While part of the automotive industry, luxury carmakers run differently and have more in common with the luxury goods sector. Minus some of the perks.
The automotive industry is in the midst of a broad transition, as the borders between tech companies and automotive manufacturers increasingly blur. A similar trend can be observed between the automotive and luxury goods sectors – though convergence here is driven more by brand perceptions and production strategies than autonomous driving and electrification.
In many respects, luxury car companies have more in common with makers of luxury goods than with mass-market carmakers. Rolls-Royce CEO Torsten Müller-Ötvös, insisting that he is in the luxury goods business, said the purchasing experience is not buying a car but “commissioning a work of art…building a dream”. As a branding strategy, distancing themselves from the greater automotive industry has worked for luxury carmakers.
Production numbers in the sector contrast dramatically with those of mass-market automotive. In ultra-luxury, defined by prices starting around $200,000, six firms dominate: Ferrari, Aston Martin, Rolls-Royce, Bentley, Lamborghini and McLaren. Along with a few highly specialised players, such as Pagani and Koenigsegg, these firms sold 29,600 cars collectively in 2017, compared with 86 million by regular carmakers, according to research firm JATO Dynamics.
Luxury carmakers are clearly not about volume. As with many luxury goods, production is often deliberately limited to preserve exclusivity. This generates waiting-lists and enables vehicles to be sold at the advertised price, free of the mass market’s discounts. Sales figures too are more in sync with the booming luxury goods sector: Annual growth for high-end cars is expected to stay at around 10% for the next few years, versus 2-3% for the automotive industry as a whole, The Economist reports.
The customer experience within the luxury car sector is also more akin to that of luxury goods. As one executive explained, luxury cars are sold for entertainment, not transport. Customers are often collectors. To accommodate their avid personal interest, they are invited to hand-select materials and customized accessories in person, and watch their cars being made. Members of the elite owners club may also be invited to purchase a limited-edition hyper-car or supercar.
The trouble is, luxury carmakers generally do not enjoy the margins seen in the luxury goods sector. With the exception of Ferrari, whose margins top 30%, most do not have robust “diffusion lines”, which allow them to make up the difference by selling branded merchandise. And, luxury carmakers are hampered by some of the major challenges faced throughout the automotive industry, such as emissions regulations and high capital spending.
On the whole, the luxury car sector is safe from automotive industry disruptions such as car-sharing and autonomous vehicles – but electrification could pose a threat. While hybrid engines can offer speed, their quiet running lacks the exultant roar of a luxury machine. The ultra-luxury segment has been experimenting with reconfiguring their businesses and diversifying their offerings to raise margins, but the question of where they really belong remains.