The luxury automotive market is a highly profitable sector, driven largely by the increasing number of ultra-high-net-worth individuals (UHNWIs), particularly in markets like China and the Middle East. Luxury vehicles generate outsize margin numbers, with most luxury brands seeing their margins increase between 2016 and 2021, while margins for mass-market brands have remained stagnant at 8% during the same period. The degree of gain varies by price band, with the $150,000-to-$299,000 and $300,000-to-$500,000 price bands observing an average of 38% earnings before tax (EBIT) in 2021, compared to less than 20% in 2016. Even during the pandemic, the above-$500,000 price band remained more profitable than other segments and maintained the strongest EBIT margins in the luxury segment.
The number of UHNWIs is expected to grow worldwide at 5% from 2021 to 2026, reaching over 700,000 people, with China seeing the fastest growth among large ultra-high-net-worth clusters at about 7% during the same period. It is anticipated that more than 50% of the growth in the luxury-car market will come from non-traditional markets, such as China, given the rapid rise in UHNWIs and HNWIs in these areas. However, incumbent luxury brands face significant legacy retail and operational challenges, as many are locked into working with dealer networks to provide the levels of customer experience that luxury-car buyers seek. Market disrupters, on the other hand, need to resolve electrification, connectivity, and other advanced-technology issues.
To sum up, the luxury automotive industry has set itself apart from the mass market and has the potential to attain even more profitable growth, particularly in the upper end of the market. The company that can deliver exceptional levels of customer experience while effectively addressing electrification, connectivity, and other advanced technology challenges for luxury cars will emerge as the winner in this race.
