SHANGHAI -- Audi expects to offset softening demand for large luxury cars in China by winning sales from volume brands.
Executives at Volkswagen’s luxury unit say China’s slowdown is leading to lower capacity utilization of its two local plants, rising incentive spending on older models and a shift away from its more lucrative upper segment models such as the A6 Long.
Audi believes it is well placed to gain share of the overall market as the brand moves into booming smaller segments but the risk remains that the deterioration in the sales mix paired with the recent emergence of discounting means premium brands will be more reliant on volume growth than ever for higher profits.
Speaking during the Consumer Electronics Show Asia in Shanghai earlier this month, Audi executives confirmed downbeat comments in March from BMW, which said that the days of high contribution margins in China were over.
China’s car market used to be an exception, but now "it’s become more normal,” said Audi sales chief Luca de Meo, referring to the loss of unusually high profits earned per car by the industry in China.
Unlike in most parts of the world, China had long been a seller’s market for carmakers as output continually lagged demand. The hardest part was building enough models and avoiding bottlenecks at their plants and those of suppliers. The easy part was selling the car since demand remained consistently strong even for models that were due for replacement.
Audi executives now speak about “lifecycle management” – a euphemism for successively raising discounts or adding more free content the older a product becomes. “For me the turning point was when Mercedes heavily discounted the S class in the first quarter of 2012,” said Dietmar Voggenreiter, who has run Audi’s China operations since 2007.
Audi’s vehicles sales have increased nearly sixfold since 2007 to almost 580,000 cars last year, keeping the brand as China’s top-selling premium brand ahead of rivals BMW and Mercedes-Benz. China is also Audi’s largest single market, more than twice as big as Germany, its second largest.
The sales growth was due in part to a massive government stimulus introduced in 2009 to encourage domestic spending, maintain employment and offset the sharp drop in exports from the global financial crisis.
Audi’s expansion has slowed each month this year from 15 percent in January to just two-tenths of one percent in April. The company has forecast that volumes will surpass 600,000 in 2015, which could mean a growth rate of as little as 3.6 percent. Audi declined to be more specific, saying its main aim is to continue increasing its share of China’s market, which amounted to a third of the 1.68 million premium cars sold last year.
Similar to what has been seen in Europe, the brand says it is growing partly at the expense of more mainstream brands. Especially younger consumers who may have bought a midsize car from a volume marque are increasingly purchasing compact premium cars such as the A3 Sportback, which started local production last year.
Executives expect the share of premium sales in China coming from upper segment cars such as the A6 Long will shrink in favor of smaller cars as wealth standards rise and automakers target customers with disposable incomes of about 100,000 yuan (roughly $15,000) compared to the 230,000 yuan ($35,000) that more affluent ones took home.
Typically, most developed premium markets have a stratification that looks roughly like a pyramid: the largest number of sales come from lower segment cars such as subcompacts. Volume progressively declines with each step upwards in segment. In China, however, it’s almost the reverse.
The segments in which the A6 and A8 compete typically represent around 35 percent to 40 percent of sales in mature markets, but they still have a share 45 percent to 50 percent in China, according to Audi.