Rivals Aim to Break German Hold on China Luxury-Car Market

Rivals Aim to Break German Hold on China Luxury-Car Market

U.S., British and Swedish Car Makers Spending Billions of Dollars to Crack Growing Demand

COLUM MURPHY

Nov. 20, 2013 2:01 p.m. ET

GUANGZHOU, China—For Chinese car buyers, luxury means German. Audi AGNSU.XE +0.30% , BMW AG BMW.XE +0.31% and Daimler AG DAI.XE +0.12% ‘s Mercedes-Benz combined hold more than 70% of the country’s about $40 billion annual market for high-end vehicles. Now, a club of smaller scale luxury brands have China in their cross hairs. In the past yearGeneral Motors Co. GM -0.84% ‘s Cadillac, Tata Motors Ltd. 500570.BY -0.61% ‘s Jaguar Land Rover, and Chinese-owned Swedish brand Volvo have detailed plans to spend billions of dollars on factories in China that would bring at least half a million additional luxury cars to the market beginning 2015.They are looking to people like Andrew Zhang. The 31-year-old electronics-parts salesman in Shanghai has been driving a BMW X1 for two years and is contemplating a change. German cars such as the Mercedes-Benz GLK 300 appeal to him, but he has also got his eye on a Range Rover from Jaguar Land Rover.

“I like the interior space; it is huge,” said Mr. Zhang. Sometimes a friend lets him borrow his, he said, and “when I drive it I feel very good.”

The competition will heat up again at an auto show that begins in this southern Chinese boomtown on Thursday, where new luxury-car launches include JLR’s Range Rover LWB and its 2014 Range Rover Evoque; Volvo Car Corp.’s new longwheel base sedan the S60L; Toyota Motor Corp.’s 7203.TO +0.16% Lexus will hold the world premiere of its 2014 CT 200h full hybrid hatchback compact luxury sedan; GM’s China debut of its Cadillac ATS small sedan; and Nissan Motor Co. 7201.TO +0.33% ‘s Infiniti unveils its Q50 2.0T engine model.

Analysts forecast China’s luxury car market will total 1.4 million vehicles in 2013. Using a broad definition of luxury cars, they estimate Chinese consumers’ luxury-car purchases could reach three million vehicles by 2020—putting it ahead of the U.S. with its estimated 2.3 million luxury vehicles.

While Chinese desire for German luxury brands is strong, industry experts say loyalty to a single brand is relatively low, providing an opening for newcomers. Chinese consumers penchant for upgrading also means buyers are frequently considering their next purchase. Some also are buying second or third cars for their households.

Making inroads won’t be easy. China has become a critical market for Germany’s three top luxury-car brands. BMW, Volkswagen AG’s Audi and Mercedes-Benz each get at least 15% of their annual sales in China. All three have aggressive capacity expansion plans and are looking for ways to increase their market share here. Audi, for example, has been quick to enter the market for smaller luxury cars with its locally produced Q3 compact SUV and it coming compact A3 sedan.

Klaus Paur, global head of automotive at research firm Ipsos, said German auto makers now “clearly convince” consumers here to buy their cars by offering cutting-edge technology, comfort and design. To be credible sellers in this market, new entrants would need to bring products that have equally strong appeal to Chinese luxury-car buyers and must work to strengthen their brand image, he said.

The challenge for upstarts is drawing car buyers who are “very traditional,” said Marco Gerrits, partner and managing director of the Boston Consulting Group. “If they upgrade they chose as default the top three German brands and hardly ever chose any of the smaller brands,” he said.

Those willing to consider smaller brands are the “more experienced” luxury drivers, he said. But since the luxury car market here is so young, those types of consumers are fewer. Brand loyalty is low, said the BCG consultant.

Tim Lee, chairman of GM China, said the U.S. auto maker has a “laserlike focus” on the top German luxury brands and hopes to dazzle Chinese consumers with a suite of new Cadillac models. GM started producing its Cadillac XTS, a full-size sedan, in Shanghai this year.

“When you have the product right, it makes the conquest sale less difficult,” said Mr. Lee, using industry terminology for luring customers from another brand.

Nissan’s Infiniti, which has been in the Chinese market around six years, sees this as a “big chance” to establish the brand in China, said Daniel Kirchert, managing director of Infiniti China.

In contrast to more mature markets, Chinese consumers’ perceptions around luxury car brands isn’t yet “fixed,” he said.

Brand building would be the “most important goal” in China for Infiniti in the next three to five years, he said. Infinti sponsors Formula One racing, although its popularity is limited in China. The company also is “partnering” with local celebrities, such as actor Wu Xiubo, and television shows to get its brand better known here.

Volvo Car, owned by Zhejiang Geely Holding Group, is banking on a new kind of Chinese luxury car buyer to spur its sales of upscale models such as its Volvo XC60 T5 Elegance, which sells for around 469,000 yuan (about $76,550).

“We are already in the spot that customers are heading for,” a Volvo spokesman said. Company Chairman Li Shufu said at a recent industry conference that some car owners have shifted from “materialistic to spiritual pursuits” and want luxury that is less flashy.

China’s recently installed government under President Xi Jinping has been cracking down on conspicuous consumption, especially of foreign luxury cars, by government officials. This has had a knock-on effect for people like Beijing publishing entrepreneur Frank Zhang, who needs to interact with officials on a regular basis.

“When you deal with state-run companies, you should keep a low profile,” said Mr. Zhang, who is no relation to car shopper Andrew Zhang. “Few publishing entrepreneurs drive BMW or Mercedes cars because that would be seen as flaunting one’s wealth.”