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Luxury auto market dominated by youth, wealth

2014-04-21 09:11 Shanghai Daily Web Editor: qindexing
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The light vehicle industry in China has often been described as a "golden decade" that began in 2004. During this time, the market expanded nearly fivefold, increasing from 4.3 million vehicles to 19.9 million. This surge continued through the global downturn, when other automotive markets were experiencing severe declines.

In fact, during the market downturn in 2011, the luxury segment still grew 54.5 percent. By the end of 2013, the segment was still enjoying double-digit growth of 18.4 percent, reaching sales of 1.4 million units, second only to the US. China is expected to surpass the US in luxury sales by 2016, and luxury segment sales by 2020 are expected to double yet again, reaching 3 million units.

So what's behind this impressive growth within the luxury segment? There are several underlying factors. Perhaps the most obvious is that premium brands appeal to those amassing greater wealth — a demographic that is rapidly expanding in China. A dealer in southern China, surnamed Zhang, observed that the average age of his luxury clientele has dropped to 25 years old from 45 years. Indeed, the "young and rich" of the country are making their status known at luxury dealerships.

Luxury vehicles have an expected compounded annual growth rate of 11.5 percent from 2013 to 2020, which is almost double the rate of standard, non-premium passenger vehicles. Luxury SUVs will see even higher growth of 19.8 percent in the same period. Based on the forecast assumption that the Chinese market will eventually reach average penetration rates of the mature US and European markets, which hover around 10 percent, Chinese luxury sales will reach 3.04 million units in 2020. Mass-market consumer preferences are clearly shifting toward the SUV body style, which provide more space, better road positioning and view, heightened safety, and above all, enhanced image and status.

Localization will be a major trend for major luxury players in China market. Almost all major luxury makers will have domestic production within the market by 2016. Assembly localization has obvious cost advantage on several levels. Local sourcing, market research and development, and creation of a streamlined value chain within the country are all cost-effective measures that luxury automakers are chasing. Localization can also reap benefits long term, both with government and legislative matters as well as minimizing additional import duties. Additionally, as Chinese consumers increasingly contribute to the bottom line, it makes sense to set up local bases that demonstrate an automaker's commitment to the market in the long term. The surging growth in capacity investment will stabilize, especially as the evolution of manufacturing processes globally eventually leads to a narrowing of the price gap between local production and importing.

A trend of overall vehicle downsizing, amid more stringent emission standards, is also reflected in the luxury segment forecast. To meet these regulations, entry-level models are increasingly available — and appealing to younger, first-time buyers. We anticipate higher compound growth for small and compact luxury vehicles, particularly with locally produced models. Forecast data suggest that small-to-compact luxury vehicles will grow from the current 110,000 units to 680,000 units by 2020. The lower-cost nameplates act as entry points to penetrate the market, while larger, more expensive vehicles can remain imports, given higher production costs.

There has been ongoing speculation about whether luxury consumption will face additional duties. For vehicles, this would likely be based on price and tax. These additional taxes, combined with the heightened concern over air pollution, have added more fuel to the conversation over luxury consumption taxes. Indeed, if tax rates are to be imposed on a graduated scale based on vehicle size and emissions, the top-end of the premium vehicle spectrum would likely be impacted. However, smaller vehicles would be more fuel efficient and, thus, should still be seen as desirable status symbols.

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