Within seven years, China will outstrip the United States to become the world's leading market for premium cars. It already beat the U.S. for top auto market in general in 2009. The Organisation for Economic Development and Cooperation said last week that China would overtake the U.S. as the world's leading economy by 2016. No doubt about it, when it comes to being big: China is fast becoming the new biggest. Niche auto markets are no different. On the luxury end, China drivers are going to be starting soon from the pole position. "In the U.S. auto market, the American version of luxury is a little different than the Chinese," says Hans Werner Kaas, a 22 year veteran of McKinsey & Company. He leads their U.S. auto practice in Detroit. "If you have a fully equipped Ford Explorer with all the bells and whistles, you've got a luxury vehicle." Around 14% of the cars sold in the U.S. are considered to be premium vehicles. In China last year it was around 9%. "The luxury segment in China is dominated by the traditional German high-end car makers. It's Mercedes Benz, BMW and Audi on the roads in Shanghai," says McKinsey partner Sha Sha in Shanghai. Where's this market heading? With under 10% penetration, it has at least 40% upside before it comes close to the U.S. today. By 2020, China will be selling around three million luxury cars while the U.S. will be selling around 2.3 million, according to a McKinsey report published last month. In the 16 page report, written by Sha Sha and two colleagues, their Asian automotive practice forecast China’s premium car market to grow at an annual rate of 12% over the next seven, compared with 8% for the overall passenger car market there. China's total luxury auto market will equal that of all of Western Europe by then. In fact, if all goes swimmingly well with China's 12th Five Year Plan -- no hard landings, no economic turmoil pulling the rug out from under China in Europe and U.S. -- then China could just as well overtake the United States as the largest premium car market in three years. Trading Up China's young professionals are earning more than their parents ever dreamed of. They grew up frugal, mainly out of necessity. But now they have extra money to spend. The one child policy means Chinese families have more money to pass down to their young children. The roads they drive on may be crowded in cities like Beijing, and the roads full of potholes in second and third tier cities, but Chinese consumers are giving up their bikes for cars. As incomes rise, they are giving up their Buicks -- the most popular American vehicle sold in the country -- for Land Rovers, Jags and German luxury. Premium cars accounted for just 24,000 units in 2000 and over a million in 2012. At a time when the luxury vehicle market is stalling in the U.S. and Europe, China is becoming an extraordinary life line for the majors from Tokyo to Detroit. Writing in "The $10 Trillion Prize", author and one of the founders of Boston Consulting Group's global consumer practice, Michael J. Silverstein, estimates that over 100 million Chinese will enter the premium markets in the next 10 years. "In their own way, they're going to take over where the U.S. and Europe have left off," Silverstein says. "They're going to upgrade and trade in their Camry's for BMWs." The older generation of premium car owners purchased vehicles mainly to reflect their social status, but the increasingly sophisticated new generation of buyers is expressing other reasons for buying premium autos. When asked by McKinsey what they thought about car shopping, over 60% of survey respondents told Sha Sha that “buying a car” as much a priority as “buying an apartment” and “paying for children’s education”. The people that think that way are growing in population. Not too far into the future, there will be more people who think like this in China -- and act on it with their hard earned yuans -- than there are people in the U.K. According to McKinsey, around 80% of Chinese premium car owners have annual disposable household income of more than 200,000 yuan (around $33,300). However, the weighted average of annual household disposable income of all surveyed luxury vehicle loving families was 450,000 yuan ($75,000). McKinsey expects this affluent segment to grow at a compound annual rate of 16% between now and 2020, offering underlying support for the global premium car market. By 2020, they've forecast that there will be 23 million affluent urban households in China – 7% of the total population and roughly equal to the total number of households in the U.K. today. Imagine the U.K. all driving Beamers. The difference is, even if that perfectly affluent world view were to happen in a small country like the U.K., it would quickly reach market saturation. There are only so many people on that island. China has hundreds of millions of drivers. Moreover, McKinsey says it expects that the new middle class among them will not only be living in Shanghai and Beijing. They estimate them to be in around 300 cities; that's 300 Chinese urban centers with consumers who have sufficient household income to buy premium vehicles by 2020. For car makers, dealership expansion should be high on their agendas says McKinsey if those companies want to maintain double digit growth. For leading premium car makers, this implies improving their consumer insight capabilities as well as ramping up dealerships to capture demand in the 300 tier three and four cities where consumers are expected to reach the threshold for household income that will enable them to buy premium vehicles. Automakers that aspire to tap into the coming wave of new premium car buyers from smaller cities will need to innovate their dealer formats and sharpen their digital marketing skills, the report says.
Reported by Forbes.com 7 hours ago.
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