Sunday, February 12, 2012

China's insatiable appetite for luxury cars

The US middle class always had a taste for luxury cars. But purchases of such cars have been generally moderated by the economic conditions. With a decline in consumer confidence since 2008, many in the US have put purchases of luxury cars on hold. After all when when there is no more equity to take out of the house and the job market is uncertain, such luxuries will have to wait. As the economic conditions in the US improve so will the purchases of premium cars - but very gradually (chart below).

Not so in China. It is difficult to describe the Chinese (upper) middle class affinity for luxury goods such as premium cars. In particular this group of people loves luxury SUVs. Since about 2006 China's "affluent" population has completely overtaken Americans with similar incomes in purchases of these vehicles. And this has nothing to do with population differences - for the same income bracket per one thousand households, the Chinese purchase nearly 6 times as many premium cars as Americans do.

In fact the American middle/upper middle class looks pretty frugal in comparison to their brethren in Western Europe. But even the Brits and the Germans who love their Land Rovers, Mercedes, Jaguars, BMWs, etc. are nowhere close to the Chinese.

Now, considering the population differences, it is easy to see why China is so critical to global manufacturers, and particularly European car makers. Whole industries are being built to support the manufacturing of premium cars just to satisfy China's demand for these vehicles. As an example Daimler spent EUR 2.4bn in 2009 on capital expenditures. In 2010-2011 that number shot up to EUR 8.1bn. This will employ a great number of people directly and via auxiliary support for this industry. This trend is something the Eurozone desperately needs right now.
Daimler: ... due to the new requirements placed on our products and the need to offer sustainable solutions for the mobility of the future, we will invest a total of more than €8 billion in property, plant and equipment in the years 2010 and 2011. Above all at Mercedes-Benz Cars, but also at Daimler Trucks, the planned investment in property, plant and equipment will be significantly higher than in the prior years. At the Mercedes- Benz Cars divisions, the focus will be on advance expenditure for new vehicles such as the successor models to the A- and B-Class, the new M-Class and the new SL. The biggest project is the expansion of our model range in the A/B-Class segment: Solely for that purpose, we will invest approximately €1.4 billion at our sites in Rastatt and Keçskemèt, Hungary.
Such demand ultimately propagates through the global economy with tremendous knock-on effects across industries. For example it greatly impacts the US parts manufacturers who supply some of the luxury car makers.

A Sober Look reader's email in reference to the recent post on the dip in China's car sales asks this question"... who cares about a drop in China's car demand? We in the US have bigger things to worry about." The answer is simple - the whole world cares, particularly now.
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