China's Luxury Car Rise Presents New Challenges for European High-End Market

China's Luxury Car Rise Presents New Challenges for European High-End MarketOn Oct. 29, 2023, news emerged that Mercedes-Benz Group, once a leader in the high-end car market, had witnessed significant declines in sales and profits, revealing the growing competition from Chinese manufacturers

China's Luxury Car Rise Presents New Challenges for European High-End Market

On Oct. 29, 2023, news emerged that Mercedes-Benz Group, once a leader in the high-end car market, had witnessed significant declines in sales and profits, revealing the growing competition from Chinese manufacturers. Chinese automakers, led by BYD, are carving a new path in the pursuit of industry dominance, redefining "Made in China" as a global luxury brand for the electric car era. Having challenged established luxury brands like Mercedes and BMW in their home market, they are aggressively expanding into Europe, a new and promising market.

The clearest sign of this trend appeared last Friday when Mercedes published its worst earnings report since separating its car and truck businesses in 2021. At the same time, Porsche, the maker of the 911 sports car, announced it was implementing cost-cutting measures and revising its model lineup due to declining profits caused by a slump in Chinese demand.

While Chinese manufacturers have rapidly transformed the market landscape with their low-priced electric vehicles, luxury brands, with their deep tradition and high-end positioning, were once considered a safe market. However, that perception is now being challenged, impacting the global $1.2 trillion high-end and luxury car market.

"We don't underestimate any competition," Harald Wilhelm, Mercedes' chief financial officer, emphasized last Friday. While he expressed doubts about whether Chinese brands like BYD could sustain their low-price strategy, he said, "I am sure the pressure will not go away anytime soon."

At the Paris Motor Show this month, FAW Group's Hongqi brand and BYD's upscale sub-brand Yangwang made their dazzling debuts, showcasing luxury sedans and SUVs designed to compete with European manufacturers like Mercedes, Porsche, and even Rolls-Royce. These vehicles not only boast cutting-edge digital technology but also feature luxurious appointments like leather dashboards, champagne coolers, and more importantly, offer competitive pricing, posing a real threat to European automakers.

NIO, known for its innovative battery swap service, has opened luxury showrooms in cities like Berlin, Oslo, and Amsterdam, displaying its flagship vehicles like the EL8 SUV, priced at 95,000. Polestar, a sub-brand of Geely, has begun delivering new cars in select European markets and plans to expand to France, Hungary, and Poland by 2025. BYD's Yangwang brand has attracted a lot of attention with its luxury off-road vehicle that can float on water and is actively establishing partnerships with local European dealer groups.

Xiaomi has invested $10 billion to enter the automotive market. In March, Xiaomi launched its SU7, a direct competitor to high-end electric vehicles like the Porsche Taycan. This avant-garde Chinese sports car has made a huge impact in the industry upon its debut. Jim Farley, CEO of Ford Motor Company, was highly impressed after test-driving the SU7, saying, "It's fantastic! I've been driving it for six months and I just love it!" Xiaomi showcased the SU7 during the Paris Olympics and set up a service station at the famous Nrburgring race track in Germany, demonstrating its ambitious European expansion plans. Xiaomi founder Lei Jun said the company plans to launch the vehicle globally, but a specific timeline has not been announced.

The rise of Chinese luxury cars comes at a critical time for European automakers. BMW, Aston Martin, and Volkswagen, the parent company of Porsche, have recently issued profit warnings. They predict that growth in the Chinese car market will slow down, largely influenced by the overall slowdown in the world's largest automotive market China.

China has long been the largest global market for the Mercedes-Benz S-Class sedan and one of the main markets for the ultra-luxury Maybach. However, this lucrative segment saw a decline in the third quarter, pushing Mercedes' key profitability metric down to 4.7%, far below the minimum target of 8%, and there is no sign of a quick recovery.

Harald Wilhelm, Mercedes' chief financial officer, said: "We are cautious about the future development of the market and will spare no effort to improve the efficiency and cost control of our overall business."

European manufacturers have long dominated the high-end car market, but Tesla's Model S, launched in 2012, disrupted this paradigm, shifting consumer focus from traditional mechanical performance to digital features and intelligent experiences. Chinese companies like BYD and NIO followed suit, emphasizing their leadership in software and battery technology.

