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Jun
2015

Government policy begins to drive the price of new vehicles lower

You will have read in previous issues of Luxury Insights China about the price of luxury cars and the government regulations that were not well thought through, that have in fact been the reason that prices were allowed to be so high. Put simply, the regulations that were meant to protect the market meant that the manufacturers were allowed to control the import and sales process from end to end. The result being higher end user prices as vehicle brands added a margin to every step of the process, pocketing large profits as a result.

Recent discussion indicates that the government is about to change the rules that affect both import and servicing that will potentially both open up the market or force the big players to drop their retail and maintenance pricing. There is talk that new regulations will allow vehicles to be legally imported through approved grey channels thus avoiding the official importation organisations belonging to their car brands, and as a result their additional margin that is passed onto the customer.

This policy may also allow a 4S store to buy its vehicles from a ‘grey importer’ but the vehicle manufacturers may have terms in place in their contracts to prevent this. Of course it would not prevent an independent 4S dealership from being established that could then pick and choose where it were to buy its cars, and could search out the best price, handing on savings to the consumer and possibly selling higher volumes of cars and earning better discounts as a result. The official 4S dealers would then push the official manufacturers distribution companies to offer lower prices so that they could then compete, and so the cycle would continue.

Talk is of 30% reductions in price as a result of official grey imports, which on vehicles selling at up to 50% higher than those in the US or Europe is a great deal of money, but in reality by the time taxes, duties and a realistic margin are factored in, savings may only be 15%, which is still attractive. Spares and servicing are also currently monopolised and expensive, and these two are potentially affected by new regulations. Until now, dealers refused to service vehicles not imported through official channels, usually because the brand themselves forbade it and wouldn’t refund warranty costs back to the dealer. This monopoly may also be broken soon.

Whether these new proposed regulations are enforced fully is yet to be seen. They will certainly loosen up the market and if they do nothing else, they will mean that vehicle prices will fall to some extent in China, but possibly not as much as we all might like to see. However, this change will affect the market in the longer term, and we can expect to see more independent 4S dealerships selling multiple brands side-by-side, and in the longer term more realistic retail prices for all luxury vehicles which may in fact increase the volume of sales as they become more affordable to a wider consumer group. As we have seen over the past ten or more years, China is an evolving market that has yet to plateau. Those operating here need to continuously expect the unexpected!


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