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Jun
2015

Luxury Cars August 2013

The Ultra high-end sector slows significantly

The slowing economy and the government drive to reduce extravagant expenditure appears to have started to take affect in the ultra high-end car sector in China. Sales for Ferrari were down 12.5% for the first half of the year and those for Bentley reduced by 23%. However, sales of high-end luxury cars such as BMW, Jaguar Land Rover and Audi were all up 15%, 16% and 17.7% respectively, so why the dramatic affect right at the top?

The first reason is that new regulations in terms of abuse of power include that of fitting ‘government’ license plates onto luxury vehicles. These plates exempt the driver from most rules on the road in terms of speeding and parking, perfect for the family of officials to put on a supercar. The second reason is that many business owners who have had some hugely profitable years during which they were able to buy multiple new ultra high-end vehicles, have seen their profits squeezed in the past 12 months, and are not now buying more new cars, in fact some are trying to sell their old ones.

The future growth of the Chinese middle class will become the driving force behind the automotive market, and brands like Audi, BMW, Mercedes-Benz and Jaguar Land Rover are likely to benefit. Their prices are still higher than elsewhere in the world, even if the vehicle is made in China, yet the customer is still hungry to purchase.

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Car pricing attracts media discussion

In the past month, the price of cars has become a major topic of discussion in the media, started by CCTV on August 16th. The point they focused on was the fact that the final list price appears to be considerably higher than the sum of the parts that make it up. Here are the comparison of the domestic prices and overseas price of some popular models in China.

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Sales staff will always say that the high price is the result of high tax, and many different ones that they overstate slightly, but the reality is that since joining the WTO in 2006, the tax in China has dramatically decreased. The government does give with one hand and then take back with the other by reducing the import tax, and then adding up to 40% consumption tax on top.

Take the latest Range Rover 5.0L for example, the basic car price is at RMB 520,000 in UK where its made and 540,000 in the US. Add on 25% of the tariff, 17% VAT and the highest 40% consumption tax, that prices the latest Range Rover 5.0L in China at 1.3 Million RMB, 590,000 RMB less than 1.89 Million RMB RRP at the dealer. The fully loaded version will cost a whopping 2.798 Million RMB!

Where does the additional profit go?

In 2005, the “Measures for the Administration of Automobile Brand Sales Implementation (MAABS)” was published that allowed the car brand to set up a Chinese distribution company that controls the only import rights, and creates an opportunity for the brand to dictate prices and make huge profits. The situation is now under investigation by the National Development and Reform Commission together with the Ministry of Commerce, and the National Administration of Industry and Commerce that aims to amend the ”MAABS”. The investigation into what in effect is a monopoly that gives the car brand an additional 462K RMB profit on our Range Rover, while a dealer only makes 128K RMB, is a situation not uncommon in China, where the government has to fix a problem it in effect created itself some years previously.

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The current thinking is to break the monopoly and allow other distributors or dealers to enter the market and buy vehicles at source, this would in theory be a step forward to reduce the price of imported cars in China, and whether it affects prices of domestically made cars remains to be seen. What we hope isn’t ignored is the handling and logistical issues that might result, making the import process less slick and potentially affecting the business of the brand in China.

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