Workers of Porsche Automobile Holding SE assembled a Porsche model Panamera at the production line on June 2, 2009 in Leipzig, Germany. The car will be launched into China's market in 2010. [Photo: CFP]

Related: GM: H1 Sales Hit Historical High in China

While luxury car producers saw sales stalled or doing U turns throughout most of their world markets during the first five months of this year, they were picking up speed in China.

"China will become Porsche's second largest market after Germany within the next three years," Helmut Broeker, Porsche's China head, told Bloomberg in June. China was Porsche��s third-biggest market last year, up from 15th in 2006.

Porsche's year-to-date sales in the US through the past five months were 8,757, off 30 percent year-on-year. However, the debt-laden Germany-based sports car producerrs boosted sales 3 percent in China during the same period to 3,174. That included 900 vehicles in May, a 44 percent increase from a year earlier.

Audi��s global deliveries from January to May decreased 12 percent to 374,750. The luxury unit of Volkswagen AG sold only 82,800 vehicles worldwide in May, down 6.1 percent on the previous year.

But it saw a 28 percent growth (12, 435 cars) in China during the same month.

China is now Audi's second biggest market in the world, just behind Germany. It sold 119,598 sedans last year in China, a 17 percent increase year-on-year.

Many luxury car producers have also injected labor and capital into dealerships and new companies to strengthen their place in the Chinese market.

Porsche will add seven more dealerships to its present 25. Audi opened a wholly controlled affiliate, Audi (China) Enterprise Management, in Beijing in April.

"In the context of shrinking demand in US and Europe and higher-growth market in China, it's not surprising at all when we hear a foreign carproducer say China will become its second largest market aside from its home market," Dong Yang, deputy director of China Association of Automobile Producerrs (CAAM), told the Global Times.

Lust for Luxury

Analysts say that the major reason for China's bullish luxury car market is that most people use luxury vehicles as a means to show off social status, wealth and taste.

"China's 1.3 billion people are simply wild about cars," Michael Dunne, a Shanghai-based managing director of J.D. Power and Associates, told USA Today.

He said that China's growing auto market has been driven not just by economics, but also by a new mindset that is riding with the new prosperity.

"There is the thrill of individual mobility, going from point A to point B in their own time and on their own terms. But it's also an opportunity to declare and project their own success," Dunne told USA Today in early June.

Zhong Shi, an auto analyst in Shanghai struck the same note.

"Three kinds of people are obsessed with luxury cars - luxury car owners, potential buyers, who can afford and will buy in the near future and luxury car addicts. Obsessions of the second and third kind make luxury car owners and potential buyers thrilled with luxury cars," Zhong Shi, an auto analyst in Shanghai, told the Global Times. "There is kind of parade and a status symbol with it all, though some luxury car owners are really car addicts," remarked Zhong.

The fact that there are many millionaires in China despite the finanical crisis is also contributing to the strong market.

The 2009 World Wealth Report, released by Merrill Lynch Global Wealth Management and consulting firm Capgemini, showed that China's high net worth individuals (HNWI), those with at least $1 million in investable assets excluding primary residences, made it the fourth-ranked country by millionaire population after the US, Japan and Germany. The UK was No. 5.

The world's population of HNWI dropped 14 percent year-on-year in with their aggregate wealth falling by 19.5 percent year-on-year, reducing both the population of the rich and their assets down to levels below 2005.

However the number of HNWI in China only fell by 11.8 percent to 364,000 at the end of 2008.

JD Power & Associates forecast that luxury car sales in China will more than double by 2014 to around 508,000, compared with 205,000 in 2007.

Demand for luxury cars is also growing in India, but from a much lower base, Power said.

The central government added BMW and Mercedes-Benz branded cars in June to its procurement catalogue. It is widely considered that the move will trigger further demand on luxury cars.

Survival of the Fittest

Dieter Zetsche, Chief Executive Officer of Daimler AG, said 2009 would be a "Darwin year" for the auto industry with the weak and the lame being pulled down by larger forces.

Figures from Beijing Polk-Catarc Vehicle Information Consulting Company Ltd showed registrations of new luxury cars in the first four months slid 7.6 percent year-on-year to 60,000.

Not all posh car producers saw growth, partially to a new consumption tax that discouraged the purchase of vehicles above 3.0 liters.

To counter that, many upscale car brands in China slashed prices, particularly for high liter models.

BMW reduced prices for Mini in early June the first time since it entered the Chinese market in 2003. Prices cuts ranged between 33,000 yuan ($4,832) and 43,000 yuan ($6,300). Audi dealers in Beijing and Changshang lowered prices for the Audi Q7 with 4.0L and above by 200,000 yuan ($29,270).

From January to April this year, overall new car registrations of major luxury car producers were up, but most of them were for less pricey models.

Registrations for high-end luxury cars were down 20 percent.

Audi A8 were down 24.6 percent, the BMW 7 series declined by 26.4 percent, the Mercedes Benz S series slumped by 1.9 percent and Lexus took a hit of 62 percent in four months.

Lexus��s steep decline of posh new-car registrations �C down 36.3 percent year-on-year to 7,315, was partially due to the new vehicle tax levied beginning on September 1, 2008.

Zeng Lintang, deputy general manger of Toyota Motor (China) Investment Co Ltd, told sina.com that the decline was due to emission tax. Almost all Lexus sold have engines above 3.0 liters, to which the tax applies. Some carproducers simply pulled the high-liter rides off the market.

Audi stopped producing its A6L 3.2L in late 2008, and has stopped selling the A8L 3.2L in China since June 8, when it released the A8L 3.0 FSI on the market. BMW has also began selling smaller powered autos, the 1.8L and 2.0L , in China.

"The consumption tax is only one contributing factor. Lots of drivers in Europe and the US think that driving high-emission luxury cars is environmentally incorrect. Some even see it in moral terms. In the long run, Chinese people will also realize it. But many of our car loving millionaires are still at the show-off parade stage," said Zhong.