End of an Era China's Tax on German Luxury Cars is Likely to Become a Problem

For the sales of German luxury cars, China used to be a paradise. However, several reasons are now making life difficult for the Germans ...

Sales of German luxury cars have plummeted in China, partly because customers are no longer spending as freely as before—due to the real estate crisis, for example—or because they are opting for Chinese models. Additionally, a new tax regulation for luxury cars was introduced a year ago. This means that the threshold at which the tax is due was lowered from the previous 1.3 million yuan for new vehicles excluding VAT to 900,000 yuan (currently about 116,000 euros / approximately US$55,000). The adjustment of China's so-called luxury tax on vehicles last year has now, as expected, had a particularly negative impact on German and other European car manufacturers. This was confirmed by a spokesperson for the German Association of the Automotive Industry (VDA) upon inquiry by dpa.

German Manufacturers Are also Losing Ground Technically in China

According to Cui Dongshu, Secretary General of the Chinese Passenger Car Association (CPCA), the lowered threshold for the luxury tax has structurally changed the market. In particular, demand for combustion engine vehicles priced between 900,000 and 1.3 million yuan  (approximately US$125,000–181,000) has significantly declined. German manufacturers would then either have to pass on the additional burden through higher end prices, thereby weakening their competitiveness, or absorb it at the expense of their margins. At the same time, expensive special equipment is being streamlined to deliberately position prices below the tax threshold, as further noted. Consumers are therefore increasingly turning to Chinese premium models with electric or hybrid drivetrains, as well as more affordable used luxury cars. However, from Cui's perspective, the tax is not the main problem for German manufacturers: he described the rise of Chinese premium brands as the decisive blow! In this context, the serious lag in "smart" vehicle technology and electrification must be mentioned.

This is How German Automakers View the Situation in China:

At BMW, the tax only affects individual upper-class models imported to China, according to reports from Munich. The vehicle price therefore concerns relatively low volumes ordered by a wealthy customer base. According to BMW, the lowered threshold has thus had hardly any impact on BMW's overall sales. And according to VW subsidiary Audi, the regulation also only concerns a very limited number of models sold in China. At the Stuttgart-based sports car manufacturer Porsche, only individual types are affected as well. The specific effects are difficult to evaluate in isolation, stated a spokesperson for Mercedes-Benz. At Mercedes, the proportion of affected vehicles is under five percent of total sales. These vehicles are exclusively in the luxury segment—particularly focusing on the S-Class and Mercedes-Maybach models. However, it remains a fact that sales have declined further for all brands recently. At Porsche, deliveries in China fell by 32 percent in the first half of the year, at Mercedes by 28 percent since January. At BMW, sales dropped by 20 percent in the same period and at Audi by 19 percent.