Audi Is Facing Stiff Competition In China From BMW And Mercedes-Benz
The luxury division of Volkswagen AG’s (OTCMKTS:VLKAY), Audi, forms almost 13% of the company’s value as per our estimates, and this doesn’t include its Chinese business, which is accounted for using the equity method of accounting. Audi rose to the position of the second highest-selling premium automaker behind BMW in 2011, after overtaking Mercedes-Benz that year. However, as Mercedes is set to rise as the global leader this year, Audi is likely to finish third again behind its compatriots for the year. This, in part, has been due to the aftermath of the dieselgate scandal, where Volkswagen admitted to fitting around 11 million cars worldwide with software that allowed its diesel vehicles to cheat on emissions tests. These also included Audi models. While customer perception has taken a hit, recalls and halting sales of diesel vehicles has hurt the Volkswagen group this year.
However, Audi has continued on an upward journey this year, growing deliveries by 4.2% year-over-year to 1.714 million vehicles. The biggest fuel to Audi’s growth has been its biggest market, China, which accounted for approximately 31.5% of all Audi vehicle deliveries through the first eleven months of the year. Demand for the compact premium sedan A3 and the SUV Q3 have remained high, allowing Audi to report solid results in China so far this year. However, the brand is facing stiff competition from Mercedes and BMW in the country, as both these brands are catching up to Audi.
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In China, SUVs are the best-selling mini-segment. While passenger vehicle sales were up 17.2% year-over-year in November, buoyed by government tax breaks, and high discounts offered by dealers, SUV sales rose 41.5% to comprise ~40% of China’s overall passenger vehicle sales. A massive rise in China for Mercedes due to more than 15 new or revamped models, expansion of the dealer network to approximately 500 dealerships, extension of local production capacity, where in addition to the C- and E-Class, the two SUVs GLA and GLC are being built, all these helped ensure that China became the automaker’s single largest market last year. Mercedes’ SUV lineup increased volume sales by 37.6% year-over-year through November, while overall sales rose 11.8%. On the other hand, BMW added the long-wheelbase version of its Crossover X1 to its Chinese operations earlier in the year, while it will introduce the sedan 1-series sedan and 5-series long-wheelbase versions in the country in 2017.
The government halved the 10% purchase tax on cars equipped with 1.6-liter engines or smaller engines in October of last year, in response to a period of slow growth in the country’s vehicle market. This is why the results so far this year in the country’s passenger vehicle market have been exceptionally positive on a year-over-year basis. Over 70% of cars sold in the country qualify for the incentive, which helps customers save up to $1,500 on a new vehicle purchase. SUVs and Crossovers have been the biggest gainers in China, growing by 40-50% year-over-year through the first eleven months of the year. However, going into 2017, this growth might stall. This is as the country will lap the tax breaks offered last October. The government recently modified and extended the tax break by setting it at 7.5%, midway between the original 10% and the reduced rate of 5%. Either way, it is uncertain the elevated level of auto sales will be sustained.
Resistance to growth as a result of the slowing automotive industry in China could hurt Audi, and in turn, Volkswagen, which derives almost one-fourth its EBITDA from Audi, as per our estimates. Audi constitutes roughly 40% of the net EBITDA for the group’s automobile division.
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