By Jacky Wong
Germany's luxury automakers from BMW to Mercedes-Benz used to rule China's streets. No longer.
A recent dispute between Porsche and its dealers in China has shed some light on the tricky situation for even some of the world's premium car brands. According to local Chinese media, some of Porsche's dealers refused to stock up more inventories and asked for additional subsidies from the company. Porsche, and its dealers in China, released a statement last week saying that they are facing complex issues and will work together to find effective ways to respond to market changes.
Indeed, Chinese car dealers are in pretty bad shape. Faced with a brutal price war, they have no choice but to offer deep discounts to customers. For example, gross profit margins on sales of new cars for Meidong, a dealer for brands such as Porsche and BMW, fell to negative 0.6% in 2023, compared with a positive 6.8% in 2021. The Hong Kong-listed company has lost 94% of its value from its peak in 2021. Eventually this will mean the automakers will have to offer more rebates and cut into their own margins.
Porsche's first-quarter deliveries in China fell 24% from a year earlier. It isn't alone. Ferrari's shipments to mainland China dropped 25% year over year in the quarter, too. Mercedes-Benz and BMW also sold fewer cars in China in the first quarter compared with last year.
The implosion of China's housing market and the resulting economic slowdown has probably taken a toll on luxury spending. Brands such as LVMH and Gucci have also seen a slowdown in China lately.
But China's car-buying habits have also undergone a seismic shift with the rapid rise of electric vehicles. Around 44% of cars sold in China in April were new-energy vehicles, which include plug-in hybrids, according to the China Passenger Car Association. German brands have long reigned supreme in China's luxury segment. While they are still dominant there -- the EV penetration rate for cars priced higher than 350,000 yuan, the equivalent of $48,300, was less than half the rate of the overall market at the end of last year, according to Bernstein -- things could change fast.
In fact, for slightly cheaper cars, Chinese EV brands have been fast gaining share. Bernstein estimated that for cars priced above 250,000 yuan, the equivalent of $34,500, German brands had only a 45% market share in 2023, compared with a 60% share in 2020. Tesla has been taking share from them, but Chinese EV brands like Li Auto and BYD's Denza have also been rolling out more premium models. German brands, by contrast, have been slower to introduce EV models. Increasingly, Chinese consumers are also looking for technology features such as infotainment or drive-assistance systems that are frequently paired with EVs.
China has long been a lucrative market for German luxury carmakers, whose prestige kept them in the fast lane. But now they need to work harder to avoid falling behind local rivals.
Write to Jacky Wong at jacky.wong@wsj.com
(END) Dow Jones Newswires
June 05, 2024 06:30 ET (10:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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