German brands reign in luxury market (3)

Moves to localize

The company is preparing to start local production, but the facility won't be ready until 2014.

Volvo and Cadillac are also accelerating plans for local production to stay competitive.

Volvo sold nearly 42,000 vehicles in China last year, an 11 percent decline from a year earlier. The company plans to make a comeback this year to achieve a 20 percent increase in sales.

"For quite some time, the dominant position of the three German companies will not be challenged as they continue to aggressively expand production capacity and sales networks in China," said Lin Huaibin, an analyst with consultancy IHS Automotive.

IHS forecasts that China's luxury car market will continue to grow at a double-digit annual rate over the next five years, Lin said. The industry analyst firm expects China's luxury car sales to increase about 17 percent to 1.43 million units this year.

"The high growth of 2010 and 2011 is unlikely to be repeated," he said. China's luxury car sales surged by 70 percent in 2010 and by 34 percent in 2011.

Yale Zhang, managing director of consultancy Automotive Foresight (Shanghai) Co, shares that view, forecasting the market will maintain growth between 10 to 20 percent every year in the next five years.

"The luxury car market in China still has huge potential in the mid and long term", he said.

"Two ongoing trends in the market can explain why - people's incomes are increasing and the prices of luxury cars are decreasing," he said.

Both Lin and Zhang noted that the prices of luxury vehicles will continue fall in China as more products are produced locally and competition becomes more intense.