts, who caught up with their Western competitors. "Like Chinese brands, they were branded as low cost, low technology and low quality products decades ago. Now Japanese and South Korean cars are on par with their global competitors, in both technology and quality. They are also catching up on cost. And I bet Chinese companies will also achieve this in a shorter time."

He says that the biggest advantage that Chinese automakers have is a sizeable domestic market.