According to the brokerage firm Huaxin Securities, BYD and NIO's combined market share in the Chinese high-end car market has roughly tripled in the past two years, exceeding 20% by the end of May. Tu Le, founder of market research firm Automotive Insights, said, "High-end Chinese brands are confident, and given enough time, investment, and patience, they will find tremendous opportunities in the European market. The Chinese are trying to convince Europeans that their cars can be equally dynamic and performance-focused."

While breaking the influence of brands like Porsche and Mercedes will not be easy, the interest of Chinese companies in this segment is evident. The luxury car market is known for its highest profit margins and highly loyal customers, who often purchase repeatedly. McKinsey & Company notes that this segment is expected to grow faster than the mass car market, providing a rare path for continued expansion,.

Europe has become the main battleground for this competition, as international trade tensions have virtually stalled the expansion of Chinese automakers in the United States. Moreover, with domestic economic challenges and intensifying market competition, Chinese automakers urgently need to boost their overseas sales to improve their performance.

To win over European customers, BYD showcased the Yangwang U8 at the Paris Motor Show, priced at approximately 143,000. This boxy off-road vehicle features an electric motor on each wheel, enabling it to move sideways like a crab. While Mercedes' electric G-Class also offers similar functionalities, the German version is priced at almost double that of the Yangwang U8.

Autel, a high-end electric vehicle brand jointly developed by Seres Group and Huawei, presented its Autel 9 SUV at the show. This model features a retractable cinema screen, flat leather seats, and a price tag that is about half that of its German counterparts. Maxim Fromont, a 23-year-old resident of Paris, said: "I was impressed by how many features this car has. If I were to buy a car for traveling, I might choose this one."

To boost their brand recognition, Chinese automakers are also actively participating in elite events. Chery and MG, a sub-brand of SAIC Motor, joined renowned brands like Aston Martin, Lamborghini, and Ferrari at this year's Goodwood Festival of Speed in the UK. BYD's Yangwang brand also appeared at the Bicester Heritage event, celebrating classic British luxury cars and sports cars.

To support its European market expansion plan, BYD has established partnerships with high-end Dutch dealers like Louwman Group, which typically sells brands like Mercedes and Lexus. In the UK market, BYD has partnered with companies like Inchcape and Vertu Motors, where Inchcape also sells brands like Land Rover, Jaguar, and BMW, while Vertu Motors sells Mercedes cars.

While the influence of Chinese brands in Europe is still limited to date, Lexus, a sub-brand of Toyota, proves that the European high-end market is not insurmountable. Lexus faced many doubts when it first entered Europe, but it has successfully carved out a niche and sold nearly 56,000 vehicles in the first nine months of this year, representing a growth of over 25%.

Michael Dunne, head of the automotive consultancy firm Dunne Insights, points out: "European luxury car buyers still favor traditional names like Mercedes. Western consumers don't seem to consider the digital experience a crucial factor at least not yet."

At the Paris Motor Show, the Hongqi brand also actively promoted its traditional culture, showcasing Chinese expertise in craftsmanship by offering bespoke fine ceramics. For its automotive offerings, Hongqi primarily displayed its Hongqi H9 luxury sedan, featuring high-quality leather, textured wood, and chrome accents, reflecting a luxurious feel. The exterior is dominated by a slender front design with a winged hood ornament on top, reminiscent of Rolls-Royce's famous Spirit of Ecstasy statue. This design resemblance is not accidental. Since 2018, Giles Taylor, former design director at Rolls-Royce, has joined Hongqi, leading the brand towards modern aesthetics, aiming to attract consumers in the global luxury goods market.

Similarly, Chinese car brands like NIO, Yangwang, and XPeng have hired designers from renowned brands like BMW, Mercedes, and Ferrari to enhance their design capabilities.

Gu Hongdi, vice chairman of XPeng Motors, believes that in the high-end market, the focus should be on building a unique brand image. "It's not just about performance or design, but about being distinctive," he said. "We want to create a brand that is both technologically advanced and culturally relevant, and that appeals to a global audience."