Auto Industry

Mercedes faces fine times

Daimler the latest to pay penalty in China

D_E-Sedan w

China’s domestic newspapers reported that it was a forlorn and desultory bunch of protesters that gathered in Shanghai last month. Their faces were smeared with dirt and their clothes were torn. All they carried were begging bowls and bamboo sticks – long China’s symbols of a life of pauperdom.

Were they unemployed migrants demonstrating about the high cost of living in Chinese cities? No, these were glamour models dressed as beggars. The dejected ladies had gathered in the Xujiahui shopping district, furious about a decision to ban them from the Shanghai Auto Show, which is now one of the car industry’s most important global events (it alternates between Shanghai and Beijing each year).

Back in February, the organisers had decreed that the ‘booth babes’ would no longer be welcome at the show. They urged exhibitors to “put an end to all types of vulgarity”, a reference to the way car brands’ had employed pert, scantily-clad models at earlier shows to draw eyeballs to their company’s stands.

Most agree that the crackdown was a hat tip to Xi Jinping’s ongoing austerity campaign, although similar campaigns have a tradition in China. Almost 70 years ago, the ruling Nationalist Party (or KMT) banned dancing on the grounds that it was unpatriotic. Cabaret dancers in Shanghai also took up bamboo sticks in protest against their loss of income and ended up in street battles with police in what became known as the ‘Dancers’ Uprising’.

After initial suspicion that they were Communist agitators, the KMT eventually let the dancers go and rescinded the ban. This time round, opinion has been divided on the wisdom of outlawing the ‘car models’, with the local media noting that the practice is well established in other parts of the world.

“Car models at Western auto shows have a long history,” reported People.com.cn. “They have withstood the test of time and public opinion. China should learn from this.” Others have been more critical of the bikinis-on-the-bonnet trend, like Sanxia Evening News, which complains that auto shows have turned into beauty parades.

It suggests the models should drop their protest before they “embarrass themselves even further”.

The ladies’ absence seems to have done nothing to dent enthusiasm for the car exhibition. The Economic Information Daily says a record 280,000 people visited the Shanghai Auto Show this year, although it noted that exhibitors have continued to hire more decorously dressed ladies to talk about vehicles, rather than simply drape their bodies across the cars on show.

The show’s success has been a boost for the auto industry, after sales growth rates halved during 2014 from 13.9% on the year before. The combined impact of the austerity campaign and slower economic growth is expected to have a similarly dampening effect during 2015.

Bill Russo of Gaofeng Advisory tells the International Business Times that the super luxury end of the market (such as Rolls-Royces) is the hardest hit. “Mainstream luxury brands have not been hurt,” he argues. “They’re as strong as ever. The sheer number of people who can buy products in this class is increasing. The size of the pie is just getting bigger.”

Dieter Zetsche, chief executive of Daimler AG, which owns Mercedes-Benz, agrees, noting too that Chinese consumers have little appetite for cut-price cars. “It’s remarkable how many Chinese customers buy a premium model as their first automobile,” he said earlier this year.

Daimler lost its crown as the world’s largest manufacturer of luxury cars to BMW in 2005, but it plans to reclaim it by 2020. China is a key part of that strategy, and in March, Daimler had its best month ever, with global sales up 15.7% year-on-year. China was firmly in the driving seat, with sales increasing by 20.8%. Last year, the Chinese market overtook Germany to become the company’s second most important after the US, with 281,588 Mercedes cars sold, or a 29.1% rise over 2013.

In percentage terms, it was much faster sales growth than Audi and BMW, albeit coming from a lower base.

Audi sold 578,932 cars in 2014. This was 17.7% more than 2013 and marked the first time it had sold more than half a million cars in a single market anywhere in the world.

BMW sold 455,979 cars, with sales up 16.7%. China is now its number one market too.

In 2015, Mercedes hopes to surpass the 300,000 mark, in part by ramping up its localisation policy, with the new Class C (built in China since 2014) and the new GLK model also on track to be built locally this year (but known in China as the GLC) .

As we reported in WiC270, the German troika’s strong sales performance may have been masking structural problems that started coming to the fore in late 2014. Much of the growth was achieved at the expense of the dealership networks, their distributors have complained. Ever-higher sales targets meant that dealers needed to sell their vehicles at steeper discounts (making their businesses unprofitable) or to rack-up unprecedented levels of inventory (which ate into their capital).

Over the past six months, all three of the German producers have been forced to address these complaints by increasing rebates and reducing sales targets.

Mercedes has also been hit with antitrust fines, after whistleblowers inside its dealership network approached the authorities in Jiangsu province. Sales staff were disgruntled by a cut in the rebates paid for sales of E-Class cars from 25% to 10%, says Time Weekly. They alleged that price fixing was going on: in terms of the minimum prices that Mercedes allowed the dealerships to sell its cars, and the tariffs for after-sales service and parts. The result, announced in April, was an Rmb350 million ($56 million) fine, equivalent to 7% of E-Class and S-Class model sales in Jiangsu last year.

Audi was fined Rmb250 million for similar infractions last year, while BMW has agreed to pay dealers $820 million in rebates for 2014 in response to allegations about unrealistic sales targets and tighter margins.

Mercedes has also joined Audi and a number of other premium carmakers in lowering their prices during the course of the investigations.

Mercedes has said that it accepts its punishment and that it is working hard to improve the relationship with its dealers. Last July, the company opened a dealership training centre in Shanghai and it has also established a Strategic Dealers Club to promote more constructive, two-way dialogue. But the efforts haven’t won much praise in the domestic media. Criticism has been intense, including Feng Shiming of Menutor Consulting, who told Time Weekly: “Mercedes-Benz is viewed as a very proud company. It has found it difficult to connect with customers. Its PR is unresponsive. It doesn’t really understand the nuances of the Chinese market and it hasn’t shown much sensitivity to policy changes.”

The Economic Observer was also scornful, highlighting the group’s “poor coping skills” during the antitrust investigation, and its struggle to understand “that the profiteering era in the luxury car market is over”. The failure led to a higher fine, the newspaper suggests.

It also notes that after-sales costs for Mercedes drivers still seem steep. Audi has reduced the parts-to-whole ratio of its best selling Audi AGL from 411% to 291%, for instance. That means the price of all of the car’s basic components put together is three times the cost of simply buying a new vehicle (indicating, says local media, the high charges for replacement parts).

By contrast, the Mercedes E-Class still has the highest parts-to-whole ratio in the entire industry of 650%, according to the China Insurance Industry Association.

In another recent interview, BMW’s boss Ian Robertson told Auto News that he expects sales growth to slow to the high single digits for 2015 and that the brand has been hit by restrictions on new licence plates in cities like Shenzhen (the eighth metropolis to try to reduce car numbers to control pollution).

However, Robertson said sales are growing more rapidly in other parts of China, as well as claiming that the dealership model is changing for the better too. How? Instead of relying on new car sales for their living, dealerships are following the European and US models of selling used cars and providing more after-sales services, which typically represents 70% to 80% of revenues in more mature markets.


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