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INTERVIEW-UPDATE 1-BMW sees double-digit Chinese growth mid-term

Tuesday, 23 Oct 2012 | 5:19 PM ET

* China sales growth to stay above 10 pct over mid-term

Margin-eroding discounts to abate as GDP picks up pace

(Adds more quotes)

By Irene Preisinger and Christiaan Hetzner

MUNICH, Oct 23 (Reuters) - German carmaker BMW hopes to maintain double-digit sales growth in China, banking on new leadership there to inject fresh stimulus into the economy.

``I believe the new government will continue to pursue this path (of more stimulus). So, it is not unlikely that we will see fresh catalysts for expansionary growth next year,'' Friedrich Eichiner said in an interview.

China is preparing for a once-in-a-decade leadership change that will be finalised next month at the ruling Communist Party's 18th congress.

The new leaders were expected to pursue economic growth north of 7 percent to preserve social harmony, especially as the new Politburo Standing Committee seeks to consolidate power.

That will be important for brands like BMW, which analysts believe earn anywhere between a third and a half of their profit in China.

BMW's once stellar margins in China are under pressure from rising incentive spending in the premium car market and lower average revenue per car sold as demand shifts increasingly toward models such as the X1 compact SUV.

``The competition in China has gotten more intense. As a premium car company, our goal is always to avoid discounting to subsidise sales. However, we cannot completely decouple ourselves from the competition,'' Eichiner said.

Eichiner said the recent increase in incentive spending by BMW and competitors in China should abate as the market recovers from economic slowdown, thanks in part to additional stimulus.

`` Annual growth rates exceeding 30 percent are not possible over the long term, even if we see double-digit growth in the mid-term,'' Eichiner said, referring to BMW's volume growth in China during the first nine months.

Five years ago, mainland China accounted for less than 4 percent of BMW's vehicle sales. Now, it is its single largest market, with almost 18 percent of group sales volume this year.

More importantly, sales of high-margin cars such as the flagship 7 Series saloon built in Bavaria are disproportionately high, with this model alone accounting for more than 14 percent of volume in China compared with 4.1 percent worldwide.

German brands dominate the premium car market in China, which is about 1 million vehicles in size and growing. Roughly eight out of 10 cars sold are an Audi, a BMW or a Mercedes.

KEEPING POWDER DRY

Morgan Stanley said BMW has an advantage over its German rivals in China thanks to its larger dealer network - it is the only premium carmaker present in 18 large Chinese cities, which alleviates competition and preserves its pricing power.

In August, BMW, aiming for 350 retail outlets across China by the year-end, opened a showroom in Lhasa, Tibet, saying it was the first premium car dealership at the ``top of the world''.

``There is a lot of potential for pent-up demand in western China and here investments in infrastructure will be key. When airports are built and highways are paved it is only a matter of time before the car business takes off,'' Eichiner said.

``That is when we start looking around together with our dealers for locations where we can invest in new showrooms.''

With fewer Chinese customers paying entirely in cash, BMW wants to offer more buyers loans through its financial services business. To gain more flexibility, it may tap offshore renminbi bond markets.

When asked what plans BMW has for the 12.2 billion euros ($16 billion) spare cash at its autos business, Eichiner said the company would end the year with roughly 10 billion, a level necessary to secure financial breathing room.

Eichiner said he wanted to keep his powder dry as much as possible to retain BMW's 'A' debt rating and was not considering acquiring any brands or taking a stake in strategic partner Toyota. ($1 = 0.7651 euro)

(Editing by Dan Lalor)