A recent report by Morgan Stanley says premium German carmakers BMW and Audi continue to outpace Mercedes-Benz in network expansion across China, especially in smaller cities.

Based on a four-month survey that began last September, the report found that BMW unveiled 45 new stores in the period and Audi opened 48.

Mercedes-Benz added 22 new stores over that time to increase its total number to 242. It now has 30 percent fewer dealerships in China than BMW and nearly 20 percent fewer than Audi.

The research also shows BMW and Audi each added more than 20 new stores in third and fourth-tier cities while Mercedes-Benz added only five.

BMW's network now reaches 144 Chinese cities, an increase of 13 compared with September last year, while Audi has extended its network to 14 new cities for a total of 133 across the country, according to the report.

Yet Mercedes-Benz added just four cities to its network from last September to reach 87.

"The lack of tier penetration may be one of the root factors to explain the disappointing growth of Mercedes-Benz," said Edoardo Spina, Morgan Stanley research auto analyst.

Sales by Mercedes-Benz in China edged up only 4 percent last year while Audi reported a 30 percent rise and BMW grew 40 percent.

But Spina noted recent changes in local management and distribution organizations at Mercedes-Benz "leave potential for positive surprises, especially in the year when crucial launches of the new E-Class and S-Class could change its fortune".

The survey also shows that 111 cities in China with a population of over 1 million still have no premium car dealerships and 71 cities have only one or two, proving that the market has still "much room for expansion".

But competition is likely to heat up, the report noted, citing the fast dealer network expansion by Jaguar Land Rover and Cadillac. The UK carmaker opened 38 new stores in the four-month survey period, while the US brand added 40.

It also found that Cadillac is keen to penetrate into smaller urban areas, with 27 of its 40 new stores in third and fourth-tier cities.

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