Thursday, May 24, 2012

(BN) BMW Quadrupling China Capacity Risks Audi-Like Dependence: Cars

Bloomberg News, sent from my iPhone.

BMW Quadrupling China Capacity Risks Audi-Like Dependence: Cars

May 24 (Bloomberg) -- Bayerische Motoren Werke AG plans to quadruple production capacity in China, risking efforts to avoid overdependence on one market.

The world's largest maker of luxury vehicles started production of the X1 compact sport-utility vehicle today at a new factory in China, part of a 1.5 billion-euro ($1.9 billion) expansion. Combined with an existing plant in Da Dong, the Tiexi facility will boost capacity to as many as 400,000 cars a year from 100,000, BMW said today, lifting its production target and investment plans for the country.

The Munich-based manufacturer's expansion, part of competition with Volkswagen AG's Audi for the luxury-car sales lead, could increase reliance on China for growth. BMW sold 43,800 more cars globally through the first four months of 2012, compared with a year earlier, with 60 percent of those additional sales in China. For Audi, China accounted for 74 percent of its delivery growth of 49,300 vehicles this year, according to company figures.

Prana Tharthiharan Natarajan, a research analyst at Frost & Sullivan in Chennai, India, points out the conundrum facing the luxury-car producers.

"There are no other regions that can provide for such massive numbers of sales as China can," he said. "In the event of economic turmoil in China, most German automakers could end up with hundreds of thousands of unsold cars."

BMW sold 2 percent of its cars to Chinese customers in 2005. That rate rose to 21 percent of the brand's sales in the first four months of this year. The company delivered a record 1.67 million cars last year and targets further growth in 2012 thanks to China. Today's opening makes China the only country with multiple BMW assembly sites outside Germany.

Shares Gain

The shares gained as much as 77 cents, or 1.3 percent, to 62.58 euros and traded 0.1 percent higher as of 9:44 a.m. in Frankfurt. The stock has gained 20 percent this year, valuing the carmaker at 39.5 billion euros.

A dropoff of Chinese demand would risk more than growth. Profit could also tumble, with automakers earning as much as five times more per vehicle in China compared with other markets because of the tendency of customers there to buy high-end models loaded with extras, according to August Joas, automotive partner with consulting company Oliver Wyman.

Quarter of Profit

That means China accounts for about 25 percent of profit for Germany's high-end automakers, said Juergen Pieper, an analyst with Bankhaus Metzler in Frankfurt.

"China's importance for all German premium carmakers is big, but it's much better to be dependent on China than on France or Italy," said Pieper. "Russia and India could be a substitute, but China will remain the number one for five to 10 years."

Daimler AG's Mercedes-Benz has the lowest dependence on China among the world's top three luxury car brands. With growth held back by the changeover to a new generation of the B-Class compact and limited availability of the M-Class and GLK sport- utility vehicles, China accounted for just 25 percent of Mercedes's sales growth of 37,000 vehicles in the first four months of 2012.

The Stuttgart-based automaker plans to boost its presence in China to challenge Audi's lead in the world's largest car market. Three compact models are due to be made in China and an engine factory will start production next year. In December, Daimler began building the GLK in China, adding to local assembly of the C-Class and a stretched version of the E-Class.

General Motors Co., the top automaker in China, has little presence in the country's luxury market. The company said last month it is preparing a renewed effort to sell Cadillacs in China.

Audi Lead

Audi got an early head start on the back of VW's entry into the market in the 1980s. That advantage has fueled its pursuit of BMW as it was quicker to tailor models for local demands, including extended versions of the A4, A6 and A8 sedans. It also exposes the brand more to the Chinese economy.

"Audi would have significantly bigger problems from a China slowdown than BMW, which has a better global balance," said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. "Audi risks becoming dependent on a single country. If China coughs, the VW Group as a whole has big problems."

To reduce its exposure to China, Audi plans to build a factory in Mexico to supply vehicles to the U.S. and South America. BMW is planning a factory in Brazil to target a new source of growth. The risks of banking on a single market were made clear when Porsche AG nearly collapsed in the early '90s because of its dependence for revenue on American demand for sports cars.

Seeking Balance

"We want to achieve a balance between Germany, the U.S. and China," Chief Executive Officer Norbert Reithofer told reporters today at the plant opening. "We do not only expand our capacities in China in order to balance production globally."

BMW said today that China sales will rise as much as 30 percent this year.

Still, the efforts by BMW and Audi to wean themselves from a reliance on China may have limited effects. The market is projected to account for more than 50 percent of the growth of the top-two upscale carmakers in 2015, with Mercedes only slightly lower at 47 percent, according to data from researcher IHS Automotive.

With Europe under strain from government spending cuts and the U.S. still recovering from the financial crisis, there may be little alternative in the coming years, and Chinese demand has proven to be resilient to a broader slowdown as BMW, Audi and Mercedes expand their lineups to include smaller, cheaper cars. Vehicle sales in China declined 1.3 percent in the first four months of 2012, while Audi deliveries gained 41 percent, BMW 35 percent and Mercedes 11 percent.

"It's a vast market with vast opportunities," said Oliver Wyman's Joas. "Compared with European and North American markets, the Chinese market has the greatest potential."

To contact the reporter on this story: Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone/


Eugene.

1 comment:

amit khan said...

I am sharing a hot news as-The Kelley Blue Book has included the 2012 Audi TT Roadster and 2012 Audi A5 Cabriolet among the top 10 roadtrip convertible of the year 2012. The presence of these names in the aforementioned list is on the account of their unequalled performance, their distinctive style and excellent refinement. The extraordinary handling and the sporty features of the Audi TT Roadster aided it in making to the nominations. Powering this solid looking car is 2.0 liter TFSI engine that is way too high on the fuel efficiency aspect.
Mitsubishi Car Prices