China is THE Place for Luxury Cars

Automakers keep sights on the China market as premium brands continue to rise, according to PwC’s Autofacts latest Analyst Note.  In the last decade, the China market expanded nearly five-fold, from 4.3 million vehicles to 19.9 million. This increase continued through the global downturn, when other automotive markets were experiencing severe declines.

Within the industry, luxury vehicles have seen a particularly impressive growth in the last several years.  Even as the Chinese market grew only marginally in 2011, the luxury segment still grew 54.5 percent. By the end of 2013, the segment was still enjoying double-digit growth of 18.4 percent, reaching sales of 1.4 million units, second only to the US. China is expected to surpass the US in luxury sales by 2016.

The population of affluent consumers in China is quickly expanding, both in volume and in age range. Younger first time buyers have increasing buying power within the market, and the result has been growing sales within the luxury segment.

“The foreign luxury brands seem to appeal to young buyers as they perceive them as safer, more technologically advanced and better quality,” said Wilson Liu, PwC’s China Automotive Leader. “On the other hand, a trend of overall vehicle downsizing, amid more stringent emission standards, is also reflected in the luxury segment. To meet these regulations, entry-level models are increasingly available and appealing to younger, first-time buyers.”

Premium brands appeal to those amassing greater wealth — a demographic shift that is rapidly expanding in China to younger generations that are hungry for consumer goods that show their higher status.

Luxury vehicles have an expected compounded annual growth rate (CAGR) of 11.5 percent from 2013 to 2020, which is almost double the rate of standard, non-premium light vehicles. Autofacts is forecasting that the Chinese market will surpass the average luxury penetration rate of 10 percent of mature markets like the US to reach just over three million units by 2020.

“As luxury segment proliferates, global premium brands are scrambling to localize production,” said Rick Hanna, PwC’s Global Automotive Leader. “It is expected that almost all major luxury brands are expected to have domestic assembly by 2016.”

Assembly localization has cost advantages including; local sourcing, market research and development, and creation of a streamlined value chain within the country. Localization can also reap benefits long-term, both with government and legislative incentives as well as minimizing additional import duties. Establishing a local base not only demonstrates a commitment to the market, but allows for cost savings and the ability to remain agile in a dynamic market where consumer preferences can shift quickly.

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