Luxury carmakers look beyond Beijing

“My dad drives an S-class and my husband a C-class,” said Chen, 29, who has a master’s degree in business administration and whose car cost the equivalent of $142,000.’ ‘So when my dad asked me what I wanted for a wedding gift, I picked Mercedes-Benz too.”

Chen, who hails from the relatively small but wealthy city of Cixi in the eastern province of Zhejiang, not only reflects China’s burgeoning affluence — she and others like her represent a new phenomenon of rich consumers far from the major metropolitan centers.

Luxury carmakers are racing to follow the money. Cixi, with average personal wealth on a par with that in Shanghai, mainland China’s financial capital, is among a number of smaller cities that mark a new competitive frontier for sellers of luxury cars. The city is known for its entrepreneurs, with nearly a third of families owning their own businesses.  Chen’s father made his money manufacturing magnets.

Audi, BMW and Lexus have staked their claims, setting up showrooms on the outskirts of Cixi, which is a two-hour drive south of Shanghai. Jaguar and Land Rover, the classic British brands now owned by Tata Motors of India, also reportedly selected a site in the vicinity.

“It’s the absolute right thing to do for the carmakers because the market has been expanding,” said Klaus Paur, managing director for Greater China at the consulting firm Synovate Moto-research. “Historically, it’s the big cities and the coastal belt. But now rich people are not only in Tier 1 and Tier 2 cities, they are in Tier 3 and Tier 4 cities as well.”
The shift to smaller cities started two to three years ago but gathered pace in 2010 as Beijing’s massive economic stimulus plan gave rise to car purchases and helped create a crop of new wealth in the hinterlands. Official worries about China’s traffic-clogged major cities have helped raise smaller cities’ share of luxury car sales. , Beijing and Shanghai, among other municipalities, have made it harder for residents to buy cars. Purchasing a car in Beijing, for example, is possible only for those who win a monthly car registration lottery.

Statistics provided by the consulting firm JD Power & Associates show that nearly 60 per cent of luxury car sales came from Tier 1 regions in 2004, including Beijing, Shanghai and Guangzhou. That share is now a little more than 50 per cent. That means more sales in smaller cities like Yulin in Shaanxi Province, Shaoxing in Zhejiang Province and Erdos in Inner Mongolia. Erdos, once a rugged outpost in the northern grasslands, is now a major market for Jaguar and Land Rover, according to Tata. Range Rover, the top line of the Land Rover family and priced as much as 3.3 million renminbi, has a special appeal to the descendents of Mongolian herdsmen, some of them newly rich from the mining businesses drawn to the region.

“We bumped into a Range Rover or Land Cruiser from time to time when we drove around the city,” Shawn Li, an information technology manager in Beijing, said after returning from a weeklong trip to Erdos. “Even the parking lot of a three-star hotel we stayed in was full of fancy cars, and that made my Jeep Compass look shabby.”

Yulin, a coal mining city in the central Chinese province of Shaanxi, is a crucial battleground for carmakers like Audi and BMW. Audi opened a dealership in Yulin at the end of 2009, and BMW followed less than a year later. Business has been booming.

“I can move five or six cars every day, on average,” said Xiao Zhang, an Audi dealer in Yulin. “There are many expensive and superexpensive cars here — Audi, Mercedes, BMW, Lexus, Jaguar, Rolls-Royces, Porsche, you name it.” Choi Duk Jun, vice president of Mercedes-Benz in China, said that when he had first gone to China five years ago, only 60 outlets handled the brand. Now there are more than 180 outlets, with 12 per cent in small cities, that have combined annual sales of at least 1,000 luxury cars of various brands. Mercedes-Benz aims to double the number of its outlets by 2015, with a quarter of them in smaller cities. To plan for future expansion, Choi closely monitors new car registration in 280 small Chinese cities.

Xu Dizhen, the owner of a Mercedes-Benz dealership in Cixi, plans to add two more outlets in Ninghai and Yuyao, adjacent cities that are also affluent. From January to September, Mercedes-Benz sold 139,400 cars in China, up 38 percent from the same period last year. China’s overall passenger car market climbed 6.4 percent during the period. Audi plans to expand its dealership network in China to 400 by the end of 2013, up from 174 dealerships late last year. Volvo, the Swedish brand now owned by the Chinese carmaker Zhejiang Geely Holding Group, plans to add more than 100 outlets by 2015.

“We are not adding more dealerships in Beijing,” said Richard Snijders, head of Volvo’s China sales arm. “We are not adding more dealerships in Shanghai. Tier 2 and Tier 3 are more or less what we are doing at the moment.”

To be sure, bringing expensive products to smaller cities comes with its challenges. Those include outpacing or misjudging market trends as well as bumping up against manpower constraints. In particular, dealerships struggle to find qualified technicians, who can earn 200,000 to 300,000 renminbi annually. “It’s a problem in bigger cities, but it’s even tougher in smaller cities,” Choi, the Mercedes-Benz vice president, said about finding mechanics who can service high-end cars. “There is a war not only for the customers, but also for talent to work at the dealership, especially on the after-sales side.” Most makers of luxury cars first came to China with their flagship models, appealing to an older generation and a restricted class of well-connected and wealthy customers. But steady growth in China has created a new generation with a radically different lifestyle that is seeking out luxury goods that announce their new status. The automakers are tripping over one another to appeal to this upwardly mobile and style-conscious class of consumers.