For Luxury Car Markers, The Chinese – Cash Cow Is Dying, Zero Hedge

For Luxury Car Markers, The Chinese "Cash Cow Is Dying"

It’s no secret that Chinese President Xi Jinping’s crackdown on corruption has had a rather dramatic effect on VIP gambling revenue in Macau, which has fallen for twelve consecutive months.

But the pinch is being felt well beyond the Baccarat tables.

“The enormous growth rates luxury-car makers like us have seen in China in latest years won’t proceed,” Porsche CFO Lutz Meschke said, at an event in Atlanta last month. Some estimates have Porsche selling more vehicles in China this year than in the US, and as Bloomberg notes, the Chinese market — which has been a thick boon for luxury manufacturers in latest years — is set to cool significantly going forward.

Freshly minted Chinese millionaires have long heralded their status by buying big, expensive cars such as Porsche’s Cayenne SUV. The penchant of rich mainlanders for flaunting their wealth is a big reason that China is set to dethrone the U.S. as the luxe automaker’s fattest market this year.

But after a government crackdown on graft and conspicuous consumption, growth in luxury-car sales is slowing, and Chinese buyers are lodging for less opulent models. That could spell an end to the gold rush for brands such as Porsche, BMW, and Audi, which have relied on China for about fifty percent of their global profits, estimates Sanford C. Bernstein..

“China is turning into a much more mature market,” Audi Chief Executive Officer Rupert Stadler said in May. “Competition will intensify” as the anticorruption drive saps request for luxury rails, he said.

The trend has been apparent for some time now. In April for example, BMW chief Norbert Reithofer (who stepped down in May) said luxury manufacturers "need to get used to single-digit growth in China." "We only sold fourteen Rolls-Royces in February. Something has clearly switched," Reithofer added.

Now, the numbers are in for May, and as FT reports, the "cash cow is dying." Here’s more:

China, the world’s largest car market by sales, has been the main engine of profitability for the likes of BMW, Daimler’s Mercedes-Benz car division and Audi in latest years, helping paper over structural weakness in Europe.

But the premium automakers have been vocal in their warnings of declining comes back in China, against the backdrop of a slowing economy, boundaries on car ownership in big cities and rising competition from cheap and cheerful domestic brands.

According to one Chinese dealer representative: “the cash cow is dying”.

That became clear on Tuesday as Audi reported a fall in monthly sales in China for the very first time in more than two years. The company – a unit of Volkswagen and the leading supplier in China’s premium auto market – said sales fell 1.6 per cent in May compared with the same month last year.

“The reticence to buy in the Chinese luxury segment was particularly noticeable,” said Audi.

Sales of BMWs and the Bavarian company’s Mini vehicles were down four per cent year-on-year in May, the manufacturer’s very first sales decline in China in ten years.

Jaguar Land Rover, the UK carmaker managed by India’s Tata Motors, has also seen sales of its once sought-after SUVs fall as much as sixteen per cent in the very first quarter, according to the company. Overall, JLR’s China deliveries were down thirty two per cent year on year in May..

There had been hopes that European car sales – eventually growing after six years of post-crisis decline – might partially offset the Chinese slowdown, but these were damped on Tuesday by figures that showcased sales in the region advanced at their slowest rhythm in almost two years last month.

Indeed, fresh car registrations in Europe rose just 1.3% in May, the weakest in what has been a 21-month run of gains:

WSJ has more color on how luxury models are faring in China’s Western provinces where, until this year anyway, growth was sturdy:

A surprise sales slump is hitting what had been a fast-growing part of the world’s thickest car market. That could be bad news for mass-market global brands like Volkswagen AG and Ford Motor Co. and luxury names such as Volvo Car Corp., Mercedes-Benz and BMW AG.

The global auto industry in latest years has been betting intensely on China’s west, where they see potential for quicker growth than in the more affluent—and car-saturated—cities along the coast and in the country’s eastern and southern manufacturing belts.

An analysis of new-car registration data by Chinese automotive research rock hard Ways Consulting Co. demonstrated that first-quarter sales across twelve western provinces grew about 12% from a year earlier to 1.Two million vehicles.

That build up trails a 15% rise over the same period for the country as a entire, and represents a shift from a year ago, when western provinces outgrew the rest of the country. New-car registrations are considered a proxy for auto sales.

Luxury-car sales show up to be faring even worse. The Ways data showcase registrations of fresh Mercedes-Benz vehicles in the western province of Sichuan fell 6.9% in the very first quarter to Three,944 cars, compared with a 50% rise in the same period a year earlier. Registration for BMW cars fell 9.1% in the very first quarter to Five,450 cars from a 36% year-over-year increase in the same period in 2014, according to Ways.

Exceptionally, it shows up as tho’ when it comes to luxury car purchases, a decelerating economy, a corruption crusade, and an effort to crackdown on extravagence within the Communist Party have been enough to offset the enormous gains investors have liked by racking up record margin debt to day trade the Shenzhen.

On the bright side for the Porsches, BMWs, and Jaguar Land Rovers of the world, there’s always the possibility that FTSE and MSCI EM benchmark inclusion will work to sustain China’s equity bubble and drive valuations even further into the stratosphere, making millionaires of the country’s semi-literate day trading hordes and sparking a mad grab for status symbols. Fingers crossed.

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