Tuesday, August 12, 2008

Luxury Car Sales Downshift to First Gear

In North America, the once-hot luxury car market cools as sales pick up in Asia, the Middle East, and Russia
by Jim Henry
A Ferrari dealership isn't like a Ford dealership; when you drive by one, you won't see a lot of unsold vehicles parked in the lot and signs advertising big discounts and incentives. But what they share is that both are selling far fewer cars these days.
Luxury auto brands, which until recently had been outperforming the rest of the U.S. market, have started to sag. Many people had thought high-end Italian sports cars would remain as invulnerable to the economic downturn as Hamptons real estate and Louis Vuitton bags, but that's beginning to change. To some extent, the higher you go in the luxury spectrum, the stronger the market remains, but even ultraluxurious brands—such as Bentley, which is down 27.9% this year—are showing vulnerability. And "mass luxury" brands, such as Mercedes-Benz (DAI), Porsche (PSHG), and Toyota's (TM) Lexus division, have seen some of the greatest drop-offs in sales, especially with their most expensive models.
That's because North American sales the past few years were artificially inflated by the housing boom and access to easy credit. As more Americans fooled themselves into thinking they were richer than they were, luxury automakers raised their production capacity and sales targets and enjoyed boom years. Customers who could never have afforded such cars as the Mercedes-Benz S-Class (BusinessWeek.com, 5/10/06), the Porsche 911, or the Lexus LS (BusinessWeek.com, 2/14/07) found that carmakers, banks, and dealers were happy to toss them the car keys. Now, for those who were borrowing against the ever-increasing value of their homes or planning to spend their fat Wall Street bonuses, the drive is over.
Skimpier Bonuses
"You've got some people who've got money, and they're coming in and buying those premium brands," said Roger Penske, chairman of Penske Automotive Group (PAG) in Bloomfield Hills, Mich., one of the nation's largest dealership groups. Penske's remarks came in a July 30 conference call. "But with the financial markets down some, that's off slightly, and you have to expect that." Penske specifically mentioned some Porsches, expensive BMWs, and Mercedes.
That trend isn't going to get any better, if New York Governor David Paterson is right. He recently stated that Wall Street bonuses are going down a projected 20% this year. New York State Comptroller Thomas DiNapoli estimated earlier this year that the securities industry paid out $33.2 billion in 2007, an average of $180,420 per recipient.
Luxury-car dealers look forward to those bonuses almost as much as the stockbrokers who get them. But with the financial industry down and stock markets and real estate values down, no one is immune.
Slippage at Bentley
"It is wrong to say certain segments of the market are immune to economic downturns in the market, as far as we're concerned," says Geoff Dowding, worldwide operations manager and vice-president at Bentley Motors in Crewe, England.
Bentley's U.S. sales this year were off 27.9% through July from a year earlier, according to AutoData in Woodcliff Lake, N.J. For all of 2007, Bentley sold 3,990 in the U.S., nearly 10 times its sales in 2003, when parent Volkswagen (VOWG) took over and relaunched the brand.
A slowdown was inevitable, since those big gains were built on adding all-new models, and for now, Bentley has its lineup complete. The economic climate, however, is a factor, says Dowding. He suggests that even those customers who can afford one may hold off buying for fear of being seen as showing off at the wrong time.

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