Luxury-Car Buyers Might Not See Savings From Slashed Sticker Prices, Experts Say

Luxury carmakers have scrambled to cut sticker prices for their top models after Mercedes-Benz said that the benefits of the government’s cut to the value-added tax (VAT) for automakers should trickle down to customers.

Yet industry experts remain skeptical as to how much automobile price changes up the supply chain will affect final car prices, given that sellers have already slashed prices as competition grows fiercer.

On March 15, the iconic carmaker said it would move to reduce the recommended retail prices of many of its models sold in China. This prompted competitors BMW, Jaguar, Land Rover and Volvo to follow suit, with the price of major luxury car models falling by about 2% on average, according to Caixin’s calculations.

The biggest drop came for Ford’s luxury brand Lincoln, with the price of its MKC model falling from 298,800 yuan ($44,522) to 279,800 yuan, a drop of around 6.7%.

The government will reduce VAT rates for manufacturers (including carmakers) to 13% from 16% at the start of April in a bid to stimulate growth across China’s slowing economy.

It follows China’s first slowdown in its automobile industry in 28 years in 2018. Sales in the first two months this year also give little cause for optimism, with sales slumping 17.51% year-on-year to 3.24 million units, according to the China Automobile Industry Association.

Yet luxury carmakers largely bucked the trend, with Mercedes-Benz seeing sales rise 10.3% to 674,000 last year, partly thanks to price cuts, experts say.

Industry watchers are still unsure how much the VAT reduction will reach consumers. According to analysis from Huatai Securities, carmakers could see their net profits rise by 8% to 10% if they keep prices the same, but this would dip to around 2% to 3% if they pass the cost reductions on to end buyers.

Yet analysts say manufacturers’ recommended retail prices often give little indication of prices for car buyers because prices end up being slashed when competition is fierce.

Last year, car sellers reduced their prices by 18.3%, after cutting 13% off prices in 2017, said Cui Dongshu, secretary-general of the China Passenger Car Association. Given the already deep price cuts, the VAT reduction might not make much of a dent in the final cost.

On the other hand, U.S. carmaker Tesla Inc. appears to be trying a different approach, announcing last week that it would raise the price of its vehicles by an average of 3% worldwide, betting that exclusivity will help sales.

Contact reporter David Kirton (davidkirton@caixin.com)