Woe is us! Car dealers suffer from slack demand
Chen Peng invested 7 million yuan (US$1.02 million) to open a dealership selling Korean Kia cars in 2013. He said he earned 2.9 million yuan in 2017. Last year, the business lost 2.8 million yuan.
Peng ruefully said he still remembers the heyday when car dealerships posted rapid profit growth before 2011.
“The good days have passed,” said a car dealer surnamed Feng, who operates more than 10 sites selling vehicles under a US car brand that he declined to identify. “I can still earn money, but the situation is far worse than the years before 2018.”
Liu Jing, a friend of mine, wants to buy an Audi A4L sedan. She told me that she and others in the same position consider this a good year to buy a car because prices keep dropping.
No rush. She said she’s holding off a bit, waiting to see what kind of off-season discounts come available in August.
The signs are everywhere. Car dealers in China are suffering amid a stalled auto market. They are forced to cut prices on clearance models and taking a hit on the bottom line. Some are even packing up and leaving the sector.
The slowdown in the first half of this year was capped by the 12th consecutive month of decline in auto sales. It is blamed on weak consumer demand amid a slowing Chinese economy and on the Sino-US trade tension. Some also point the figure at stringent new car-emissions standards.
Some Chinese provinces have implemented the tougher standards early, ahead of nationwide standards due to come into effect next year as part of the fight against pollution. That has created uncertainty among manufacturers, dealers and consumers.
Consumers thinking that the government may step in with incentive measures are sitting tight.
The slowdown is a bucket of cold water splashed in the face of an industry that for so long enjoyed the double-digit growth that catapulted China into its ranking as the world’s biggest auto market by sales.
The relationship of car dealers and auto manufacturers has exacerbated the slowdown.
In that relationship, manufacturers have the upper hand, and dealers are reluctant to talk to the media for fear of repercussions.
Carmakers set sales targets, and if consumer demand wanes, they still push their vehicles onto dealers. Inventories build up, prices drop and dealers get caught in a cash-flow squeeze.
Nearly 40 percent of car dealers in China lost money last year, according to the China Automobile Dealers Association, and forecasts predict further losses this year. The association also said the average gross margin on each new vehicle sale slipped to 0.4 percent from 5.5 percent last year.
The dour outlook for car dealers wasn’t helped by the news that Pangda Automobile Trade Co, a major Chinese dealer located in Hebei Province, filed for bankruptcy in May, after the company reported more than a 6.1-billion-yuan loss in net profit last year.
Pangda blamed the loss on the decline in car prices due to high inventory and lawsuits related to lease-financing, sales and loan contracts.
“The top 100 dealer groups entered a period of structural adjustment in 2018,” said Song Tao, deputy secretary general of China Automobile Dealers Association. “Revenue, profit margins and return on net assets all fell in 2018, compared with the previous year.”
The China Auto Dealers Chamber of Commerce said in April that 85 percent of car dealers failed to meet carmakers’ sales targets last year. The only exceptions were dealers for Mercedes-Benz, GAC Toyota, BMW, Lexus, Chevrolet and Cadillac achieved the sales targets set by the car manufacturers.
About 58 percent of dealers reported that prices of the cars they sold were actually lower than the wholesale prices of car manufacturers, the chamber said. About 12 percent of dealers lost more than 5 million yuan in 2018, and only 12 percent of dealers earned more than 5 million yuan.
Car manufacturers try to counter the slowdown by expanding their dealer networks, which only increases competition. Dealers also face fierce competition from car sales on e-commerce websites, mobility service providers and used-car websites.
“Smaller car dealers may suffer more than the bigger ones that have more experience and the ability to handle risk,” said Zhang Xiaofeng, an independent market analyst. “Consumers who live in smaller cities and rural areas are taking a wait-and-see stance before buying their first vehicles.”
Dealers selling luxury care have been somewhat immune to the slowdown. A Shanghai car dealer, surnamed Pan, who sells a German luxury car brand, said that he saw some dealers of mass-market car models offering big discounts to consumers, even slashing some prices by half.
“There is little impact on luxury car brands like us,” he said of the current market conditions. “We sell cars valued at 500,000 yuan or more. Our target consumers are very stable. We don’t offer discounts that would reduce the value of the car brand.”
The China Auto Dealers Chamber of Commerce urged automakers and car dealers to work together to address the problem, suggesting mechanisms for formulating reasonable price, controlling inventory levels and listening to dealer feedback.
Some dealers are trying to lift business by providing more diversified services for car buyers. Shanghai-based automaker SAIC-GM upgraded its traditional 4S stores to 7S stores this year, adding used-car servicing, sharing services and financial support. SAIC Volkswagen also added smart and sharing services at its 7S stores.
“For dealers, it’s wise to consider providing customers with more services, including used-car services and insurance in order to make profits beyond just selling new cars,” said market analyst Zhang. “But they need to balance cost with income when developing new businesses.”