• Tuesday, October 06, 2015

Why foreign cars are expensive in China

Staff Reporter 2013-08-05 08:46 (GMT+8)
A BMW at car expo in Shenyang, Liaoning province. (Photo/Xinhua)

A BMW at car expo in Shenyang, Liaoning province. (Photo/Xinhua)

A BMW 650i sedan can sell for 2 million yuan (US$326,000) in China compared to the original price of US$91,000 in Germany.

"Gross margins of imported luxury cars with large engine sizes in China are conspicuously higher than corresponding levels in foreign countries," an auto importer told the Chinese-language National Business Daily.

The hefty profit margin has combined with high taxes leading to the exorbitant retail prices of imported cars. At present, imported vehicles are subject to a 25% tax on the basis of CIF (cost, insurance and freight) prices, 17% value-added tax and a consumption tax ranging from 1%-40% according to the engine size, with models with a engine being subject to the highest 40% rate. As a result, an imported vehicle with a 4.0l engine or larger and CIF price of 1 million yuan (US$163,000) would be subject to taxes totaling 1.43 million yuan (US$233,000).

From the official list prices of foreign cars in China, manufacturing and transportation costs account for 25%-40% of the retail price and general dealers or auto importers, which are set up by foreign auto firms take 30%-40%. Previously, a foreign auto firm would have two to four general agents in China, which typically would coordinate their retail prices, tantamount to price fixing. Following the introduction of "measures for sales management of auto brands" in 2005, foreign auto firms began to substitute a general dealer for several agents, leading to an absolute market monopoly.

Insiders note that when delivering imported autos to domestic dealers, auto importers reserve a profit margin of some 8.5% from the latter, though they often could not achieve this margin due to competition. In order to hit sales targets, some dealers often sell autos without any profit for themsleves or even at a loss.

The price cuts by some dealers, however, are criticized by auto importers as a move that jeopardizes brand image and they therefore often set floor retail prices, leading to conflict between dealers and general dealers.

According to the aforementioned "measures for sales management of auto brands," general dealers have the power to supply the vehicles and establish branded sales and service networks, thereby determining retail prices and the profit margins of dealers. Usually, dealers' profits consist of two parts: a fixed margin for retail sales and an extra margin provided by importers after achieving their sales targets. For BMW, the rates are set at 5% and 3%, respectively.

Via this arrangement, foreign auto firms make guaranteed profits in China and even keep substantial profits abroad. In the same vein, foreign firms raise the price of auto parts, thereby retaining a substantial portion of profits for their parent firms.

Who`s who »
Du Jiahao (杜家毫)

Du Jiahao is the governor and deputy Communist Party secretary of Hunan province. Du previously served as deputy governor of Heilongjiang province and has also held many positions within the Shanghai ...