Luxury car maker Daimler AG (USA) (OTCMKTS:DDAIF), owner of the iconic Mercedes Benz, is eyeing double-digit growth in China as it aims to increase its share in the nation’s booming luxury car market.
Daimler AG (USA) (OTCMKTS:DDAIF) is expecting up to 15% growth in China in the current year. The company will expand its network of dealer outlets by opening 75 new stores in the inland West and smaller cities.
Daimler AG (USA) (OTCMKTS:DDAIF)’s management has admitted that the company has lagged behind its rivals — such as Volkswagen AG (ADR) (OTCMKTS:VLKAY), the maker of Audi — who have been aggressively expanding in China. In a previous article, I highlighted Volkswagen AG (ADR) (OTCMKTS:VLKAY)’s impressive performance in China. In the first half of the year, Audi reported a remarkable 18% increase in Chinese sales, while Mercedes Benz’s sales remained flat.
However, for Daimler’s investors, the positive development is that the management has recognized their “shortcomings” and believes that the solution lies in expanding the dealership network. By the first half of 2013, Daimler AG (USA) (OTCMKTS:DDAIF)’s number of active dealerships in China had increased by 20 to 279. As mentioned earlier, the business plans to open 75 new dealerships in the country, of which nearly 34 will be opened in Tier-3 and smaller cities.
New Products
Daimler is eyeing a boost in sales in the second half of 2013, which will be driven by an increase in dealerships and some new product launches . For instance, the long version of the new E-class and the Grand Edition of C-Class will be launched in China in this month. This will be followed by the arrival of S-Class later in Q4-2013 .
The most important of these is the S-Class, which has been specifically designed for the Chinese market . The anticipated SUV, called the GLA, will be launched in 2014. And this is just the beginning; over a span of 24 months, Mercedes Benz will launch 20 new or upgraded vehicles in the country .
Capacity Expansion
Daimler AG (USA) (OTCMKTS:DDAIF) will also increase its production capacity of Mercedes cars in China. It currently imports nearly half of its cars, and therefore ends up paying a hefty 25% excise duty. By expanding its Chinese capacity, Mercedes will reduce the number of imported cars to nearly one-third of its total sales, cutting costs and helping Daimler compete more effectively with its rivals in terms of price .
China’s Luxury Car Market: Competitive Landscape
China is a highly competitive market, in which Daimler AG (USA) (OTCMKTS:DDAIF)’s growth ambitions are threatened by local as well as foreign players. Volkswagen AG (ADR) (OTCMKTS:VLKAY) and General Motors Company (NYSE:GM) are two of the biggest foreign companies operating in the four BRIC nations in general, and China in particular.
China is already the world’s biggest automobile market, and it’s expected to grow faster than other BRIC nations between 2013 and 2015 . Its luxury car market, which is expected to expand by 140% between 2012 and 2016, is on track to become the biggest in the world by 2016 .
Interestingly, when it comes to luxury cars, the slowdown in the Chinese economy is having an adverse impact on sales of some of the premium luxury cars, such as Ferrari and Lamborghini. On the other hand, the affordable luxury car makers, such as Volkswagen, have been witnessing an increase in sales . The luxury car space is usually dominated by European manufacturers ; in China, Volkswagen’s Audi leads in terms of sales.
Last year, Audi sold 407,738 cars in China, nearly doubling Mercedes Benz’s sales. By the end of this past July, Audi had sold 269,905 cars in China year to date, and it looks well-positioned to achieve its target of selling 450,000 vehicles in 2013. The company is now gearing up to open its second assembly plant in China, which will eventually increase the carmaker’s capacity there to 700,000 units per year .
General Motors Company (NYSE:GM) is the biggest non-Chinese vehicle manufacturer in China, but it is a small player in the country’s luxury car market . But General Motors Company (NYSE:GM) is planning to take the three German manufacturers — BMW, Volkswagen and Daimler — head-on by increasing its focus on the luxury car market. America’s leading car manufacturer will launch at least six new or upgraded cars in the U.S and China in the next 30 months. It aims to aggressively expand its Cadillac brand through new premium crossover cars . The competition in China’s luxury car market will certainly heat up as Mercedes Benz’s expansion plans coincide with Cadillac’s aggressive push.
Conclusion
Daimler AG (USA) (OTCMKTS:DDAIF)’s ambitious plans for expansion in China will come on the back of $2.67 billion investment over the next two years . The company hopes these efforts will increase its Mercedes Benz sales by one-third, to more than 300,000 vehicles a year, by 2015. If this happens, then China will become Mercedes Benz’s biggest market — larger even than its home turf in Germany.
Daimler has realized that its rivals have outperformed the company in China through superior infrastructure. Companies like Volkswagen, BMW and General Motors Company (NYSE:GM) have spent billions on production plants and have a vast network of dealerships. Keep an eye on the company’s Chinese sales to see whether Daimler can emultate those rivals’ successes.
The article Mercedes Emulates Audi in China’s Booming Luxury Cars Market originally appeared on Fool.com and is written by Sarfaraz Khan.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool recommends General Motors.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
