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China market rout, slowing economy sap demand for luxury cars

Via FMT News : Prices for German luxury cars in China are tumbling as the country’s stock market sell-off and worries about broader economic growth chill demand for auto brands that once commanded price premiums from affluent Chinese consumers.

At Mercedes-Benz stores operated by a dealer group with nearly 200 multiple brand outlets, customer traffic at showrooms has dwindled markedly since mid-June, when a stock market slide that saw indexes plunge by as much as a third began.

A senior manager at that dealer chain said customer traffic at some of its Mercedes-Benz stores was “down 20 percent to 30 percent” compared with last year’s levels over the past month.

A China-based spokesman for Mercedes-Benz owner Daimler AG could not immediately be reached for comment.

Dealing with a similar fall-off in customer traffic and orders, a dozen BMW stores run by another dealer group are being forced to provide increasingly steep discounts to entice customers, according to the head of the chain with showrooms across China.

He said business had already been weak, due to China’s slowing economic growth and a corruption crackdown that has weighed on sales of flashy cars, and his stores had to offer a 5 percent discount to grease sales last year.

Over the last week or two, as the stock market rout pummeled the net worth of potential buyers, many of those stores were forced to offer steeper discounts on cars such as the BMW X6 crossover SUV, according to the dealer group chief.

“The business has been slow for the last 18 months, but lately we have had to discount even more,” the dealer operator said, asking for anonymity because he did not want to damage his group’s relationship with BMW.

“When people walk into a showroom now, with anything less than 15 percent discount they would not even consider opening their wallets.”

Jimmy Cao, a Beijing-based BMW spokesman, said he was not able to provide an immediate comment.

The average “maker suggested retail price” (MSRP) for all passenger cars remains relatively high in China, at around 280,000 yuan ($45,000), according to research firm JATO Dynamics.

But actual prices customers pay when buying cars have fallen steadily since 2012 to slightly less than 170,000 yuan, chiefly because of heavy discounting by dealers, according to JATO.

Sales forecast cut

In the first sign that turmoil in the stock market could affect spending in the real economy, China’s automakers’ association on Friday slashed its 2015 forecast for vehicle sales growth to a meager 3 percent.

The China Association of Automobile Manufacturers (CAAM) previously predicted combined sales for passenger and commercial vehicles to grow 7 percent to 25.1 million this year.

“The stock market has some impact on the car sales as it hurts cash flow,” CAAM chief Dong Yang told reporters on Friday, adding he was confident sales would pick up in the second half.

Defending the double-digit operating margins that the China car market provided just a few years ago is not easy as the economy cools to its slowest pace in growth in a quarter century, and auto dealers in China are tightening their belts to keep margins from falling further.

The BMW dealer group chief said his outlets, which employ about 200 people at each location, had put a hold on new hires.

“We have not instituted pay cuts, but we have actually frozen salary increases as well,” he said.

The dealer group chief was also trying to persuade the German brand to lower the bar for bonuses and rebates – a primary source of profitability for most dealers – by reducing its sales volume objectives for his stores.

“If the factory actually lowered our targets, we wouldn’t have so much pressure to discount in trying to achieve our targets,” he said.

Several automakers, including General Motors Co and Volkswagen AG, have already readjusted their pricing strategies in China by pushing down MSRPs closer to prevailing transaction levels.

GM’s Shanghai-based spokeswoman Irene Shen said by email the Detroit automaker was not considering lay-offs or big productions cuts.

“GM is committed to China and intends to continue to grow and enhance our business working with our partners in China,” she said. “We have made no major moves to curtail production. We regularly manage our production volumes to maintain inventories within a healthy range.”

Global automakers would, in any case, find it hard to make significant lay-offs in China, given they are mostly partnered with Chinese state-owned car makers who defer to Beijing’s priority of defending social stability by safeguarding jobs.

“For high profile JVs, it would be difficult to make more radical restructuring moves like larger scale lay-offs and capacity reductions,” James Chao, Shanghai-based Asia-Pacific managing director at industry consultant IHS Automotive.

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