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BMW Shows That Luxury Brands Can Pull Off ‘Common Prosperity’

BMW Shows That Luxury Brands Can Pull Off ‘Common Prosperity’

Thursday, 2 September, 2021 - 05:00

BMW AG is set to effectively bail out its flailing Chinese joint-venture partner. For the German carmaker, that’s a smart move.


BMW’s China unit is close to a deal to buy production assets worth $252 million from the parent of its main partner, Brilliance Auto, Bloomberg News reported citing people familiar with the matter. The information was disclosed at a creditors’ meeting for Brilliance Auto on Tuesday. State-owned, Shenyang-based Huachen Automotive Group Holding Co., the parent, has been navigating a bankruptcy restructuring process since last November after it defaulted on 6.5 billion yuan ($1 billion) of debt. The deal, if approved, would allow it to pay down some of its borrowings.


Beyond alleviating the debt troubles of its China partner’s parent, premium carmaker BMW’s move to pick up production assets out of the restructuring in its biggest market is a clever one — especially right now. With this potential purchase, the German company can make more quality cars at increasingly affordable prices. That’s in keeping with Beijing’s focus on “common prosperity,” or a more equitable distribution of incomes across the country.


The plan to address regional, urban-rural and income gaps matters for automakers, as Beijing’s proclamation is likely to affect how consumers make and spend their money. Cars account for one of the largest portions of discretionary expenditure in China. President Xi Jinping’s common prosperity push will thus force a rethink of how vehicles are priced. As disposable incomes rise, and Beijing focuses on closing the large wealth gaps between tiers of cities, the likes of BMW and its peers will have to find a way to be part of the solution.


Navigating this impending shift in spending power is critical for BMW. Around 36% of the company’s premium cars are priced at less than 250,000 yuan – the lowest end of the range — compared with more than 40% for its competitors such as Volkswagen AG-owned Audi and Mercedes-Benz AG. As China tries to create what officials are calling an “olive-shaped social structure,” with a wider middle class, lifting the portion of cheaper but better-made cars would give it a leg up in lower-tier cities, where Brilliance has historically (although still relatively poorly) made and sold cars.


“To BMW, Liaoning province and the city of Shenyang have become the crucial innovation and production base in China, and the cornerstone of our future success in China,” BMW said in a statement to Reuters, without giving details about how it plans to participate in Huachen’s restructuring.


BMW’s China business has always done well. It grew 11.7% in the second quarter and over 40% in the six-month period ending June. Most of the cars it makes for Chinese buyers are manufactured on the mainland. The company imports around 20% to 25% of its sales volumes of its almost 800,000 units. Even the troubles of its local partner haven’t gotten in the way.


BMW was the first international automaker to increase its holdings in its China venture after Beijing allowed foreign companies to raise their stakes a few years ago. At the time it seemed expensive, but now the move looks prescient. While Brilliance will only have a 25% stake in the joint venture in 2022, the dividend from BMW and investment income will still be significant, according to Daiwa analysts. The German company’s latest move, much in the same way, will likely keep it well ahead of its peers — and could give its flagging partner a lift, too.


Bloomberg


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