German carmakers are facing challenges in China
Germany’s luxury automakers, such as BMW and Mercedes-Benz, once dominated the streets of China. Not anymore.
A recent dispute between Porsche and its dealers in China has highlighted the complex situation faced by even some of the world’s top car brands. As reported by local Chinese media, a number of Porsche dealers have declined to increase their inventories and have requested additional subsidies from the company. Recently, Porsche and its dealers in China issued a statement acknowledging the challenges they are currently encountering. They expressed their commitment to collaborating and finding suitable solutions to address the evolving market conditions.
Chinese car dealers are facing significant challenges. In the face of a fierce price war, they are compelled to provide significant discounts to customers. As an economist would analyze, the gross profit margins on sales of new cars for Meidong, a dealer for brands like Porsche and BMW, experienced a significant decline from a positive 6.8% in 2021 to a negative 0.6% in 2023. The Hong Kong-listed company has experienced a significant decline in its value, with a staggering 94% drop from its peak in 2021. Inevitably, this will result in the automakers needing to provide additional rebates and reduce their own profit margins.
Porsche experienced a 24% decline in first-quarter deliveries in China compared to the previous year. It is not the only one. In the quarter, Ferrari experienced a 25% decline in shipments to mainland China compared to the previous year. In the first quarter, Mercedes-Benz and BMW experienced a decline in car sales in China compared to the previous year.
The downturn in China’s housing market and the subsequent economic slowdown may have had an impact on luxury spending. Recently, there has been a decrease in demand for brands like LVMH and Gucci in China.
China’s car-buying habits have experienced a significant transformation due to the rapid growth of electric vehicles. Approximately 44% of cars sold in China in April were new-energy vehicles, which encompass plug-in hybrids, as reported by the China Passenger Car Association. German brands have enjoyed a dominant position in China’s luxury segment for quite some time. Although they maintain a strong presence in that market, the rate of electric vehicle adoption for cars priced above 350,000 yuan, approximately $48,300, was less than half of the overall market rate by the end of last year, as reported by Bernstein. However, the situation could quickly evolve.
Chinese EV brands have been rapidly increasing their market share, particularly in the slightly cheaper car segment. According to Bernstein’s analysis, in 2023, German brands held a market share of only 45% for cars priced above 250,000 yuan (approximately $34,500), compared to their 60% share in 2020. Tesla has been gaining market share, while Chinese EV brands such as Li Auto and BYD’s Denza have been introducing higher-end models. In contrast, German brands have been more cautious in their approach to introducing electric vehicle (EV) models. Chinese consumers are increasingly seeking out technology features like infotainment or drive-assistance systems, which are often found in electric vehicles.
China has been a highly profitable market for German luxury carmakers, who have enjoyed their prestigious status and maintained a strong position in the industry. However, they must now put in more effort to prevent themselves from lagging behind their competitors in the area.
