BMW Bayerische Motoren Werke AG

By Stephen Wilmot 

Germany's car manufacturers are once again being bailed out by China.

Having skidded to a halt in February, Chinese vehicle sales are rebounding -- particularly at the luxury end of the market. Premium brands clocked year-over-year growth of 13.6% in April, according to insurance sales tracked by brokerage Bernstein, bringing the decline for the first four coronavirus-stricken months of 2020 to just 14.2%. Bernstein's feedback from dealers suggests demand remains strong this month.

Volkswagen, which owns the Porsche and Audi brands, Mercedes-maker Daimler and BMW dominate the field in China just as they do elsewhere -- only more so. Jürgen Pieper, an analyst at private German bank Metzler, estimates their combined share of the country's luxury-car market is more than 90%, versus roughly 85% globally.

It seems counterintuitive that a sales recovery should be led by products that are more status symbols than everyday necessities. China's wider car market has been shrinking since mid-2018, though, even as premium sales have kept growing. In previous years, the segment's resilience seemed linked to consumers' funding sources: Mass-market brands were more dependent on shadow finance and subsidies, on which Beijing was trying to clamp down.

This year, the uncomfortable truth may be that, in China as in the U.S., the tech-enabled affluent class that might buy a BMW or Mercedes is less economically affected by the health crisis than the blue-collar workers that make them. Social distancing has also given those with means an extra reason to buy a vehicle. China has excellent public transport, but people are nervous about using it, subway use last week was down about 40% year over year.

The luxury-car boom in China is in little danger of running out of road. Car ownership in the country is still far below levels in the West. Premium brands account for just 15.3% of total sales nationwide, according to Goldman Sachs -- up from 9.6% in 2016, but far below the level of the top coastal cities (25% to 29%), let alone luxury hot spot Hong Kong (52%).

The rise of China may be the single biggest reason why Germany's auto stocks -- cost-heavy Daimler aside -- have massively outperformed U.S. peers and the wider European stock market over the past two decades. China kept them in business in the 2009 crisis and will help them through the current one. The country usually contributes roughly 35% and 50% of their profits, estimates Michael Muders, a portfolio manager at Frankfurt-based Union Investment.

This long-term growth story comes with challenges. An increasing share of the vehicles that the companies sell in China are made by local joint ventures of which they only own half. BMW signed a landmark deal in 2018 to increase its stake in its key joint venture to 75%, but it still hasn't completed it. Meanwhile, the car industry in Germany itself has suffered from years of production cuts. The combination of growth in Chinese factories they can never really control with a slow decline at home will only get more awkward politically.

Still, their enduring appeal to China's confident elite puts Germany's manufacturers in a league of their own for investors within the otherwise risk-laden global auto sector. This year the difference will be more obvious than ever.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

May 20, 2020 05:05 ET (09:05 GMT)

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