Manufacturing News

Bling! China luxury car tax eclipsed by race for status

If you were planning to spend 1.3 million yuan ($189,000) or so on a car in China, your next ride just got a little more expensive.

Cars costing more than that were slapped with a 10 percent "superluxury" tax starting last Thursday to "guide reasonable consumption" and cut emissions, the country's Ministry of Finance announced.

That has about as much chance of crimping Chinese demand for luxury vehicles as a Honda Civic has of beating a Bugatti Veyron in a road race.

Look, for instance, at the devastation that President Xi Jinping's anti-corruption drive has had on Daimler AG since the policy started in 2013. Far from suffering, Chinese sales of Mercedes-Benz cars have outstripped those in Germany and then the United States, to the point where China is now its biggest market.

The past year has been a particularly good one to sell sweet rides to China -- one obvious reason why Beijing may be looking to crack down. Registrations of premium sports hypercars such as Lamborghini's Aventador rose 47 percent in the first half of the year, according to Bloomberg Intelligence analyst Steve Man, while those of Rolls-Royce, Maserati, Bentley and Aston Martin marques were up more than 60 percent.

Luxury cars are a classic example of Veblen goods, products for which demand will sometimes rise, rather than fall, with increasing prices.

That paradoxical behavior appears to be common in China. "Some of our vehicles are even traded above listed prices," said Daimler Chairman Dieter Zetsche, with an air of mild astonishment, during a July earnings call.

Tax policies are more likely to make a difference at the lower end of the market, where consumers are more price-sensitive. Beijing's tax cut on cars with engines of 1.6 liters and smaller certainly stimulated demand.

Yet it had only a minor impact on the segment's market share. Large cars generate 7.7 percent of China's light-vehicle sales, down only slightly from 8.2 percent before the purchase tax was reduced.

The British brands in the superluxury market have another advantage. With their tiny volumes, humongous prices, mania for quality and global customer bases, luxury marques are more likely to have a factory in England than China.

As a result, the likes of Aston Martin, Rolls-Royce and Bentley will be pocketing benefits from their Chinese sales as a result of the post-Brexit slump in the pound, which has driven the currency down almost 9 percent against the yuan over the past six months.

They could take advantage of that to counter Beijing's austerity drive and cut prices -- but it's another question entirely whether they'll do so, given the risk of undermining their prestige. After all, the luxury car industry wouldn't exist in the first place if customers were the sort of people to mind their nickels and dimes.

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