Bloomberg News

Audi Spurns China Company-Car Role to Rebuild Market Share: Cars

November 08, 2011

Oct. 27 (Bloomberg) -- Audi AG’s status as the carmaker of choice for Chinese bureaucrats has emerged as an obstacle in the world’s biggest automobile market as BMW and Mercedes-Benz gain traction with a generation of rich young buyers.

Audi’s share of China’s luxury-car sales has tumbled by 25 percent in less than two years as state agencies and executives tighten budgets and younger buyers seek alternatives to sedans traditionally used by the government. The German automaker supplied an estimated 70 percent of cars used by the government and state-held enterprises during the 1980s.

“Audi is seen as being a bit old-fashioned because of its association as being a government car,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “Wealthy consumers today want something sexier, more indulgent, which is why BMW and Mercedes have done well.”

Daimler AG’s Mercedes boosted its portion of Chinese luxury-car sales to 22 percent in the first six months of the year from 16 percent in 2009, according to industry researcher J.D. Power & Associates. Bayerische Motoren Werke AG’s share grew to 25 percent from 21 percent. Their successes came at the expense of Audi, which dropped to 30 percent from 40 percent.

“Audi cannot rely on government sales going forward as such demand will likely fall,” said Jenny Gu, a Shanghai-based analyst at J.D. Power. “Demand from private consumers will grow much faster as buyers upgrade their vehicles.”

Audi is counting on Dietmar Voggenreiter, its president for China, to reverse the market-share slide. The Ingolstadt, Germany-based company, which relies on luxury sedans for the bulk of its China sales, introduced trendier models such as the R8 Spyder sports car and the A1 subcompact this year. It will import the Q3 sport-utility vehicle in 2012 and eventually produce it locally, he said.

Young and Rich

Audi’s push underscores the burgeoning number of wealthy entrepreneurs in a country where the rich may be the youngest in Asia. The average age of people in China with liquid assets of at least 500,000 yuan ($78,700) is 36, compared with 48 in Hong Kong and 38 in Indonesia, according to a HSBC Holdings Plc report released last month that also covered Australia, India, Malaysia, Singapore and Taiwan.

Young customers and families are the Volkswagen AG unit’s “main customer focus” in the country, Voggenreiter, who took the reins in November 2006, said in an interview last week.

“Because of the wealth development, you see a lot of young customers and young families who’re now buying premium cars,” Voggenreiter said at the carmaker’s factory in Changchun, in northeast China. “Ten or five years ago, you had a lot of business and government customers.”

History With Government

Audi, the first high-end sedan maker in China, started making the A6L with its local partner FAW Corp. in Changchun in 1999. Its sedans make up about a third of government and state- linked enterprise fleets, down from about 70 percent in the late 1980s, said Zhang Xin, a Beijing-based analyst at Guotai Junan Securities Co.

Under newest procurement rules, cars used by government agencies must have engines no bigger than 1.8 liters and cost less than 180,000 yuan. That rules out the A6L, which starts at 355,000 yuan and accounts for a third of Audi sales in China. Its deliveries have fallen 5 percent in the first nine months.

The diminishing share of government purchases as a proportion of Audi’s sales means the impact of the government’s tightening budget to Audi will be minimal, Voggenreiter said.

Delivery Plans

Audi’s A7 coupe, which will be available from next month in China, will compete with BMW’s 6-series cars and Mercedes CLS range -- both revamped since last year. Audi will roll out 13 new or upgraded models globally this year, including the redesigned A6 sedan and Q3 compact SUV.

Mercedes, which hired tennis Grand Slam winner Li Na in June to promote the brand, introduced 25 new and refreshed models in China this year.

Audi expects China deliveries this year to top 300,000 and plans to expand annual manufacturing capacity in the country to as high as 700,000 vehicles by 2015 depending on market demand, Voggenreiter said. The carmaker expects import sales to increase 77 percent to about 55,000 units in 2011, he said.

The made-in-China A4L, A6L sedan and Q5 SUV accounted for more than 80 percent of Audi’s sales in the country last year, according to J.D. Power.

‘Ticket to Wealth’

Audi sold 223,631 cars in China in the first nine months of the year, an increase of 29 percent from 2010. Mercedes delivered 38 percent more vehicles, or 139,400 units, in the first nine months. Munich-based BMW, which offers its 3-and 5- series sedans in China, sold 171,342 units in the same period, a gain of 63 percent from last year, according to J.D. Power’s data.

“Ten years ago, everyone wanted to be in government as that was seen as the ticket to wealth,” said Rein of China Market Research. “Today, the new wealthy consumer doesn’t want to be associated with officialdom.”

Outside China, Audi is perceived differently, said Jim Hall, principal of automotive consulting firm 2953 Analytics Inc. in Birmingham, Michigan.

“Audi has a slightly schizophrenic image,” Hall said. “In China its sedans are government cars and are considered stodgy. In the U.S. and Europe, Audi is edgy, stylish and a smarter buy than a Mercedes or a BMW.”

--Liza Lin, with assistance from David Welch in Detroit, Tian Ying in Beijing and Chris Reiter in Berlin. Editors: Chua Kong Ho, Young-Sam Cho, Kevin Miller

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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