Why BMW, Audi and Mercedes are losing their shine in China

(By Caixin journalists Yu Cong and Elise Mak)

There was a time when the BMW name was enough of a status symbol in China that the average car buyer could be easily talked out of choosing a less expensive luxury vehicle from a domestic automaker.

A former BMW salesperson recently recalled how he once tried to persuade a customer to buy an i3 electric subcompact over the BYD luxury model they were also considering.

“I tried to convince a customer, saying, ‘Isn’t the 180,000 RMB (US$25,000) BMW i3 more respectable than the BYD Han?’” the former salesperson told Caixin.

The customer, however, wasn’t moved. “The base model of the i3 lacked features like heated seats and an electric tailgate, and it cost more to insure than a domestic car,” the ex-salesperson explained.

Even after offering the i3 at nearly half the original price, the salesperson couldn’t get the customer to take the BMW model.

It is a lesson that BMW AG and fellow German luxury car brands like Mercedes-Benz Group AG and Audi have also learned this year in China. As a price war has raged in the world’s largest auto market, Volkswagen AG’s luxury brand Audi has increased the average discount that it is offering on vehicles to nearly 30%, well above the average of 14% across the entire domestic market, according to Chinese auto consultancy firm Ways. BMW followed by boosting its average discount to 25%, and Mercedes-Benz with nearly 20%.

And yet sales have fallen. For the first half of 2024, Mercedes-Benz’s deliveries to China slumped 9% year-on-year, according to company data. BMW’s sales were down 4.3% from the same period in 2023, while Audi’s fell 2%.

For years, BMW, Mercedes and Audi owned the luxury car market in China. But their failure this year to boost sales by slashing prices is a sign that the brands no longer carry as much weight as they used to in the country. The question is, why?

In short, the German auto giants have failed to keep up with the Chinese market. They were late to adapt to its monumental shift to electric vehicles (EVs), missed how China’s luxury car buyers had grown more discerning, and stood by as their more market-astute domestic competitors launched models with similar features at far lower prices, industry insiders and analysts said. All this has left BMW, Mercedes and Audi playing catch up in the world’s largest car market.

Their loss helps explain the domestic competition’s gains in the broader Chinese passenger car market this year. In the first ten months of 2024, Chinese brands’ share of the market rose by 9.3 percentage points from the previous year to a record 64.6%, according to the China Association of Automobile Manufacturers. Meanwhile, German carmakers’ market share dropped to 14.9%, a record low.

In the days when the internal combustion engine still powered most of the cars sold in China, foreign brands like Mercedes-Benz, BMW and Audi dominated the luxury segment, allowing them to set vehicle prices above 300,000 RMB. But the country’s rapid shift toward new-energy vehicles (NEVs) — a category that includes pure electric, plug-in hybrid and fuel cell vehicles — left them flat-footed.

The shift reached an inflection point in 2021, which was the first year that NEVs made up more than 10% of new car sales. High-end models from domestic brands, like the Li Auto One and the Nio ES6, both priced above 300,000 RMB, became breakout hits.

The change would become something of a wake-up call for the German carmakers. “Before 2021, Mercedes-Benz, BMW and Audi didn’t see Chinese brands as serious competitors,” a Mercedes-Benz employee told Caixin. “But as NEVs started eating into the market share of their fossil fuel vehicles, management began to understand just how severe the problem was.”

By 2023, the change would be apparent to anyone just looking at the sales numbers. Chinese EV upstart Li Auto Inc. sold more than 376,000 vehicles that year. Its smaller peer Nio Inc. sold approximately 160,000. The figures eclipse those of BMW and Audi in China. The former sold 99,972 all-electric vehicles in the country last year, while sales of the latter’s e-tron series of EVs came in above 30,000.

And the trend is only expected to continue. S&P Global Mobility forecast that NEVs will account for 46% of Chinese passenger vehicle sales this year, up from 36% in 2023.

It is not just that Chinese consumers are increasingly buying electric. Their standards have gotten higher too.

Chinese car buyers now expect “an upgraded experience at a downgraded price”, according to auto consultancy Ways in a late August report. It is something that the German luxury brands haven’t grasped as quickly as their Chinese competitors.

