Mercedes to Make Cars in China

Munich April 20, 2005; Bret Okeson writing for Bloomberg reported that DaimlerChrysler AG said China will approve next month a plan to manufacture Mercedes-Benz cars in the world's third-largest vehicle market, adding to a glut of capacity that is forcing rival BMW to cut prices.

``As capacity increases, naturally competition will increase,'' said DaimlerChrysler's spokesman Trevor Hale, in an interview from Beijing. ``We're confident we can increase our position.'' China's car sales growth dropped in the 20 months since DaimlerChrysler invested 1 billion euros ($1.3 billion) with Beijing Automotive Holdings Co. to build 25,000 C-Class and E-Class luxury cars a year in the Chinese capital.

Growth in car sales slowed to 15 percent last year, after surging 76 percent in 2003 and 50 percent in 2002, the Chinese government said. Bayerische Motoren Werke AG, General Motors Corp., Toyota Motor Corp., Volkswagen AG, Ford Motor Co. and Nissan Motor Co. spent $15.6 billion on Chinese auto ventures in the past two years. China can now make 40 percent more cars than it can sell, Credit Suisse First Boston analyst Koji Endo said.

``It will take several years for the market to grow enough to handle all the excess capacity,'' said Markus Brueck, who helps manage 15 billion euros at Metzler Investment in Frankfurt and has sold his holdings in BMW and DaimlerChrysler. In the ``long term, premium carmakers have to be in China, but they will go through a rocky patch.''

DaimlerChrysler Chief Executive Juergen Schrempp, 60, is under pressure to revive the reputation and sales of Mercedes and retake the position of world's largest luxury carmaker, lost to BMW this quarter. Schrempp faced calls on April 6 for his resignation at the Stuttgart, Germany-based company's annual meeting after recalling 1.3 million Mercedes cars last month to fix defects.

DaimlerChrysler's shares have fallen 13.5 percent this year, compared with a 0.5 percent gain for BMW shares.

BMW sold 8,661 Chinese-built cars last year, out of 30,000 3-Series and 5-Series cars it has the capacity to make in the country. The company's total sales in China were 15,480 units last year, including imports.

Cutting Prices

The Munich-based carmaker, which passed DaimlerChrysler last quarter as the world's largest maker of luxury cars, cut the price of its China-made 318i, 325i, 520i and 525i models by 14 percent after sales fell 16 percent last year.

BMW cut the price of 530i sedans in January to 598,000 yuan ($72,252) in China from 698,000 yuan. The same models sell for $46,500 in the U.S. and $53,623 in Germany.

Foreign carmakers were able to maintain higher prices in 2002 and 2003 amid rising sales. DaimlerChrysler hasn't cut the price of its Mercedes-Benz cars in China.

`Difficult Market Conditions'

China isn't the only market where BMW cut prices. The carmaker lowered the base price of its most popular model, the 3- Series, by 9 percent to 27,100 euros in Germany, when it introduced a new version this year. Chief Executive Helmut Panke said the company was responding to ``difficult market conditions.''

BMW misjudged China's demand, said Credit Suisse's Hong Kong-based analyst Jeannie Cheung, who has a ``neutral'' rating on Brilliance China Automotive Holdings Ltd., BMW's Chinese partner.

``They don't really understand the Chinese consumer's mentality on the 3-Series,'' Cheung said. ``In China, the 3- Series isn't that big of a car and if the Chinese want a luxury car, they want it to be big.''

General Motors, Ford, BMW, DaimlerChrysler, Toyota and the world's largest carmakers will display their vehicles at the Auto Shanghai 2005 show this week.

Yearn for Luxury

China's economy, which grew by an average annual rate of 9.3 percent in the past 15 years, has created a generation of wealthy people, with 210,000 millionaires in U.S. dollar terms in 2003, according to Cap Gemini Ernst & Young's 2003 World Wealth Report.

The nation, with per capita annual urban salary exceeding $1,000 on average, had three U.S.-dollar billionaires last year, according to Euromoney's annual ranking of China's richest people.

That's attracted the attention of the world's luxury carmakers. BMW began making 3-Series and 5-Series cars in northeastern China's Shenyang city in 2003. General Motors last year started producing Cadillac CTS sedans and SRX sport-utility vehicles, the first time the Detroit-based carmaker made the Cadillac brand outside North America and Europe.

Volkswagen's Audi unit, which makes A4 and A6 cars in northeastern China's Changchun city, has 40 percent of China's market for cars that cost more than $50,000 each. Ford's Premier Automotive Group unit, which makes luxury models like Aston Martin sports cars, Jaguar sedans and Range Rover sport-utility vehicles, said it's considering plans to make Volvo cars in eastern China's Nanjing city.

Unsustainable Growth

``A lot of these plans were made on the basis of the unsustainable growth rates of 2002 and 2003,'' said Ashvin Chotai, an analyst at Global Insight Inc. in London. ``The credit tightening has hit the sale of luxury cars disproportionately.''

DaimlerChrysler won't change its decision to build a new plant in China's capital, said Hale.

Audi sold 64,018 cars in China last year, little changed from 2003 and its Chinese partner FAW Car Co. said sales won't grow this year. Audi cut 43,000 yuan from the price of its A6 model, which competes with BMW's 5-Series in China.

Luxury carmakers aren't the only manufacturers feeling the pinch. The combined profit of China's largest carmakers fell 78 percent in the first two months of 2005, with more than half of them losing money, the China National Bureau of Statistics said.

Chongqing Changan Automobile Co., which makes Ford's Mondeo sedans and Suzuki Motor Corp.'s Alto compact cars in central China, reported a 77 percent drop in fourth-quarter profit and a 17 percent decline in 2004 net income on April 14.

Denway Motors Ltd., which makes Accord and Civic cars in southern China with Honda Motor Co., said second-half profit rose 13 percent, slower than the 77 percent surge in 2003.

Chinese are delaying purchasing cars on the anticipation prices will come down further, said Yale Zhang, an analyst at CSM Asia Corp.

``People realize there's still a lot of room for price cuts,'' Zhang said in Shanghai.

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