Compact Saloon Sales To Outpace Growth In The Overall Chinese Luxury Car Market

by Trefis Team
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China is the world’s largest car market with nearly 18 million passenger car sales in 2013, more than twice the sales in the U.S., but still trails the U.S. in premium car volumes. [1] According to McKinsey, the luxury vehicle market in China is expected to grow at a CAGR of 12% till 2020, outpacing the 8% annual anticipated growth in the country’s overall passenger vehicle market. This also means that the country will surpass the U.S. as early as 2016 in luxury vehicle sales, and surpass the 3 million annual sales mark by 2020. [2] Growth in the Chinese premium vehicle segment has been instrumental in driving volume growth for many automakers around the world. Notably, European automakers Audi, BMW and Mercedes lead the country’s luxury autosegment, together accounting for 73% unit sales last year by our estimates. In particular, demand for compact luxury powertrain vehicles has been on a steep rise in China. In this article, we take a look at the growth potential of the entry-level premium segment of China’s car market, boosted by rising consumer demand.

China’s Luxury Segment Headed For Growth, Mainly In Compacts

According to our estimates, premium vehicle sales in China stood at over 1.5 million units in 2013, up 21% year-on-year. The luxury segment beat the 13.9% growth in the overall passenger vehicle market in the country. But despite already being the world’s second largest premium vehicle market, China offers further growth potential, as only 7% of its overall vehicle sales were formed by the luxury vehicles last year. In comparison, the proportion of luxury vehicles in the U.S. auto industry rose to over 11% in 2013, after suffering a minor dip through 2011-2012. [3] With growing disposable incomes and rising number of affluent customers in China, we expect the proportion of higher-priced vehicles in the country to rise in the coming years.

  • Growing Wealth And Population Of HNWI:

The population of high net worth individuals (HNWI) in China is expected to cross 2.19 million by 2017, representing an increase of 34% over 2012 levels. [4] The cumulative wealth is estimated to grow by 50% to $9.4 trillion during this period. This bodes well for luxury automakers as HNWIs form their target consumer base.

  • The Chinese Consider Price A Top Consideration:

A bulk of growth in China’s luxury car market is expected to come from the compact saloon segment. Emerging economies generally harbor relatively more price-sensitive customers, who might opt for a lower priced luxury car. In a McKinsey survey of luxury car-buyers with comparatively high willingness to purchase but low ability to pay, it was found that price is the most important factor for a Chinese consumer, ahead of mileage, design and quality. In contrast, German customers valued price the least among quality, comfort, design and fuel efficiency. [5] The more affluent Chinese consumers also consider price-points as an important factor in purchasing a luxury vehicle, according to the survey.

  • Millennial Customers Prefer Cheaper Luxury Cars:

In addition, China has a relatively young population, and millennial customers tend to prefer smaller and lesser expensive alternatives. The average age of a luxury car-buyer in China is 10-15 years less than the average customer age in the western countries, especially European. [6]

Due to these reasons, we expect the compact segment of the luxury car market to grow at a rapid pace in China in the coming years. In fact, IHS Automotive expects compacts to constitute 20% of all luxury vehicle sales in 2015, up from around 11% in 2012. [7]

Compact Cars Are Bestsellers For Automakers

Smaller-sized luxury vehicles are gaining popularity as they attract a wider consumer base, comprising people who intend to buy premium vehicles but have limited resources. Around 44% of all unit sales for the world’s highest selling luxury carmaker BMW were constituted by the upscale small/mid-sized 1-series, 3-series and 4-series last year. On the other hand, the compact executive cars A3 and A4 accounted for 35% of Volkswagen’s Audi volumes in 2013, up from 33.7% in 2012. Daimler’s Mercedes-Benz also launched its compact CLA-Class last year and followed it up with the new model launch of its best selling C-Class, which sold over 300,000 units in 2013, a dip as consumers decided to wait for the refreshed model in 2014. Compact luxury models are not only the best-selling vehicles for the German automakers, but also the fastest growing in terms of volumes. As the lower end or compact saloon segment is growing at a fast rate, bolstered by high consumer demand, automakers might also look to improve China sales by focusing on this segment.

The other competitors in the compact luxury segment include the Lexus CT and Lexus IS, together accounting for 33% of Lexus’ 2013 volumes. Although Nissan’s luxury vehicle division Infiniti saw a decline in volumes last year, compact car sales (which comprise the Q50 and G sedan) grew by 3%. The British carmaker Jaguar is also set to enter the compact segment of the premium car market with the launch of the XE in 2015. With growing target consumer base in China, automakers will look to gain from the growth potential of the small-sized luxury car market in China.

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Notes:
  1. New PC registrations or sales“ []
  2. Upward mobility: the future of China’s premium car market“, mckinsey.com []
  3. Luxury share of the U.S. market remains in 10-11% range“, February 2014, blog.polk.com []
  4. Chinese HNWI wealth to climb to USD 9.4 trillion by 2017“, prweb.com []
  5. Getting to know China’s premium-car market“, June 2013, mckinsey.com []
  6. Luxury automakers scramble to woo younger Chinese buyers“, April 2014, theglobeandmail.com []
  7. Germans think small in China“, September 2013, wsj.com []
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