Wolf Richter www.testosteronepit.com [18] www.amazon.com/author/wolfrichter [19]
Supercar-makers Lamborghini, Ferrari, and Rolls-Royce are reacting to the triple forces whacking the global markets for luxury products: a corruption crackdown in China, Abenomics in Japan, and the Fed’s money-printing binge in the US.
Last year, Chinese President Xi Jinping incorporated into his plan a crackdown on spending by government entities and officials on luxury goods, banquets, trips, certain services, and lavish gift-giving. It was part of a larger crackdown on corruption. He warned that public outrage over such practices by elite officials and their families put the Communist Party at risk. And he meant business.
It turned into a crackdown on ostentatious displays of such goods, and it has pinched sales of luxury items in what had become the world largest market for them. Last year, over a quarter of global luxury goods sales took place in China, after having soared on average 27% per year since 2008, according to a McKinsey report (Bloomberg [20]). While crackdowns have a way of dissipating into the polluted air, the initial reaction was fierce.
The Swiss Federation of the Watch Industry complained that exports to China, which had set a record in 2012, plunged 26% in the first quarter [21]. Stores in China were suffocating under an inventory glut. “The gold rush in China is over,” said at the time François-Henry Bennahmias, CEO of Swiss watchmaker Audemars Piguet, which was shuttering 6 of its 22 shops in China.
High-end restaurants, overpriced imported wines and spirits, teas picked and crafted by select artisans, Lamborghinis, Ferraris, and Rolls-Royces... they have all been hit. For them, China is no longer the promised land.
“In the past, there were many super tycoons who wanted to show off their wealth,” said Yale Zhang, managing director of consulting firm, Autoforesight Shanghai. But now they were putting a lid on their expenditures. Their kids have been the big buyers of supercars, Zhang said, but “their budget can be easily controlled by daddy.”
Sales of supercars costing more than 2 million yuan ($327,000) a piece had plunged 29% to 2,500 units in 2009 during the financial crisis, but then soared to 9,000 units by 2011, and continued to soar into 2012. But later in 2012, the crackdown on corruption hit, and overall sales dropped to 8,000 units. And in 2013, sales continued to drop, rather than re-surge.
Ferrari (owned by Fiat) has seen its sales slide 12.5% so far this year. Lamborghini (owned by Volkswagen) moved a phenomenal 230 units last year – OK, not exactly huge numbers, but these are cars for the absolute elite, and the price is right. CEO Stephan Winkelmann expects sales to drop 13% in 2013. The idea that luxury sales in China, which has been printing billionaires by the minute, might crash is a hard-to-swallow concept for the industry.
“Still it’s a big market, it’s our number-two market,” Winkelmann said while in New Delhi [22] for the launch of the brand’s second dealership in India. But about China he groused that “as much as I know about the local policies, and what the government is doing, for the time being it is a little difficult to buy these type of goods.”
How do you replace a high-growth market like China that suddenly falls flat on its face? “Unfortunately, there are not so many Chinas around the corner,” he said.
The new promised land is the US (again), where the Fed’s money-printing binge and zero-interest-rate policy have done wonders. In 2012, the US became the number one market again for Rolls-Royce (owned by BMW), whose Phantom retails [23] for over $400,000 a pop. September was huge, with sales almost tripling from last year to, well, 56 units, bringing year-to-date sales to 285 units, up 29% (Motor Intelligence [24]). For Ferrari, however, September was crummy, down 20%, and year-to-date sales were crummy too, increasing only 7% to 1,539 units, when the overall auto industry was up 8.1%. But Lamborghini sales rose 19.1% in September to a whopping 56 units. Year to date, they jumped 27.6% to 490 units.
“The U.S. is really getting back on track and getting more important for us,” explained [20] Lamborghini CEO Winkelmann in an interview in Tokyo – he does get around quite a bit.
The other new promised land is Japan (again) – where Abenomics kicked in early this year, and where the Bank of Japan is printing trillions of yen on a monthly basis. These wealth distribution policies drove up asset prices and the national debt, and sales of luxury goods [25] like art, jewelry, high-end watches, and precious metals jumped 18.3% in August and 14.2% in July, after having been on a tear all year – while regular folks are struggling with stagnant wages and year-over-year goods inflation of 1.8% [26].
Ferrari sales jumped 28% in Japan through August. And Lamborghini sales rose 14% – constrained only by supply. Eager buyers, the beneficiaries of Abenomics, have to deal with waiting periods of up to one year for a $400,000 Lamborghini Aventador. “We are very happy with Japan,” raved Winkelmann. “It’s coming back big time.”
In this manner, supercars have become a litmus test of what works and what doesn’t. What works: Printing money and handing it to the largest banks and securities dealers to let them distribute it as they see fit, the case in the US and Japan. Pushing interest rates below the rate of inflation to where it bleeds savers, pensions funds, systems like Social Security, etc. is also beneficial. But cracking down on lavish gift-giving to get in on a deal or to get something done, or cracking down on corruption in general, is a really, really bad idea; sales of ultra-luxury products just go to hell.
“This sort of political brinkmanship is the dominant reason the rating is no longer ‘AAA,’” S&P ratings agency wrote about the US in a research note. More ominously, it warned that if Congress failed to pass a debt-ceiling hike before the out-of-money date in mid-October, it would cut the U.S. to “selective default.” And then there would be the post-default era. Read.... S&P Threatens To Cut US Debt To JUNK [27].