Is the Party Over for Luxury Cars?

Rolls-Royce Ghost Series II, London Photograph: James Lipman +44 7803 885275
James Lipman/Rolls Royce

It’s a $100 billion industry, and one that continues to grow with each passing year. Luxury cars (cars selling for $40,000 or more) account for over 11% of global auto sales, and more importantly, 18% of profits. Because of the money companies make on the sale of each individual vehicle, automakers have gone full-steam ahead in the years since the global financial crisis and made premium cars a top priority. And as the market continues to grow, they’re pouring millions into the market in hopes of an even bigger return.

It’s why Range Rover will soon be joined by Bentley, Jeep, Lamborghini, Maserati, Rolls-Royce, and (probably) Mercedes-Maybach in the ultra-premium SUV segment. Why Cadillac is preparing to take on the Germans in the executive sedan segment, and Ford is sinking serious resources into Lincoln for the first time in decades too. It’s the reason Ferrari was named most powerful brand in the world in 2014 (it has since been unseated by Lego), and is worth an estimated $11 billion as it prepares to be spun off into an independent company. And even why Jaguar Land Rover is projecting that it will be building 1 million cars annually within a decade, and Aston Martin is flush with cash for the first time in its history, and looking to build a factory in America.

But what happens when the party ends?

Source: Porsche
Source: Porsche

It’s always the hardest question to ask, especially when the good times are here. But really, what happens? It wasn’t that long ago that newspapers ran pictures of supercars abandoned at airports while the end seemed near for everyone from GM to Jaguar. And while the global economy has reached incredible heights of late, troubling news from Europe and Asia could mean that the luxury boom could be coming to an end sooner than automakers hoped. Even more telling, it seems like the industry is already starting to take evasive action.

Source: Mercedes
Source: Mercedes-Benz

Even though it still seems like business as usual at most companies, several big events have forced the industry to make serious adjustments, and the have potential to severely effect the luxury auto market in coming years. The Greek debt crisis, with its potential to destabilize the Euro and add strain to a recovering European economy could spell trouble for auto sales on the Continent. And with the collapse of the Russian economy, which was once thought to be the golden goose of the luxury market, the country has all but been left for dead by the auto industry, with Audi and GM pulling out of it altogether, and people snapping up luxury cars as a bulwark against the value of the tumbling ruble.

China, which has long gobbled up Audi A8s like we do Toyota Camrys, saw sales slip 2.3% in June. That may not sound like much, but this is the first year-over decline in over two years for the world’s largest auto market, and in light of the company’s recent stock market bust, it could be a sign of troubling times ahead. According U.S. News & World Report, LMC Automotive, an industry think tank has already concluded that there is  ” …little reason for optimism,” adding “We believe that the painful market adjustment currently under way is far from over.”

Source: Audi
Source: Audi

With today’s global economy, nearly every major automaker has significant amounts of capital and resources tied up in the Chinese market, because no one buys luxury cars in numbers quite like the Chinese. In short, the country’s economic explosion of the past decade is the reason why we’re about to get that glut of ultra-luxury SUVs, a revived Cadillac and Lincoln, and a number of other new models. If its economy goes down, there will be serious repercussions throughout the auto industry. It may not be time to panic, but if China’s recent economic woes continue, the automotive landscape could look very different within a few short years.

Like classics? It’s always Throwback Thursday somewhere.

Follow Derek on Twitter @CS_DerekS