A case in point is the new C10 model that Chinese EV startup Zhejiang Leapmotor Technology Co. Ltd. launched in March. The model features the same Qualcomm Snapdragon 8295 chip as the 2023 Mercedes-Benz E-Class. The difference? The C10 starts at 128,800 RMB. The cheapest E-Class is priced around 450,000 RMB.

Leapmotor has been one of the bigger success stories in the Chinese auto market this year. Its vehicle deliveries nearly doubled in the first half to 86,696 vehicles, outpacing the EV market as a whole.

JATO Dynamics analyst Felipe Munoz said Chinese brands now offer features that buyers used to only be able to find in models priced between 200,000 RMB and 300,000 RMB — a move “unimaginable” to foreign brands.

“Luxury in China is no longer what it was ten or 20 years ago,” said Nomura analyst Joel Ying. “In the future, smart driving and human-vehicle interaction features will define luxury in China’s auto market.”

Nio is aware of this. Its market researcher said consumers now prioritise smart driving features and advanced cockpits.

However, foreign brands have been slow to adapt. Mercedes-Benz launched a new E-Class with L2+ navigation-assisted driving in late 2023, but that still leaves it behind Chinese EV-makers like Nio and XPeng Inc., which introduced similar features in 2020 and 2021. As of mid-2024, neither BMW nor Audi had released comparable features in the Chinese market.

“The main problem for Mercedes-Benz, BMW, and Audi is that their products can’t keep up with Chinese competitors,” said Zhou Lijun, chief analyst at Yiche Research Institute. “Domestic brands release new models quickly, with attractive designs, interiors and features.”

More and more Chinese EV-makers have been positioning themselves to take advantage of the changes in the domestic market and challenge foreign luxury brands head-on. In June 2024, Nio offered free trade-ins of three-year-old BMW 3 Series models to new Nio ET5s, as part of its 1 billion RMB subsidy programme to attract traditional gasoline vehicle owners to buy its models.

In the middle of this year, Huawei Technologies Co. Ltd., in collaboration with its automaking partner BAIC Motor Corp. Ltd., launched the Stelato S9 at a sticker price of nearly 400,000 RMB. That put the model in direct competition with the high-end Audi A8 and BMW 7 Series, which cost twice as much. Li Auto has also gained a strong following with its inexpensive, family-friendly models — a segment that foreign brands have failed to capture.

Even before this year’s round of price cuts, foreign automakers had begun to rethink their China strategies to focus on improving the quality of their products. One of the changes is to carry out research and development (R&D) locally to stay competitive.

In July 2023, BMW cut its sales targets and prioritised quality over volume. At the Chengdu Auto Show a month later, the carmaker unveiled 13 new models, including the seventh-generation plug-in hybrid M5. It is also investing heavily in local R&D, including spending 20 billion RMB to upgrade a factory in Shenyang, northeast China’s Liaoning province, in order to start producing its “Neue Klasse” (new generation) line-up of EVs in China in 2026.

BMW has opened R&D centres in Beijing, Shanghai, Shenyang and Nanjing, Jiangsu province. That makes China home to more of the automaker’s R&D facilities than any other country outside its home of Germany. Its Shenyang R&D centre is set to focus on autonomous driving technology.

Audi is also adjusting its China strategy. Volkswagen’s joint venture with China FAW Group Co. Ltd. has announced plans to produce the new Audi A5 in China, renamed the A5L, and expand its product lineup.

In addition, Audi is working with SAIC Motor Corp. Ltd. to develop a new intelligent digital platform and launch three pure-electric models starting at the end of next year.

Mercedes-Benz, too, has shifted its focus. The company expects more of the R&D work it does in China to influence global markets. For example, it plans to use a plug-in hybrid battery pack developed by a Chinese R&D team in models sold around the world.

Still, the competition in China isn’t going anywhere. At the launch of BYD-owned Denza’s new Z9 and Z9 GT models, priced around 340,000 RMB, Chairman Wang Chuanfu seemed sure of his company’s prospects. “We have the confidence and capability to compete with the global automotive giants,” he said.

This article was first published in Chinese by Caixin Global as “In Depth: How BMW, Audi and Mercedes Ended Up Also-Rans in China”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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