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Luxury carmakers could stall on expansion plans

By Doug Young (Global Times)

08:57, April 23, 2012

China's luxury car sector is showing signs of overheating, as domestic and foreign automakers spend hundreds of millions of dollars investing in a vast consumer market whose fast growth makes it increasingly vulnerable to bubbles.

Last week, news emerged that Nissan plans to start production of its Infiniti cars in China, seeking to tap strong demand for luxury brands in the world's largest auto market. This news came just a week after US auto giant General Motors announced a plan to produce its own luxury Cadillac brand in China.

Even domestic names like Geely and Chery have made recent moves that indicate plans to enter the luxury segment.

But after two years of breakneck growth fueled by government incentives, China's broader auto market grew by just 2.5 percent last year as the nation's economy slowed.

Despite the slowdown, luxury car sales continued to boom, notching double-digit gains for the year. That growth continued into the first quarter of 2012, even as the broader market contracted 3.4 percent in the same period.

Audi's first quarter sales in China jumped 40 percent to over 90,000 units, a record for Volkswagen's luxury unit. Rival BMW also notched growth of 28 percent, and Mercedes saw its first-quarter sales rise nearly 20 percent.

While Cadillac and Infiniti prepare to start local production, existing luxury players are also investing big money on their own expansions. Audi currently plans to boost its capacity to 700,000 units per year, up from the current 300,000, and BMW is embarking on a similar scheme that will see it spend 1 billion euros ($1.32 billion).

All the new investment could boost China's overall luxury car capacity to more than 1.5 million vehicles per year, or 8 percent of the total of 18.5 million vehicles sold in the country last year - clearly an excessive figure for a market where the vast majority of consumers can't afford such cars.

Adding to the looming glut is Beijing, which showed its intentions for the luxury car space earlier this year when it published a preliminary list of approved models for purchasing by government departments.

The list excluded all foreign brands, a huge exclusion for government agencies that now purchase $13 billion in cars annually.

Many saw this list as a move to help domestic automakers, while providing a signal that Beijing wants to curb luxury vehicle purchasing by government agencies as it seeks to address public perceptions of corruption and wasteful spending.

There's every indication that demand won't be able to keep up with the expansion of capacity in the luxury car market, due to natural limitations and government intervention. When that happens, big automakers will quickly find they've spent millions of dollars on new capacity that could sit idle for years until demand catches up with the wave of new investment.


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