Why foreign cars are expensive in China; A BMW 650i sedan can sell for 2 million yuan (US$326,000) in China compared to the original price of US$91,000 in Germany

Why foreign cars are expensive in China

Staff Reporter

2013-08-05

A BMW 650i sedan can sell for 2 million yuan (US$326,000) in China compared to the original price of US$91,000 in Germany.

“Gross margins of imported luxury cars with large engine sizes in China are conspicuously higher than corresponding levels in foreign countries,” an auto importer told the Chinese-language National Business Daily. The hefty profit margin has combined with high taxes leading to the exorbitant retail prices of imported cars. At present, imported vehicles are subject to a 25% tax on the basis of CIF (cost, insurance and freight) prices, 17% value-added tax and a consumption tax ranging from 1%-40% according to the engine size, with models with a engine being subject to the highest 40% rate. As a result, an imported vehicle with a 4.0l engine or larger and CIF price of 1 million yuan (US$163,000) would be subject to taxes totaling 1.43 million yuan (US$233,000).From the official list prices of foreign cars in China, manufacturing and transportation costs account for 25%-40% of the retail price and general dealers or auto importers, which are set up by foreign auto firms take 30%-40%. Previously, a foreign auto firm would have two to four general agents in China, which typically would coordinate their retail prices, tantamount to price fixing. Following the introduction of “measures for sales management of auto brands” in 2005, foreign auto firms began to substitute a general dealer for several agents, leading to an absolute market monopoly.

Insiders note that when delivering imported autos to domestic dealers, auto importers reserve a profit margin of some 8.5% from the latter, though they often could not achieve this margin due to competition. In order to hit sales targets, some dealers often sell autos without any profit for themsleves or even at a loss.

The price cuts by some dealers, however, are criticized by auto importers as a move that jeopardizes brand image and they therefore often set floor retail prices, leading to conflict between dealers and general dealers.

According to the aforementioned “measures for sales management of auto brands,” general dealers have the power to supply the vehicles and establish branded sales and service networks, thereby determining retail prices and the profit margins of dealers. Usually, dealers’ profits consist of two parts: a fixed margin for retail sales and an extra margin provided by importers after achieving their sales targets. For BMW, the rates are set at 5% and 3%, respectively.

Via this arrangement, foreign auto firms make guaranteed profits in China and even keep substantial profits abroad. In the same vein, foreign firms raise the price of auto parts, thereby retaining a substantial portion of profits for their parent firms.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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