The Luxury Car Industry Will Not Be Defeated by COVID-19

Luxury car industry, COVID-19

Mercedes Benz Thailand CEO Roland Folger explains the factors behind the prestige car industry’s unique resilience.

By Brian Keng

The coronavirus pandemic has had a ripple effect on the global economy. While some sectors like ecommerce and gaming have experienced a boom, others like the travel and automotive industries saw crippling declines in demand and sales.

As countries shut down their borders and implemented lockdowns, the automotive industry first saw its supply chains disrupted (Deloitte). Disruptions in exports of Chinese automotive parts, manufacturing interruptions across Europe, and closures of assembly lines in the U.S. plagued the sector.

Compounding the problem, the demand for cars fell drastically as people stayed shut in their homes amid stringent movement restrictions imposed during the first half of 2020, according to a report by Counterpoint Research. Consequently, the impact of COVID-19 was felt across the automotive sector, and the luxury cars segment was not immune.

Impact of COVID-19 on the prestige car segment

According to Mercedes-Benz Thailand President, Managing Director, and CEO Roland Folger, apart from the disruption in supply chain, the luxury cars industry also witnessed a sharp decline in sales during the initial lockdown period. This was mainly because people could not access the dealerships where they would usually obtain information about cars.

Moreover, there’s been a psychological impact on customers that has affected the demand for luxury cars, he says. Business owners are the usual buyers of prestige cars. As the economy took a downturn, these customers contemplated downsizing or shutting their business, or laying off employees. Understandably, it wasn’t a good time to buy a new car.

Furthermore, the extent of the impact on the prestige car industry is a byproduct of the impact on other sectors. For example, clientele running businesses in sectors that were hit particularly hard by the pandemic became less inclined to invest in a new car.

“Hotels that used to be, especially in Thailand, a large clientele for us […] have basically very much shut down all of their spendings on increasing or renewing their car fleets,” says Folger.

“What I’m trying to say, in a nutshell, is there’s a lot of different influences that affect our businesses, that affect the automotive business in total,” he says.

“The whole question is how long will this last? And how will the future of our businesses be?” he adds.

Why the luxury car industry is more resilient

The luxury car industry owes its resilience to its customer base. In fact, the luxury industry is even more resilient than the entry-level automotive market, says Folger.

“We in the luxury industry are a little bit more resilient than, for instance, the entry industry would be if you look into how sensitive to spending your customers are,” he says. “These are normally more affluent people that have a lot more financial reserves than the mass-market, typical customers.”

Folger adds that the key lies in differentiating between luxury vehicles and regular vehicles. As long as that distinction is clear, he says the industry will survive.

According to him, the decision to purchase luxury cars is driven by several factors. This is because vehicles are not always bought strictly for transportation–subconscious cues and status symbols can play a big role.

“If you arrive at a hotel in a normal mass market car, or in a Mercedes, you get a different treatment,” says Folger. “And that response that you automatically get from people that have never met you, that naturally drives also your decision on what kind of vehicle that you would purchase.”

Moreover, the decision is also driven by more rational factors like the residual or resale value of luxury cars, functionality, safety, and comfort, among others.

“On top of that, you have also […] emotional appeals and aspects. And that’s a question of, you maybe want to differentiate within your peer group,” he says. “You want to show that you have a little bit more elaborate taste, you know more about the background of your vehicle.”

In the past, Mercedes Benz has been perceived as a highly traditional older brand, Folger says, but as the company has evolved, it’s become more attractive to a younger demographic. With new designs, functionalities, and customer experiences, the brand seems to be able to connect with youth more easily than before.

“Part of that is certainly driven by supplements like AMG that make us much more sexy and attractive than the typical, more sedate sedan type of vehicle,” he says. AMG is a high-performance subsidiary of Mercedes Benz.

And being relevant for the young generation is a step in the right direction, especially since the age of Mercedes’ customers is decreasing worldwide, he adds.

Adjusting to the new normal

The pandemic has accelerated the pace of digitalization and digital adoption among consumers in light of infection risks through physical contact. The luxury car industry is no different.

“We always call it [COVID-19] our accelerator button. So, things that we had planned to do anyway, but maybe over the course of the next two years, we now crammed into more or less three or four months,” says Folger.

Some of these changes that were implemented to adopt to the new normal include health safety measures like sanitization and temperature checks, online training for dealers (which has had the added benefit of reducing costs), helping secure financing for the less affluent customers, and digital sales.

Time to recover from the pandemic

The luxury automotive sector has recovered from several past crises, like the the 2008 GFC and the Asian financial crisis of 1997. Citing these examples, Folger says that he expects the prestige car sector to take four to five years to recover from the pandemic.

“…at the moment, we would expect up to four or five years’ delay until we see again, figures as we have seen in 2019,” he says.

However, he also believes that the recovery could occur faster, especially in Asia. This is because China has grown into a “force to be reckoned with,” and is pulling out of the crisis much quicker than other economies. Provided the country does not go through a new infection wave, Folger believes China’s recovery could boost other economies in the Southeast Asian region.

Though Folger acknowledges that the situation is rife with uncertainties, at this point in the COVID-19 pandemic it’s a pure ‘survival of the fittest’ scenario. The luxury car sector has come this far, and if it continues innovating and adapting, there should be nothing in the way of a strong revival.

About the Author

Brian is a car enthusiast and CEO of Enovate Motors Philippines, which focuses on innovative technology that affects the future of travel. Brian is also the CEO of Century Peak Energy corporation, and VP of Century Peak Holdings.

[email protected].com

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