(Reuters) - Luxury auto giants BMW (BMWG.DE), Audi (VOWG_p.DE) and Mercedes (DAIGn.DE) have been enjoying robust demand in China for almost three years as they vie to be the world's biggest premium car manufacturer. That could be about to change.
While carmakers will use this week's Paris auto show to display models such as Audi's updated $146,600 top-of-the-line R8 coupe and Porsche's $126,000 four-wheel drive 911, the fate of the vehicles will be decided thousands of miles away in China, where premium-car buyers are showing signs of saturation.
Effects of a slowdown in the world's second-largest economy, where BMW, Audi and Mercedes account for about three quarters of luxury car sales, have already made themselves felt.
There is much at stake for the European carmakers, which have invested in local factories with Chinese partners to sidestep hefty duties on imported cars.
Daimler warned on September 20 that profit at its Mercedes division would slip this year, citing heightened competition in China and the crisis in austerity-hit Europe.
"We're bracing for a challenging environment," chief executive Dieter Zetsche said.
The day before, Porsche said it would cut output and spending next year to offset lower sales.
"The Chinese have overconsumed premium cars in recent years," Singapore-based Bernstein analyst Max Warburton wrote in a study published on September 25. "Right now, we see a number of risks to sustained high profits from China."
Sales of high-end cars have surged in China since 2010 because of strong demand from the growing ranks of millionaires, making China a profit driver for luxury automakers, with Europe in the doldrums and the U.S. economy expanding slowly.
But a decline in China's growth rates over the past six quarters is prompting luxury buyers to switch to smaller vehicles, undermining pricing and swelling inventories.
The HSBC China manufacturing purchasing managers' index (PMI) fell to its lowest level since March 2009 in August, mirroring a decline in China's official PMI index and further delaying expectations of an economic rebound.
The rate of growth of Chinese premium car sales may slow to 25 percent this year or 1.23 million vehicles and to about 18 percent per annum through 2015, from last year's 44 percent surge to 980,000 cars, research firm IHS Automotive said.
Warburton said China also lacked the infrastructure to cope with an expected surge in the availability of used premium cars that will compete with new vehicles as drivers offload unwanted models, hurting prices and driving down residual values.
Sales of used premium cars in China may rise 45 percent this year to 309,000 from 213,000 in 2011, Warburton said, and the supply of used premium vehicles may almost triple by 2016.
Back in Paris, China's luxury leader Audi is rolling out facelifted coupe and spyder versions of its R8 supercar. Other presentations include the sleek new RS5 cabriolet and the five-door A3 Sportback.
The top-of-the-line R8 V10 Plus burns 12.9 litres of fuel per 100 kilometres, relying on a 550-horsepower 10-cylinder engine. Due to hit European showrooms by the end of the year, the model costs $223,700.
Porsche, which counts China as its No. 2 market, just behind the U.S., will show an advanced four-wheel drive version of the 911 Carrera as coupe and cabriolet, with extended rear wings to allow for fitting wider rear wheels and tyres.
Mercedes, which has pledged to surpass BMW and Audi to regain the worldwide luxury-car crown by 2020, will show the new CLS Shooting Brake, a revamped version of the A-Class compact and an electrified concept of its B-Class small car. The carmaker will also show a design sculpture as a teaser for the expected redesign of its flagship S-Class saloon next year.
Unveilings by world market leader BMW, which sells half its flagship limousines including the 5-Series and 7-Series in China, include an updated 3-Series Touring estate and a new four-wheel drive version of the 1-Series coupe.
Even BMW, whose Chinese brand sales grew about 30 percent in the first eight months to 192,800 autos, almost five times the Mercedes brand's meagre 6.2 percent gain to 127,700 vehicles, is bracing for an end to China's car-buying craze.
"Business will normalize," said Friedrich Eichiner, finance chief of BMW, which has two plants in China with its partner Brilliance China Automotive Holdings Ltd (1114.HK).
"We mustn't forget that the boom was a counter reaction to the banking and financial crisis of 2008. "The Chinese economy was leading the way. But the (car) market has now grown to a certain size."
Shanghai-based IHS analyst Bin Zhu said German carmakers' leading position was not under threat, although they had pushed too much volume into the world's No. 2 luxury market, inflating dealership inventories and triggering massive discounts.
"The top luxury manufacturers are laying heavy hopes on China," Zhu said. "The German companies are still gaining ground and will keep dominating the market."
Zhu doesn't expect the dynamics behind China's luxury-car boom to weaken substantially, saying discounts are spurring demand again and it has picked up since the summer.
The premium sector will continue to outgrow China's underlying passenger car market, which may expand no more than 9 percent to 13.79 million vehicles in 2012, adding only single-digit growth per year through 2015, IHS says.
"There will be some restraint in Paris but luxury will certainly be on display despite a dominant sentiment of austerity," said Frankfurt-based IHS analyst Mario Franjicevic.
Additional Reporting By Christiaan Hetzner; Editing by Helen Massy-Beresford