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Mercedes luxury car sales drive faces speed bump in China

Shanghai, CHINA: A salesman walks past a Mercedes S-class sedan at a showroom in Shanghai after the firm announced a 57 percent increase in car sales in China and Hong Kong during the first four months of the year, 30 May 2006. Mercedes plans to invest 1.5 billion euros (1.8 billion USD) to produce cars in China, where a booming economy has created a growing class of 160 million 'luxury consumers', accounting for 13 percent of the country's total population, according to research by the semi-official China Brand Strategy Association. AFP PHOTO/Mark RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)

By Tom Mitchell in Beijing

When Daimler decided to post a board member to Beijing for the first time, it did so with a simple mandate: repair long-running operational problems at the German company’s Mercedes-Benz unit in China and close the gap with BMW and Volkswagen’s Audi.

That task, however, has been complicated by an investigation into motor pricing practices by the National Development and Reform Commission, one of the three government agencies that enforces China’s 2008 anti-monopoly law. The probe has ensnared Mercedes, BMW, and market leader Audi to varying degrees, and injected a new risk factor into the sales battle between the big three luxury automakers.

While these three German companies dominate luxury sedan sales in the world’s largest car market with a combined segment share of 80 per cent, Mercedes has been the laggard. Hubertus Troska, who took over as chairman and chief executive of Daimler’s China operations last year, and Nicholas Speeks, head of its Mercedes unit in the country, set about unifying a fragmented dealership structure and investing heavily in its manufacturing joint venture with state-owned carmaker BAIC Motor.

Mercedes sold 138,000 cars in China in the first half of this year, compared with 225,000 at BMW and 269,000 at Audi. But Mercedes’ sales are accelerating rapidly and the company seems on target to reach its goal of 300,000 units by 2015.

Executives are still waiting for the results of the NDRC’s investigation but signals so far suggest Mercedes and Audi may be in for a rougher ride than BMW. At issue is the degree to which the three carmakers have been involved in dealers’ pricing of spare parts and vehicles.

Audi has confirmed that a handful of its sales offices – managed by VW’s joint venture with state-owned carmaker First Auto Works – violated unspecified aspects of the anti-monopoly law, and said it would accept whatever penalty the NDRC hands down. Last month the regulator levied its biggest antitrust fines yet on 10 Japanese parts suppliers for price-fixing.

Mercedes said one of its joint venture’s sales offices was raided by NDRC officials, while the official Xinhua news agency quoted an investigator as saying the German carmaker had “used its leading position to control the prices of its spare parts, repair and maintenance services in downstream markets”.

In an attempt to mollify the NDRC, Mercedes announced large price cuts on more than 10,000 spare parts. BMW, which has managed to keep a much lower profile throughout the investigation, volunteered cuts on only about 2,000 components, having lowered its prices more aggressively over recent years.

“If Audi and Mercedes receive heavy fines and BMW gets off relatively lightly, then that’s wonderful for BMW,” says one Beijing-based auto executive who adds that lost revenue from the spare parts cuts is a small price to pay for what has been such a lucrative market. BMW reported more than €200m in second-quarter dividend income from its joint venture with Brilliance Auto, another Chinese carmaker.

Mercedes has said it cannot comment on the continuing NDRC investigation, but when asked about pricing issues at a media briefing earlier this year Mr Speeks said the carmaker was “not able and not inclined to dictate what price the dealer and the customer agree”.

“We have anti-monopoly and antitrust laws in [China] as we do in other countries,” he said.

Mr Speeks also, however, welcomed the fact that the discounts granted by Mercedes’ China dealers had fallen in 2013.

“[Car companies] don’t like it when the dealers sell at big discounts because they feel it hurts brand image,” says Janet Lewis, analyst at Macquarie Securities in Hong Kong. “Mercedes in particular has suffered from dealers getting too aggressive with discounting.”

As it awaits the NDRC’s decision, Daimler has continued to pour money into initiatives consistent with Beijing’s long-term development goals for the auto industry, which include greater technology transfer and more export sales.

Last year Mercedes and BAIC inaugurated Mercedes’ first fully fledged engine plant outside Germany, which will eventually ship components back to Germany. Daimler has taken a minority stake in BAIC ahead of the Beijing company’s planned initial public offering in Hong Kong, and Mr Troska has said his company would welcome a reciprocal investment.