Selling to miners and herders

The shift to smaller cities started two to three years ago, but gathered pace in 2010 as Beijing's massive economic stimulus plan spurred car purchases and helped create a crop of nouveau riche in the hinterlands.

Official worries about China's traffic-clogged major cities have helped. Cities such as Beijing and Shanghai have made it harder for residents to buy cars.

Buying a car in Beijing, for example, is only possible for those who win a monthly car registration lottery.

Statistics provided by J.D. Power and Associates show that nearly 60 percent 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 percent.

That means more sales in smaller cities like Yulin in Shaanxi province, Shaoxing in Zhejiang, and Erdos in Inner Mongolia.

Erdos, once a rugged outpost on China's northern grasslands, is now a major market for Tata Motors' Jaguar and Land Rover, according to the company.

Range Rover, the top line of the Land Rover family and priced as much as $518,000, has a special appeal to the descendents of Mongolian herdsmen, some of them newly rich from the mining businesses flocking to the region.

"We bumped into a Range Rover or Land Cruiser from time to time when we drove around the city," said Shawn Li, a Beijing-based IT solution manager, after returning from a week long-trip in 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."

Another coal mining city in the province of Shaanxi, Yulin, is a key battleground for luxury car makers such as Audi and BMW.

Audi opened a dealership in Yulin at the end of 2009, BMW followed suit 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 super expensive 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 first came to China five years ago, only 60 outlets handled cars with the distinctive three-point stars on the front.

Now there are more than 180 such outlets with 12 percent in small cities that have combined annual sales of at least 1,000 luxury cars of various brands. The German car maker aims to double the number of its outlets by 2015, with a quarter of them in smaller cities.

From January to September, Mercedes-Benz sold 139,400 units in China, up 38 percent on an annual basis. BMW sold 177,522 units, up 45 percent. China's overall passenger car market climbed 6.4 percent during the period.

Xu Dizhen, owner of Mercedes-Benz dealership in Cixi, already plans to add two more outlets nearby in Ninghai and Yuyao, two adjacent affluent cities.

To plan for future expansion, Choi closely monitors new car registration in 280 small Chinese cities.

Rivals are also on the move.

Audi plans to expand its dealership network in China to 400 by the end of 2013, up from 174 dealerships late last year. Volvo Car, now owned by China's Geely group, is adding over 100 outlets by 2015, targeting lower-tier regions.

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