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For Luxury Car Markers, The Chinese "Cash Cow Is Dying"

Tyler Durden's picture




 

It’s no secret that Chinese President Xi Jinping’s crackdown on corruption has had a rather dramatic effect on VIP gambling revenue in Macau, which has fallen for 12 consecutive months. 

But the pinch is being felt well beyond the Baccarat tables. 

“The enormous growth rates luxury-car makers like us have seen in China in recent years won’t continue,” Porsche CFO Lutz Meschke said, at an event in Atlanta last month. Some estimates have Porsche selling more vehicles in China this year than in the US, and as Bloomberg notes, the Chinese market — which has been a huge boon for luxury manufacturers in recent years — is set to cool significantly going forward. 

Newly minted Chinese millionaires have long heralded their status by buying big, expensive cars such as Porsche’s Cayenne SUV. The penchant of rich mainlanders for flaunting their wealth is a big reason that China is set to dethrone the U.S. as the luxe automaker’s biggest market this year.

 


 

But after a government crackdown on graft and conspicuous consumption, growth in luxury-car sales is slowing, and Chinese buyers are settling for less opulent models. That could spell an end to the gold rush for brands such as Porsche, BMW, and Audi, which have relied on China for about 50 percent of their global profits, estimates Sanford C. Bernstein..

 

 “China is turning into a much more mature market,” Audi Chief Executive Officer Rupert Stadler said in May. “Competition will intensify” as the anticorruption drive saps demand for luxury rides, he said.

The trend has been apparent for some time now. In April for instance, BMW chief Norbert Reithofer (who stepped down in May) said luxury manufacturers "need to get used to single-digit growth in China." "We only sold 14 Rolls-Royces in February. Something has clearly changed," Reithofer added. 

Now, the numbers are in for May, and as FT reports, the "cash cow is dying." Here's more:

China, the world’s largest car market by sales, has been the main engine of profitability for the likes of BMW, Daimler’s Mercedes-Benz car division and Audi in recent years, helping paper over structural weakness in Europe.

 

But the premium automakers have been vocal in their warnings of declining returns in China, against the backdrop of a slowing economy, limits on car ownership in big cities and rising competition from cheap and cheerful domestic brands.

 

According to one Chinese dealer representative: “the cash cow is dying”.

 

That became clear on Tuesday as Audi reported a fall in monthly sales in China for the first time in more than two years. The company – a unit of Volkswagen and the leading supplier in China’s premium auto market – said sales fell 1.6 per cent in May compared with the same month last year.

 

“The reticence to buy in the Chinese luxury segment was particularly noticeable,” said Audi.

Sales of BMWs and the Bavarian company’s Mini vehicles were down 4 per cent year-on-year in May, the manufacturer’s first sales decline in China in 10 years.

 

Jaguar Land Rover, the UK carmaker controlled by India’s Tata Motors, has also seen sales of its once sought-after SUVs fall as much as 16 per cent in the first quarter, according to the company. Overall, JLR’s China deliveries were down 32 per cent year on year in May..

 

There had been hopes that European car sales – finally growing after six years of post-crisis decline – might partially offset the Chinese slowdown, but these were damped on Tuesday by figures that showed sales in the region advanced at their slowest pace in almost two years last month.

Indeed, new car registrations in Europe rose just 1.3% in May, the weakest in what has been a 21-month run of gains:

WSJ has more color on how luxury models are faring in China's Western provinces where, until this year anyway, growth was robust:

A surprise sales slump is hitting what had been a fast-growing part of the world’s biggest car market. That could be bad news for mass-market global brands like Volkswagen AG and Ford Motor Co. and luxury names such as Volvo Car Corp., Mercedes-Benz and BMW AG.

 

The global auto industry in recent years has been betting heavily on China’s west, where they see potential for faster growth than in the more affluent—and car-saturated—cities along the coast and in the country’s eastern and southern manufacturing belts.

 

An analysis of new-car registration data by Chinese automotive research firm Ways Consulting Co. showed that first-quarter sales across 12 western provinces grew about 12% from a year earlier to 1.2 million vehicles.

 

That gain trails a 15% rise over the same period for the country as a whole, and represents a shift from a year ago, when western provinces outgrew the rest of the country. New-car registrations are considered a proxy for auto sales.

 

Luxury-car sales appear to be faring even worse. The Ways data show registrations of new Mercedes-Benz vehicles in the western province of Sichuan fell 6.9% in the first quarter to 3,944 cars, compared with a 50% rise in the same period a year earlier. Registration for BMW cars fell 9.1% in the first quarter to 5,450 cars from a 36% year-over-year increase in the same period in 2014, according to Ways.

Incredibly, it appears as though when it comes to luxury car purchases, a decelerating economy, a corruption crusade, and an effort to crackdown on extravagence within the Communist Party have been enough to offset the enormous gains investors have enjoyed by racking up record margin debt to day trade the Shenzhen. 

On the bright side for the Porsches, BMWs, and Jaguar Land Rovers of the world, there's always the possibility that FTSE and MSCI EM benchmark inclusion will work to sustain China's equity bubble and drive valuations even further into the stratosphere, making millionaires of the country's semi-literate day trading hordes and sparking a mad grab for status symbols. Fingers crossed. 

