Luxury brands need to wake up to the new 'normal' in China

SHANGHAI -- The new year didn't begin as pleasantly as before for luxury car brands in China. Many of them find themselves confronted with angry dealers demanding compensation for the losses they suffered in 2014.And the reason behind the latest battle is that luxury carmakers refuse to accept that the market has slowed rapidly.Since 2012, the Chinese economy has been growing less than 8 percent annually, down from the double-digit growth of the previous decade.Affected by the slowing economy, light-vehicle sales in China no longer are growing 20 percent or more a year -- a pace routinely seen until a few years ago.However, by aggressively expanding their distribution networks, luxury carmakers succeeded in maintaining sales growth of around 30 percent in 2012, 2013 and the first half of 2014.Entering the third quarter of 2014, the Chinese economy continued to lose momentum with growth sliding to below 7.5 percent.The weak economy exerted its toll on the auto market -- monthly light-vehicle sales growth in China has slid to below 7 percent year on year since September after rising more than 10 percent in the first eight months.Luxury brands were also hit hard -- luxury car sales grew 19 percent year on year in the third quarter, down from more than 35 percent in the first quarter.Despite slowing demand, luxury carmakers were determined to achieve their ambitious targets for 2014. And they started dumping vehicles on dealers in the fourth quarter of the year.Because of high inventories, most luxury car dealers lost money during the year, according to the China Automobile Dealers Association.The move triggered a strong backlash among dealers. In December, the association published an open letter appealing to China's central government to prevent automakers from burdening dealers with excessive inventories.Meanwhile, dealers of several luxury brands including BMW, Porsche, Lexus and Jaguar Land Rover demanded automakers cover the losses suffered last year, according to Chinese media.BMW's dealers even threatened to stop ordering vehicles from the carmaker.After intense negotiations, BMW this week agreed to pay 5.1 billion yuan ($820 million) to its dealers in China to help cover their losses. The dealers are still in talks with BMW over 2015 sales targets."BMW and its dealer partners are fully aware that the overall automotive market in China is normalizing with the growth speed from super high rate to the lower but stable pace," BMW said in an open letter to its dealers this week."Under such a situation of 'new normal', it is agreed that the car maker and the dealer shall work together with the focus on the customer satisfaction and quality of business, and explore new business opportunities such as after-sales, financial service and used car business while winning customers of new cars," it added.After forging ahead for several years, China's luxury car sales have finally stabilized.BMW has come to terms with this new normal. Prior to BMW, Audi and Mercedes-Benz already offered to pay generous subsidies to appease their dealers in December.It is time for other luxury brands to adapt to the changed market conditions.Pictured: Yang Jian is managing editor of Automotive News China.

Luxury brands need to wake up to the new 'normal' in China

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