China has set six straight annual records for the most new vehicles bought by any country in the 150-year history of the automobile. And yet, a troubling trend has emerged among the dealers moving all that metal -- most are just spinning their wheels.
Three-in-four dealers were either unprofitable last year or just breaking even, according to the China Automobile Dealers Association. With little sign of improvement in the economy and carmakers pushing too much inventory onto their ever-growing networks of retailers, the situation may worsen this year, said Zhu Kongyuan, secretary general of the China Auto Dealers Chamber of Commerce.
“It’s getting more and more difficult for dealers to stay in business, as new car sales are not making much profit anymore with all the competition on price,” said Zhou Jincheng, an analyst at researcher Fourin Inc. in Nagoya, Japan. “Under this situation, dealerships won’t stay as they are. They’ll be reorganized, and some may be integrated.”
China’s auto industry operates in a Gold Rush-like atmosphere. Manufacturers have raced to fill their lineups and expand their dealer networks to stake their claim of a market that’s grown six-fold in the last decade.
This week, General Motors Co., Volkswagen AG and Nissan Motor Co. are among the exhibitors parking 1,179 vehicles on 30 soccer-fields-worth of floor space in Beijing for the city’s biennial motor show. Those three carmakers have nearly as many dealers as there are McDonald’s, KFC and Starbucks stores in China, according to analysts at Sanford C. Bernstein & Co.
With more than 1,600 exhibitors at the auto show and dealers struggling, China may seem ripe for consolidation both at the dealer and manufacturer level. Manufacturers have done only 10 acquisitions valued at more than $1 billion in the last decade, according to data compiled by Bloomberg. The first such deal among retailers was China Grand Automotive Service Co.’s $1.1 billion purchase of a stake in BMW AG retailer Baoxin Auto Group Ltd., announced in December.
Conditions are in place for similar deals, including for U.S. auto dealer groups like AutoNation Inc. and Penske Automotive Group Inc. to enter China, said Michael Dunne, a Hong Kong-based strategy and investment adviser at Dunne Automotive Ltd.
While China’s been setting annual sales records, deliveries have come up short of the state-backed China Association of Automobile Manufacturers’ initial growth forecasts in four of the last five years. Last year’s 4.7 percent expansion was the smallest since 2012.
“The slowing market means that several dealers are genuinely interested in exiting the business for the first time,” said Dunne, who first started visiting Chinese dealerships in the 1980s.
“They’ve got to shift in a hurry to areas that they’re not familiar with,” including used-car sales, parts and service repairs and financing. “These are areas where big, American dealership groups really excel.”
New entrants would be able to count on Beijing providing a boost if car sales wane, with the government keen to transition the economy toward greater reliance on the consumer than on investment. After deliveries fell in five consecutive months last year, the central government stepped in with a tax cut on purchases of vehicles with smaller engines that took effect Oct. 1.
While the tax cut has succeeded in buoying sales, it’s fallen short of helping dealers clear their crowded lots. For the last seven months, the China dealers association’s Vehicle Inventory Alert Index has registered above the 50 percent level that indicates low market demand and high inventories.
Tensions between dealers and manufacturers flared up in late 2014 and early last year. BMW, Volkswagen and Toyota Motor Corp. were among companies that agreed to lower sales targets and issue payouts to retailers to help cover dealers’ losses.
The concessions won from manufacturers, and a proposal earlier this year to relax restrictions on car dealers so that they would be able to distribute vehicles from multiple carmakers and resell excess stock to each other, suggest that dealers are poised to enjoy more leverage over carmakers going forward, Dunne said.
“The proposition of entering China is more attractive now than it has been in the past," he said, "because dealers do generally have more clout when it comes to whether or not they have to take product from the manufacturers."
For Ford Motor Co., working closely with its dealers helps to manage a healthy inventory level in China and develops used-car sales. Since 2010, Ford has more than doubled the number of dealerships for its Changan joint venture to exceed 850 last year. The automaker has also doubled the dealer count with its Jiangling Motors venture to 292 in the same period.
“Our intention is that the dealer network here -- like in the developed markets -- needs to adapt as we get to more mature market-like behavior,” John Lawler, head of Ford’s China unit, said in Beijing before the opening of the exhibition. “Traditionally, they’ve been completely focused on new-car sales. We need to work with them to develop the other two legs of the stool -- not only service and accessories, but also used cars.”