BMW Tripling China Output Risks Audi-Like Asian Dependence

Bayerische Motoren Werke AG (BMW) plans to triple the number of vehicles it can make in China, risking efforts to avoid overdependence on one market.

The world’s largest maker of luxury vehicles will start production of the X1 compact sport-utility vehicle today at a new factory in China, part of a 1 billion-euro ($1.27 billion) expansion. Combined with an existing plant in Da Dong, the Teixi facility will boost capacity to as many as 300,000 cars a year from 100,000. The opening makes China the only country with multiple BMW assembly sites outside Germany.

The Munich-based manufacturer’s expansion, part of competition with Volkswagen AG (VOW)’s Audi for the luxury-car sales lead, could increase reliance on China for growth. BMW sold 43,800 more cars globally through the first four months of 2012, compared with a year earlier, with 60 percent of those additional sales in China. For Audi, China accounted for 74 percent of its delivery growth of 49,300 vehicles this year, according to company figures.

Prana Tharthiharan Natarajan, a research analyst at Frost & Sullivan in Chennai, India, points out the conundrum facing the luxury-car producers.

“There are no other regions that can provide for such massive numbers of sales as China can,” he said. “In the event of economic turmoil in China, most German automakers could end up with hundreds of thousands of unsold cars.”

A dropoff of Chinese demand would risk more than growth. Profit could also tumble, with automakers earning as much as five times more per vehicle in China compared with other markets because of the tendency of customers there to buy high-end models loaded with extras, according to August Joas, automotive partner with consulting company Oliver Wyman.

Quarter of Profit

That means China accounts for about 25 percent of profit for Germany’s high-end automakers, said Juergen Pieper, an analyst with Bankhaus Metzler in Frankfurt.

“China’s importance for all German premium carmakers is big, but it’s much better to be dependent on China than on France or Italy,” said Pieper. “Russia and India could be a substitute, but China will remain the number one for five to 10 years.”

Daimler AG (DAI)’s Mercedes-Benz has the lowest dependence on China among the world’s top three luxury car brands. With growth held back by the changeover to a new generation of the B-Class compact and limited availability of the M-Class and GLK sport-utility vehicles, China accounted for just 25 percent of Mercedes’s sales growth of 37,000 vehicles in the first four months of 2012.

Challenging Audi

The Stuttgart-based automaker plans to boost its presence in China to challenge Audi’s lead in the world’s largest car market. Three compact models are due to be made in China and an engine factory will start production next year. In December, Daimler began building the GLK in China, adding to local assembly of the C-Class and a stretched version of the E-Class.

General Motors Co. (GM), the top automaker in China, has little presence in the country’s luxury market. The company said last month it is preparing a renewed effort to sell Cadillacs in China.

Audi got an early head start on the back of VW’s entry into the market in the 1980s. That advantage has fueled its pursuit of BMW as it was quicker to tailor models for local demands, including extended versions of the A4, A6 and A8 sedans. It also exposes the brand more to the Chinese economy.

Reducing Exposure

“Audi would have significantly bigger problems from a China slowdown than BMW, which has a better global balance,”said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. “Audi risks becoming dependent on a single country. If China coughs, the VW Group as a whole has big problems.”

To reduce its exposure to China, Audi plans to build a factory in Mexico to supply vehicles to the U.S. and South America. BMW is planning a factory in Brazil to target a new source of growth. The risks of banking on a single market were made clear when Porsche AG nearly collapsed in the early ‘90s because of its dependence for revenue on American demand for sports cars.

“We will not rely on China,” Ian Robertson, BMW’s sales chief, told reporters yesterday in Paris. In addition to pursuing growth in Brazil, Russia, India, South Korea and Turkey, he said, the company has identified “the next 10”growth markets to guard against overdependence on China.

BMW’s growth rates in China will likely slow over the next few months but remain above 10 percent for the year, he said.

European Strain

Still, the efforts by BMW and Audi to wean themselves from a reliance on China may have limited effects. The market is projected to account for more than 50 percent of the growth of the top-two upscale carmakers in 2015, with Mercedes only slightly lower at 47 percent, according to data from researcher IHS Automotive.

With Europe under strain from government spending cuts and the U.S. still recovering from the financial crisis, there may be little alternative in the coming years, and Chinese demand has proven to be resilient t