The Financial Times reported next week that the Chinese will become the third largest buyer of Rolls-Royce Phantoms taking the spot from Japan. Rolls-Royce plans to sell 70 Phantoms in China and 50 in Japan according to the article.

The cost of a Rolls-Royce Phantom starts at about US$400,000 in the Chinese mainland. Most orders are in Hong Kong, which has the world’s highest number of Rolls-Royce motorcars per capita. After taxes, the price is nearly doubled because the Chinese heavily taxes imported cars. As a reference point, Thailand taxes imports so heavily the final price can be 4 times what it would be without taxation. Of course, no company knows customisation like Rolls-Royce, and this is the reason one Chinese developer recently paid US$2,000,000 to import a highly customised version recently.

Of course, taken in the grand scheme of it all, Chinese imports of 70 cars pales in comparison to California, which will import twice as many for the rich, and possibly, famous.

For the BTKM analysis, we view this all as a sign that with the significant increase in the number of Chinese millionaires, Rolls-Royce can expect to see increase demand and thus increased revenue generated in Asia. Therefore, R-R will need to consider a strong marketing and supply channel push in the country in the coming year. At current rates, Rolls-Royce could expect to import more cars than California in less than five years.

Of course the implication here is that other European carmakers will also prosper. Rolls-Royce former amalgamate, Bentley, would lead us to believe that the Crewe, England-based automaker will also see much increased sales, especially considering a lower, yet exclusive price point.

Editors note: Here at Beyond the KM, we would buy a Phantom, but still need to find the money and the driver … so feel free to click the ads to generate a little loving revenue!

In the previous posting of Beyond the KM, we took a look at the competition that the European automakers from Peugeot to Porsche will face in the coming years. We examined some of the East Asian manufacturers and assessed their strategies in Europe. In this installment we will suggest some strategies that the automakers might employ to fight off the increasing competition from Asia.

First, the marketing must change at European carmakers. Mercedes-Benz, for example, will see competition in the form of a Chery – Chery Automobiles of China that is. As noted in part 1, pointed out before, Chery will compete on price. Mercedes-Benz could never be profitable producing their vehicles and then selling them for $20,000. They require higher costs and profit margins. As a result, Mercedes and BMW must offer superior channels for delivery of vehicles, offer more models to fit as many niches as economically possible, and they must offer as much customization as possible, and they must develop a special connection with owners to retain current customers and gain more. These factors are essential to not just grow the market, but to retain market share in the face of stiff, price-based competition.

A second strategy that the automakers must focus on is innovation. Innovation does not mean BMW’s iDrive (few people find it fun OR enjoyable to spend five minutes “configuring” a car in order to turn it from mild mannered coupé into deadly beast). The innovation will not just come from more computers that interfere with driver usability, rather the innovation will come in the form of safety systems, handling improvements, design improvement, and improvements in drive train. Most importantly in the coming years will be improvements in engine technology that allows for more fuel-efficient engine designs and later the implementation of alternative fuel engines such as hydrogen.

Third, auto service must become increasingly important to the Europeans. Not only do they have the home field advantage, the companies have existing service centers. Additionally, service is typically higher profit than new car sales. Additionally examine, the highline car market. The average profit for a domestic car in the U.S., of which tens of thousands are made each year compared to the Porsche 911, which has fewer and far more customized vehicles, is vastly different. A Ford dealership may make just a few hundred dollars, but a new Porsche can make thousands because it is more exclusive, higher priced, and a very customized vehicle.

In another example, BMW has a service program called BWM Ultimate Service, available only in the U.S. This program should be offered everywhere because it really puts BMW in a class of its own in the way it deals with the customer. Any problem is easily taken care of, no questions asked. This allows the service departments at dealerships to run like cogs in a well-oiled machine. Service is where the profit is and will be in the future, car companies must embrace this.

Another area that will require change in the future will be on the part of government. Government changes must take place at the national and international levels. Tax laws must favor automakers and suppliers both. Labor laws must become less restrictive and more flexible as the market changes. Import laws must also be modified to handle imports from China. The European Union must take notice now so as to allow proper time for discussion.

Finally, the labor force must change. Germany’s automakers are some of the least product in the world. Only recently did VW force its unions to make its members more flexible in the hours it works. Until the recent agreement, VW workers were working under 29 hours per week and were the highest paid in the world! In addition to flexibility of the workers, the work forces in the EU and even U.S. must become smarter. Education levels are rising and the “blue collar” work is the worker of yesterday. In the future, workers will have to be mentally more flexible and be more innovative in the way they work.

Change is afoot in corporate offices in Europe’s automakers. GM and Ford have struggled for many years now with the harsh realities of the global auto market. Now those realities are knocking on the doors of the European automakers. About two-thirds of Western Europe’s carmakers have seen changes in the executive suite in the last two years.

The reasons vary, e.g. BMW’s Helmut Panke left due to age restrictions, yet the BMW board failed to grant him a waive to allow him to drive the ultimate machine longer. The fact remains though that boardrooms and shareholders, alike, are concerned about increasing competition from the Far East.

Once a joke to respectable manufacturers, the Chinese automakers - led by Shanghai Automotive Industry Corporation (SAIC) and Nanjing Automobile – are increasingly competitive. The Chinese are increasingly developing more and more sophisticated facilities and borrowing more and more from the Europeans. Take American Axle and Manufacturing. AAM has been setting up new factories at breakneck pace. Indeed some of the intellectual property has been sold to the Chinese as well.

What all of this means is that the Chinese now have a way to produce good quality cars, yet sell them for next to nothing. Therein lies the problem not just for Renault and Peugeot and VW. Mercedes-Benz and BMW must be careful in their strategies since companies like Chery, is planning to bring their “luxury” automotives to the U.S. market soon. At $20,000 Mercedes and BMW are tracking the company, you can be sure. In the end, automakers will find difficulty in beating the Chinese on price. They must find other ways or they will falter as Ford and GM have done.

The next part in this topic will deal with possible strategies that the European automakers might develop to combat the competition from the east.