China’s rapidly rising middle- and upper-classes are increasingly coveting luxury automobiles and opening doors for high-end American models while bringing along the prospect of subsequent aftermarket opportunities. The performance attributes of premium U.S. nameplates are also attracting attention, especially as well-to-do government officials – instructed by superiors to tone down the blatant bling – are frequently foregoing chauffeurs in favor of getting behind the wheel themselves.
According to data from the Digital Luxury Group consultancy, the vehicle category tops online searches among the Chinese luxury sector at 53.5 percent, besting by a wide margin beauty products (22.7 percent) and fashion (15 percent). In 2012-13 the most sought-after high-end automaker offerings were from Audi, BMW, Lexus, Mercedes, Porsche, Lamborghini, Volvo, Land Rover and Infiniti, with Cadillac pulling into the No. 10 spot.
Luxury vehicles have experienced “a particularly impressive growth in the last several years,” says Wilson Liu, head of the China automotive division at PricewaterhouseCoopers (PwC). Even as the Chinese auto market grew only marginally in 2011, the luxury segment netted a 54.5 percent growth rate. By the end of 2013, the segment was still enjoying double-digit growth of 18.4 percent, reaching sales of 1.4 million units, second only to the U.S. China is expected to surpass the U.S. in luxury vehicle sales by 2016, he reports.
Liu explains that the population of affluent consumers in China is quickly expanding, both in volume and in age range. Younger first-time buyers have increasing buying power within the market, and the result has been growing sales within the luxury segment, he says.
“The foreign luxury brands seem to appeal to young buyers as they perceive them as safer, more technologically advanced and better quality,” says Liu. “On the other hand, a trend of overall vehicle downsizing, amid more stringent emission standards, is also reflected in the luxury segment. To meet these regulations, entry-level models are increasingly available and appealing to younger, first-time buyers.”
“Premium brands appeal to those amassing greater wealth – a demographic shift that is rapidly expanding in China to younger generations that are hungry for consumer goods that show their higher status,” according to a PwC Autofacts Analyst Note issued in June 2014.
Luxury vehicles have an expected annual growth rate of 11.5 percent from 2013 to 2020, which is almost double the rate of standard, non-premium light vehicles. Autofacts is forecasting that the Chinese market will surpass the average luxury penetration rate of 10 percent in “mature” markets such as the U.S. to reach just over 3 million units by 2020.
“As the luxury segment proliferates, global premium brands are scrambling to localize production,” says Rick Hanna, PwC’s global automotive leader. “It is expected that almost all major luxury brands are expected to have domestic assembly by 2016.”
Assembly localization has cost advantages that include local sourcing, market research and development, plus creation of a streamlined value chain within the country, Hanna says, adding that localization can also reap long-term benefits, both with government and legislative incentives as well as minimizing additional import duties. “Establishing a local base not only demonstrates a commitment to the market, but allows for cost savings and the ability to remain agile in a dynamic market where consumer preferences can shift quickly.”
Elevating Cadillac
General Motors’ Cadillac plans to introduce nine new models in China over the next five years, with more than 95 percent of its lineup produced in country by 2018. Its current Chinese offerings range from ATS and ATS-L luxury sedans to the SRX and Escalade luxury SUVs. During the first 11 months of 2014, Cadillac’s sales of 64,359 vehicles in China represented a 50.7 percent leap from 2013’s tally. Buick posted a 3.7 percent gain.
“Global growth and the elevation of Cadillac is one of GM’s most important strategic priorities,” says GM President Dan Ammann. “China represents a crucial opportunity given its very strong market and the positive momentum we have built here for Cadillac.”
“We have a solid foundation, as Cadillac has greatly elevated its product substance and has taken many successful growth steps in China already,” adds Cadillac President Johan de Nysschen.
“Cadillac is in a strong position to address the rapidly rising demand for luxury vehicles in China, a country in which we have a strong foundation given GM’s long-standing strength here,” de Nysschen says. “By offering a broad lineup of products built in China for local consumers, we are intent on being at the forefront of the next stage of the luxury segment’s development.”
GM has 10 joint ventures, two wholly owned foreign enterprises and more than 58,000 employees in China producing cars and commercial vehicles sold under the Baojun, Buick, Cadillac, Chevrolet, Jiefang, Opel and Wuling nameplates; the automaker’s overall sales in China amounted to more than 3.1 million vehicles as 2014 came to a close.
The Lincoln Way
Following its Chinese debut of the Lincoln line in April, Ford has moved quickly by opening eight dealerships by the end of the year – covering Beijing, Shanghai, Guangzhou, Hangzhou, Qingdao, Xi’an and Chengdu, with others on the way across China throughout 2015. Lincoln executives expect to have 60 dealerships in place by the end of 2016.
As China’s fourth-largest city, Chengdu is home to more than 14 million people. Lincoln arrived there in December via an initiative described as “a strategic step forward” in entering the southwestern region of the nation.
“As with all Lincoln facilities in China, the Chengdu Meilin Lincoln Store is designed around the ‘Lincoln Way,’ a unique new automotive ownership experience for Chinese luxury customers,” explains Lincoln China President Robert Parker. “By opening our first dealership in southwest China, we can provide customers with the chance to enjoy a truly personalized, truly luxurious service experience.”
Key elements of the Lincoln Way include a dedicated Lincoln Team, a distinct, welcoming, home-like environment featuring a relaxing tea house; intuitive personalized technology, with an exclusive Personalization Studio; and complete sales and service transparency, according to Parker. “The Lincoln Way will be the hallmark of all Lincoln stores in China.”
The program promises to serve “today’s younger and more discerning luxury customers who value individuality. Through Lincoln’s specially trained staff, customers will experience a warmer, more engaging purchasing and ownership experience personally crafted to their individual needs and desires,” Parker says.
“It completely shifts luxury automotive ownership from a sales and service transaction model to an experience model,” he continues. “Instead of selling luxury for luxury’s sake, Lincoln dealerships in China leverage the insight that a new generation of customers want brands that meet their personal needs and reflect who they are as an individual. Compared to other dealership facilities – which are built around the products and often cold, impersonal and cavernous, Lincoln dealerships are built around the customer, using clean elegant designs, harmonious colors and quality materials.”
Initial offerings involve the MKC, a small premium utility vehicle, and the MKZ, a midsize premium sedan. Both vehicles come in three model series, the Reserve, the Select and the Preferred. The MKZ and MKC will be followed by the MKX, a mid-size SUV, a full-size sedan, and the Lincoln Navigator as five new Chinese models are set to be unveiled by 2016.
Based on the company’s research, “Feedback from luxury auto buyers raised concerns about being charged for unnecessary repairs, the amount of time required to complete maintenance and repair work as well as the care given to the vehicles during the process,” Parker reports. “Lincoln customers have complete transparency throughout the process, including write-up, diagnosis and parts change. Customers can also watch their vehicles serviced in real time from the comfort of the Lincoln dealership Star Lounge through the E-Console linked to cameras positioned in the service bays.”
Accelerating Chrysler’s volume
Now officially known as Fiat Chrysler Automobiles (FCA), in November the automaker expanded its joint venture with the Guangzhou Automobile Industry Group Co. (GAC).
“China is a market of strategic importance to FCA in the next five years,” says John Kett, the program’s general manager. “Collectively the import brands of Chrysler, Jeep and Dodge, in addition to the localized brands of Fiat, have the group ranked as the fastest-growing brands in China. This plan will accelerate our volume and market share growth at significant speed,” he points out, adding that the company plans to increase its Chinese sales volume to 760,000 vehicles by 2018.
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