China Luxury Car Consumption Tax Policy May Impact European Luxury Brands

According to foreign media reports, with the major adjustment of China's luxury car consumption tax policy—the threshold for the 10% super luxury car consumption tax has been significantly lowered from 1.3 million yuan to 900,000 yuan—many models from European luxury brands such as BMW, Mercedes-Benz, Porsche, and Jaguar Land Rover will be affected. It is expected that this policy change will further worsen the already declining sales situation faced by European high-end car manufacturers in China.

The Ministry of Finance and the State Administration of Taxation of China stated in a declaration that lowering the threshold for luxury car consumption tax is intended to "further guide reasonable consumption." The policy adjustment took effect on July 20.

Image source: Land Rover

Richard Molyneux, the Chief Financial Officer of Jaguar Land Rover, told analysts during the company's earnings call, "This means that almost all Range Rover models under Jaguar Land Rover are now subject to taxation. What is more surprising is that only a 48-hour buffer period was allowed from the announcement of the policy to its implementation."

China levies a consumption tax on ultra-luxury cars based on the manufacturer's suggested retail price, including optional configurations. This tax is an additional levy on top of the regular taxes and fees associated with the production or importation of new cars. It is worth noting that although high-end electric vehicles may enjoy tax reduction or exemption benefits during production or importation, they are still subject to this special consumption tax.

Jaguar Land Rover stated that the company will bear this additional tax in the short term. Molyneux said, "The dealer network is already very fragile and cannot be asked to bear this cost."

Due to fierce market competition leading to a decline in profits, many Chinese car dealers are struggling to raise funds, which has forced some car brands to provide additional support to their retail networks.

Mercedes-Benz announced that it will maintain the pre-tax prices of certain high-end models, including the S-Class luxury sedan, unchanged until August 31.

According to reports, within the two days from the announcement to the implementation of the luxury car consumption tax policy, brands such as Porsche, Mercedes-Benz, and Jaguar Land Rover experienced a buying frenzy.

When this tax was first introduced in 2016, it mainly affected models from ultra-luxury brands such as Bentley, Aston Martin, and Rolls-Royce. However, after the new policy lowered the threshold, it impacted more luxury models, including the Mercedes GLS, BMW X7, and Range Rover.

For a long time, the Chinese market has been an important source of profit for European luxury and ultra-luxury brands, as wealthy Chinese consumers are keen on purchasing high-end imported models.

However, the recent slowdown in China's economic growth, coupled with the rapid improvement in the product quality of domestic car manufacturers, has led to a cooling off of European high-end models.

In the case of BMW, the brand's sales in China fell by 15% year-on-year in the first half of the year, to 318,125 units. In its semi-annual financial report, BMW attributed this decline to "continued sluggish consumer demand in the high-end car segment."

Mercedes-Benz's sales in China fell by 14% in the first half of the year to 293,172 units.

Porsche was also hit hard, with sales in China falling by 37% in the first half of the year to 18,837 units. In an earnings call, Porsche stated that its performance in the Chinese market "continues to reflect the challenging market environment in the luxury car sector, intense competition, and the company's ongoing transition to a value-oriented sales strategy."

Image source: Porsche Cars

A Porsche dealer stated that electric sedans like the Porsche Taycan are priced close to the tax exemption threshold and are usually discounted to below 900,000 RMB. However, to be exempt from the luxury car consumption tax, a permanent price reduction is required. The salesperson said, "How to formulate the pricing strategy still needs to be discussed in detail."

Jaguar Land Rover's sales in China fell by 31% to 32,757 units in the first half of this year, partly due to the company's termination of local production for certain models, including the Jaguar series. Molyneux disclosed to investors that the company's sales have continued to decline since the implementation of the adjusted luxury car consumption tax.

Mercedes may be the most impacted. According to data from the China Automobile Dealers Association, among models priced over 1.02 million RMB, Mercedes accounts for nearly half of the sales, with a total of 16,000 units sold in the first half of the year.

Land Rover follows closely with a 23% share, and Porsche ranks third with an 18% share.

Meanwhile, the affected Chinese models are few and far between. The U8 large SUV from BYD's high-end sub-brand Yangwang is one of the few high-end Chinese models affected by the lowered luxury car consumption tax threshold.