Potential for luxury cars

The headline-making slowdown in sales of luxury cars in China has triggered concern among automakers, but given the vast market and expanding middle class, it is too early to predict the boom is at an end.

The growth of China's premium car sales slumped to 4 percent year-on-year in the first three months, compared with 17 percent for the light vehicle segment. The fall is especially eye-catching compared with growth rates in previous years. In 2010, it was nearly 80 percent; in 2011, it was almost 40 percent; and last year, it was still as high as 20 percent.

The slower sales in the first quarter this year are being attributed to the central government's recent move to cut government spending, which includes spending on official vehicles. But as the affluent middle class is expanding rapidly, private consumption could pick up to fill the gap.

According to estimates by Goldman Sachs, China's potential market for middle class buyers exploded to 37 million people last year from 1 million in 1995, and it could rise to 256 million in 2025. The purchasing potential of such a large, wealthy group is huge.

As China pushes its consumption-oriented policies, private consumption is set to become more brisk, which will prove a boon for luxury carmakers.

Last year, there were 1.25 million premium vehicles sold in China, making it the second-largest market for that car segment after the United States, and sales could rise to 3 million by 2020, making it the largest market, according to management consulting company Mckinsey.

Admittedly, sales of luxury cars in China may not continue at a rate as high as in previous years, but there is only a slim possibility that sales growth will grind to a halt. Given the huge market in China, stable one-digit growth should not be sneezed at.

The only negative impact may come from uncertain prospects of China's economy. If China's economic growth weakens to a level that affects people's incomes then it will dampen domestic demand, and the luxury car segment will not be immune.

So far, however, there are few signs of such a drastic economic slowdown in the coming years.

(China Daily 05/07/2013 page8)