The streets of Beijing and Shanghai are so gridlocked and polluted, it is a wonder that anyone still thinks buying cars is a good idea. And indeed Chinese customers appear to be falling out of love with the big, expensive luxury cars that were once seen as a must-have.
The Chinese car association has cut its growth forecasts three times this year – it now sees car sales growing at just 5 percent – compared to a forecast of 10 percent at the start of the year.
BMW, which has pushed hard to grow in China, is preparing itself for a rougher ride.
Although sales still rose 17.9 percent and almost one in four BMWs sold this year was sold in China, times are getting tougher.
“The high growth of the last year is likely to fall to single digits,” said a BMW spokesman at the company’s Munich headquarters.
The car giant is currently struggling with its dealer networks. The company has spent billions expanding its dealer network to take on Audi, which dominates luxury car sales in China. Under the terms of the agreement, BMW gives dealers a cut of around 5 percent for selling a new car, along with other performance-related bonuses.
For weeks Chinese BMW dealers have refused to buy new vehicles because their showrooms are already full. On top of that, they are demanding about €650 million worth of rebates from BMW to compensate for the lower sales. They also feel that the BMW targets they have to meet to earn their bonuses are unrealistic.
“The sales targets BMW tried to force on us were unattainable, and would have ruined us,” said one major Chinese dealer. Some dealers in the Chinese network wrote a joint letter to BMW in Munich, asking the company to negotiate with dealers and not to set rigid car sales targets too far in advance. BMW would not confirm details of the letter but confirmed that it had had difficult negotiations.
The new 7-Series model will only launch in China at the end of 2015, which means losing ground to its main rival, the new Mercedes S-Class, in the meantime.
The joint letter does not represent all the 545 BMW offices and dealerships in China. A BMW spokesman said the company would “welcome” the creation of an association that represents all BMW dealers in China.
It is a sensitive situation. China is the German auto industry’s backbone and has, in the past, remained steady through economic turbulence elsewhere. Every third car sold by Volkswagen and Audi is sold in China. BMW now sells around 450,000 BMWs, Minis and Rolls-Royces in China – ten times as many as in 2006.
Volkswagen is the market leader, but Audi, BMW and Mercedes dominate the luxury sector. The sector represents just 8 percent of the overall Chinese car market, but it is especially lucrative and more than 70 percent of the companies are in German hands. The Chinese government’s anti-corruption crackdown, that has stopped officials buying foreign cars, is expected to hit the sector, but so far the effect has not been as dramatic as expected.
Many of these German cars are produced locally, but top models such as the Mercedes S-Class, BMW 7-Series and the Audi A8 are imported from Germany, and sold through local dealers, who buy the cars at their own risk and get bonus payments if they meet sales targets.
BMW does not break down what share of its profits come from China but analysts estimate that around 20 to 30 percent of operating profits come from the Far East.
China has in recent years been one of BMW’s easiest markets, and demand was so strong that extra cars often had to be shipped over from Munich. The chief executive Norbert Reithofer, who steps down in May, has always been wary about becoming too dependent on China, but it is clear that the record results BMW delivered under his leadership would not have been possible without China.
But Chinese buying habits are changing. The demand for luxury cars is falling. Drivers now want compact models that generate smaller margins.
BMW’s ability to counter the downswing in demand is not helped by a relatively old model line-up. This is especially the case with its top-of-the-line 7 Series. The new 7-Series model will only launch in China at the end of 2015, which means losing ground to its main competitor, the new Mercedes S-Class, in the meantime.
Nevertheless, BMW is still in a cheerful mood, even if the party is coming to an end. It plans to sell an extra 2 million cars next year and significantly exceed the €8 billion operating profits it made this year.
Frank Sieren is a leading German expert on China, and Handelsblatt’s correspondent in Beijing. Markus Fasse, a car- and airline industry specialist, reports for Handelsblatt from Munich. To contact the authors: email@example.com, firstname.lastname@example.org.