China Plush

In China, German Automaker BMW Sees Profit Surge Amid Wave of Luxury Consumption

BMW Expands Greer Plant
Production and sales are surging for German automakers such as BMW.
  • Why it matters

    Why it matters

    Chinese consumers are spending more money on luxury goods, including German BMW and Mercedes cars, a trend which stands to benefit Germany’s and Europe’s economy at large.

  • Facts

    Facts

    • BMW profit rose 27 percent to €1.8 billion ($2.4 billion) in the second quarter.
    • BMW unit car sales rose 21 percent in China vs. 5 percent overall.
    • Audi and Porsche have also seen sales rise thanks to China.
  • Audio

    Audio

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Consumers in China are shifting into high gear, more specifically, the precision higher gears found in German luxury cars Mercedes, Audi, Porsche and BMW. Demand appears to be so strong that the motor of Germany’s auto industry now lies in China, experts said, where consumers have moved on from buying the bare necessities to the pricey status symbols long favored in the West.

The trend, experts said, was confirmed again on Tuesday, when BMW reported a greater-than-expected rise in second-quarter earnings and sales on the back of its booming business in China. The success of the Bavarian automaker mirrored that of VW and Mercedes-Benz maker Daimler.

BMW said profit rose 27.2 percent to €1.8 billion ($2.4 billion) in the second quarter as sales rose 1.8 percent to €19.9 billion. BMW said it sold 533,187 BMW, Mini and Rolls-Royce cars in the period, up 5.3 percent.

While lining up for German autos, Chinese consumers are not stopping there. Overall luxury consumption is on the rise in the world’s most populous market.

“There are calculations that predict that 50 percent of luxury consumption worldwide comes from Chinese people,” said Moritz Rudolf, economic expert at the Mercator Institute for China Studies in Berlin.

Other premium brands are also benefiting from that trend of rising affluence in the socialist country. “The macro trend points in the direction of more consumption in China,” said Mr. Rudolf.

There are 2.8 million millionaires in China today and the number is increasing each year.

Every year, the number of Chinese households earning more than $13,500 ( €10,000) rises by 20 million, making more people inclined to buy luxury goods, cars and designer apparel, Mr. Rudolf said.

There are 2.8 million millionaires in China today and the number is increasing, he said.

BMW has sold more than 1 million cars, including Mini and Rolls-Royce, in the first half of 2014, the company said. The number of cars sold rose 6.9 percent from a year earlier.

Mainland China sales made up 22 percent of BMW Group’s sales in the first half of 2014. Five years ago, Chinese car sales, including those in Hong Kong and Taiwan, accounted only for 6.7 percent of total vehicles sold.

Other German car companies have also profited in China. Audi, the premium brand of the German Volkswagen group, recorded a 21.2 percent rise in deliveries in China in the first quarter of this year.

“China was again the key growth driver,” Audi noted at the time.

Sportscar maker Porsche, also part of the Volkswagen group, has reported that China remained its second-largest sales market in 2013, growing 20 percent last year.

“The best-selling model series remained the Cayenne, with almost 27,000 new vehicles delivered,”, Porsche wrote in its annual report.

 

Source: Reuters
A woman poses for a picture next to a BMW M3 car during the 15th Shanghai International Automobile Industry Exhibition in Shanghai. Source: Reuters

 

But Chinese luxury consumers are not only buying cars and other goods in China.

More and more are traveling to buy luxury goods in Europe, Mr. Rudolf said. In fact, import and consumption taxes are very high in China. A bag made by the French designer Louis Vuitton, which is a part of LVMH, would be a third more expensive in Beijing than in Paris.

“Some Chinese tourists are very keen on buying a luxury bag from Prada in Paris, but check in at a 2-star hotel,” Mr. Rudolf said.

While the trend in Chinese luxury consumption is on the rise, European watch makers are seeing sales drop. “This is because of the anti-corruption campaign by the (Chinese) government,” Mr. Rudolf said. “Very expensive smaller goods are easy to bribe people with, so people stop buying them to avoid any association with corruption these days,” he said.

When it comes to larger luxury good items, such as cars, an increase in pollution, a one-day-a-week ban on driving and the mandatory purchase of emissions-control licenses can be uncomfortable for car drivers, but are unlikely to stop the overall trend in consumption. “Car makers focus on innovative cars that come with eco-friendly engines,” Mr. Ruldolf said.

BMW plans to increase production in China to six vehicle models from the current three, and also plans to start selling its electric-powered i3 car in China starting in October after already launching the electric car in Europe, the United States and Japan.

But the focus of attention for German automakers is shifting to China, now the world’s largest car market, where car sales are expected to rise 12 percent to 18.3 million vehicles in 2014, according to BMW. The U.S. car market is expecting sales of 16.2 million vehicles this year.

Even with tougher emission control standards on the way in China, consumers will continue demanding luxury cars, especially those from Germany, Mr. Rudolf said.

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