Luxury Car Industry the Luxury

Luxury Car Industry

The luxury car market has changed dramatically in the past ten years. There are a couple of different reasons for this change. The first is the specter of sustained higher fuel prices, something that has kept some fringe buyers out of the luxury market. The second is a series of economic slowdowns in the West, coupled with economic booms in many emerging markets. This has reduced consumption of luxury cars in Europe and North America, resulting in steep declines during the worst of the economic slowdown (Reuters, 2009). Sales were expected to fall in 2009 to below 1996 levels, less than one million units total (Business Week, 2009). BMW responded to this by introducing new cars to its lineup in an attempt to reinvigorate sales (Ibid). This effort ultimately failed, and sales of BMWs dropped 19.5% in the first half of 2009 despite the new vehicles (Fairclough, 2009).

This downturn in traditional markets has only partially been offset by increases in emerging markets. Some, such as China and India, show strong growth potential and look to be the future of luxury car sales. In China, luxury car sales increased 7% in the first half of 2009. For Mercedes, China is the number one market for its S-Class (Ibid). Mercedes, BMW and other luxury car brands have opened joint ventures in China to produce for this emerging demand (Ibid).

India is also a market with strong potential. Although luxury cars are priced at a premium in India due to high tariffs, sales are growing in that country (no author, 2011). Buyers are not price sensitive, unlike Western buyers faced with sluggish economies. The vehicles are selling rapidly because they are an important status symbol, which again differs from Western markets where a Mercedes or BMW is a nice status symbol, but not a critical ego boost. As a result, the luxury car market is shifting its attention to the world's largest emerging markets to capture these consumers, even at a time when the core markets are struggling with rapidly declining sales.

The article by Eric Yep entitled "Suzlon to Sell Non-Critical Assets" reflects a corporate finance decision. The company, an Indian energy firm, is seeking to generate funds in order to make changes to its balance sheet. The firm has debts maturing next year that it needs money to retire. The article does not get into detail about why asset liquidation is the best choice for Suzlon, but the situation is interesting.

The company is an energy firm that is invested in a broad range of energy. Suzlon's core assets include wind farms scattered around the world. Yet, wind farms are mentioned in the article among the assets that the company is seeking to sell. The company cites rapid growth in revenue, which should indicate that there is sufficient retained earnings to pay down the maturing debt, but the latest annual report shows that the company has lost money in the past two years. In the past year, Suzlon has increased the amount of equity on its balance sheet, so seems committed to a program of d eleveraging. It could be that the assets being sold are underperforming, and their sale would not only generate capital but would also allow the company to be more efficient going forward.

It is interesting, though that the company has not chosen to renew the debt. While interest rates in India might be high, borrowing in the West is generally quite affordable and Suzlon has enough business outside of India that interest rate parity can be ignored -- the new loans would be paid with dollars or Euros. The company clearly wants to reduce the amount of leverage it has, perhaps anticipating a general upward trend in interest rates. Or Suzlon could simply want to increase the equity on its balance sheet. Either way, the article does not go into detail about this, leaving the reader to speculate as to why Suzlon would sell off assets from its core business to retire maturing debt next year, rather than finding another way to finance its business.