China’s luxury car market
If you are rich and you want the world to know this, you must sport a flashy car. The situation gets headier if you are barely in your mid-30s.
This is currently the situation in China, where the luxury car market has grown by an incredible 36% annually over the past decade. The young age group of luxury car buyers has had a major role to play in this.
Although things have slowed down in the current decade, McKinsey still expects the annual growth rate of China’s luxury car market to be around 12% till 2020. By then, China will have overtaken the US as the biggest luxury car market in the world. Analyst predictions call for luxury car sales to reach about 2.7 million in China by 2020, compared to 2.25 million in the US.
GM’s target
General Motors Company (NYSE:GM)’s does not want to lose out on the luxury car opportunity in China. The company believes that China will account for up to two-fifths of the global luxury auto market by 2020. True that its current share is just 2.5% in the luxury segment, but it is still the largest car seller in the country.
So now the US auto giant has a target of tripling the number of Cadillacs sold in China to 100,000 by 2015 and expanding its market share to around 10% by 2020. The company is looking at around 250,000 luxury car sales by that time. GM has selected its 110-year-old luxury brand Cadillac for making this happen. In 2012, it sold around 30,000 Cadillacs in China.
It was imperative for General Motors Company (NYSE:GM) to make this push sometime. Despite its being the biggest car seller in China, it is not able to make as much of a profit as rival Volkswagen because of its limited presence in the luxury segment.
Luxury cars are typically priced between $32,000 and $190,000 according to McKinsey’s estimates and carry fat margins. Volkswagen generates a lion’s share of its global profits from Audi sales in China.
A huge challenge
The Chinese equate luxury cars with German brands. Audi, Mercedes-Benz, and BMW completely dominate the market, holding approximately 70% market share between them. At the end of last year there were more than 300 BMW and Audi stores in the country and some 260 Mercedes stores.
Audi leads the market with approximately 29.6% share. It increased sales by 29.6% to a record 405,838 units in 2012, outselling Cadillac by almost 14:1. In 2013, Audi’s popularity remains as strong as ever with sales jumping 16% in May. Volkswagen has its own ambitious plan of increasing annual Audi sales in China to 700,000 units. General Motors Company (NYSE:GM) has a tough task at hand.
To make the task even more challenging, General Motors Company (NYSE:GM)’s cross-town rival Ford Motor Company (NYSE:F) will debut its luxury brand, Lincoln, in China in the second half of 2014. It is true the Lincoln has lost its glory as the leading luxury brand in the US as Ford Motor Company (NYSE:F) has focused on other segments. Sales fell to about 82,150 units in US in 2012, down from its peak of 231,660 units in 1990. The story may change very soon, however.
Management has already decided to revive the brand by adding more models beginning with the MKZ sedan and tapping new fast-growing markets like China. Ford Motor Company (NYSE:F) has arrived in China later than GM and Volkswagen, but is on a fast growth trajectory with vehicle sales shooting up by 48% between January and May 2013.
GM’s plan
The company has decided on three things – increased production, increased dealerships, and increased lineup. GM is banking on these strategies to help it achieve its target.
As a result, it has started building a Cadillac factory in Shanghai. General Motors Company (NYSE:GM) will spend around $1.3 billion on this facility, which is scheduled to start production in two years’ time. The factory will have an annual capacity of 160,000 vehicles.
It will increase the number of Cadillac stores to over 200 by the end of this year. The company has an overall investment budget of $11 billion in China till 2016. The new dealerships will penetrate the country really deep. GM is looking to go not only to the tier-2 cities but also to tier-3 and tier-4 cities.
This year GM has introduced its XTS sedan in China. The company plans to launch a new Cadillac model every year through 2016. The designs would be keeping in mind Chinese preference for more rounded shapes. The current Cadillac models which are highly popular in the US and use inspirations from US stealth fighter aircraft are not liked in China too much.
Will GM make it?
No doubt the task ahead of General Motors Company (NYSE:GM) is uphill. But the company has done its homework well. It has some solid plans and the necessary budget to finance its bold initiatives. Once the new models hit the market, with more dealers and deeper penetration, the Cadillac brand should definitely see more demand. We can be reasonably optimistic that GM will be able to make it.
The article This Auto Giant Is Setting the Bar High originally appeared on Fool.com and is written by Eshna De.
Eshna De has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Eshna is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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