 

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Wed, 06/17/2015 - 22:08 | 6207830 Four chan
Four chan's picture

lol porsche is sold out is porsche's only problem.

Wed, 06/17/2015 - 22:22 | 6207838 Yen Cross
Yen Cross's picture

 Negative ghost pilot. There's a glut of used Porsches.

 If you have dealer access, check Manheim. All the chickens are coming home to roost.

 The first prices to cave in are in the luxury segment...

Wed, 06/17/2015 - 22:38 | 6207889 Boris Alatovkrap
Boris Alatovkrap's picture

Mindset of China luxury car consumer:

Yuan bai gu ka? In fyu cha, mei bi me ni ka is mei king in China, ba fo nao, yu no wan bai china ka, yu wan bai jya mein ka.  Jya mein ka beli beli fas!

Wed, 06/17/2015 - 22:55 | 6207920 Yen Cross
Yen Cross's picture

lol

Wed, 06/17/2015 - 23:09 | 6207952 walküre
walküre's picture

You are really talented and original. I just hope you have a good career where your talent's aren't wasted.

Thu, 06/18/2015 - 02:20 | 6208282 Greater Fool Theory
Greater Fool Theory's picture

Boris and Bonzai, my two favorite ZH contributors.

Wed, 06/17/2015 - 22:18 | 6207840 COSMOS
COSMOS's picture

He said anticorruption drive slows down luxury car demand. Nailed it right on the head.  Now you know who drives those cars.

Wed, 06/17/2015 - 23:08 | 6207948 roddy6667
roddy6667's picture

It's more than that. Recently Xi Jinping ordered all Party members, especially the higher ones, to avoid any activity that should not be emulated by the people. Conspicuous displays of wealth and even smoking in public were on this list. It is part of the China Dream campaign that you see eveywhere in China. It's about having Chinese values instead of copying the West's values.

Wed, 06/17/2015 - 23:46 | 6208031 suteibu
suteibu's picture

Some of the tenets of Confucianism are being re-established at the highest level of Chinese leadership it seems.  This is a good thing.

Thu, 06/18/2015 - 04:08 | 6208385 Laowei Gweilo
Laowei Gweilo's picture

just means they're buying the cars overseas instead

 

vancouver porsche/mb and vancouver aston martin sure as fuck haven't slowed down. even lambos...

and the main mod shop and also main wrap shop are busier this year than they have been in last 2-3 years

Thu, 06/18/2015 - 08:06 | 6208712 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

This will prove a major problem for Germany in particular. Its economy is largely export driven in a time when world trade seems to be slowing visibly.

Wed, 06/17/2015 - 22:17 | 6207852 suteibu
Wed, 06/17/2015 - 23:12 | 6207956 walküre
walküre's picture

Imagine this in the US where the banker's bitch can't have the Silver Spur and the hubby shows up at their Park Ave. residence with a 2016 Genesis

Wed, 06/17/2015 - 23:17 | 6207967 suteibu
suteibu's picture

Imagine a government targeting people who flaunt their wealth and a population that isn't too keen about it either.  The wealthy Chinese can park their Silver Spurs at their Park Ave. residences.

Wed, 06/17/2015 - 22:25 | 6207868 Ginsengbull
Ginsengbull's picture

Maybe they finally realized that they can't drive right.

Wed, 06/17/2015 - 22:47 | 6207900 oddjob
oddjob's picture

They seem to have driven auto sales quite well.

Wed, 06/17/2015 - 23:48 | 6208035 Abbie Normal
Abbie Normal's picture

Like the way they couldn't shoot straight because of their slanted eyes?

Tell that to the hundreds of thousands of wounded or KIA GIs from WW2, Korea and Vietnam.

Wed, 06/17/2015 - 22:38 | 6207891 NOZZLE
NOZZLE's picture

They call them Yellow niggers for a good reason.

 

Officer Casebolt, could you please respond to a fight at the Craig Ranch HOA pool, it seems the teen daughter of a resident has advertised a pool party on violation of HOA rules and invited the Section 8 Ghetto from across town. Be advised to proceed with caution since the animals are in their genticaly predictable mode of out of control monkey.

Wed, 06/17/2015 - 22:49 | 6207909 adr
adr's picture

Just wait until all the new banana vendor billionaires go to biy their first cars.

Just have to sell some stock without crashing the market first.

Thing is just like Shanghai apartments they are buying the stock to hold onto it, hoping that in twenty years it will be worth enough to fund a good retirement.

Wed, 06/17/2015 - 22:59 | 6207929 yrad
yrad's picture

I drive a 98 Chevy Pickup with 1 mil in assets.

Wed, 06/17/2015 - 23:12 | 6207959 walküre
walküre's picture

Word!

Thu, 06/18/2015 - 17:25 | 6211470 Abbie Normal
Abbie Normal's picture

Upvoted you but then the thought occurred:

Can $1MM in assets go 0-60 in 3 seconds?

Wed, 06/17/2015 - 23:14 | 6207961 walküre
walküre's picture

Hoping for some fire sales on currently way overpriced Seattle or Portland RE soon....

Thu, 06/18/2015 - 00:36 | 6208158 The Ingenious G...
The Ingenious Gentleman's picture

You folks are heartless. Me? I'm sitting here bawling my eyes out for Porsche and Rolls Royce.

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