Dealers Under Pressure in China, Quit Networks Amid Mounting Losses

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Although the Chinese market is the world’s biggest, the market is undergoing a period of adjustment as sales cool from previous years where 30% increases in sales were not uncommon.

Several days ago Guangzhou-Honda dealers received an email explaining the process of how to leave the GZ-Honda dealership network, however Chinese media revealed that many dealerships are actively looking to leave the network but the email sent out played out a situation where GZ-Honda were asking poor performing dealerships to leave. In May alone 4 dealerships left the GZ-Honda network, a further 8 are in their last month in business. One GZ-Honda dealership manager quoted by the Auto QQ website said “From the note sent to us, it looked like the company wanted us to leave, in fact it’s the dealers that want to pull out. Many dealers are losing money year after year and in some cases they are losing up to 10,000RMB on every car.”

In 2011 China sold 18.5 million, from a 30% sales rise to a slow down on 2.5% increase, but over the past two years manufacturers have rushed to expand their dealership networks, with more inter network competition dealers are learning that profits are harder to make.

China has a total of 65,900 dealers, and several thousand more going through the government application process, if we look at the USA, statistics show that there are just 20,000 new car dealerships in the States, less than a third of China’s. Manufacturers are looking to expand their networks rapidly in the next year, GM are looking to have 600 new dealerships peddling Buick’s, Chevrolet’s and Wuling/Baojun vehicles, Ford will add another 110, FAW-VW alone will double its network from 445 to 800 + dealerships by 2015, and at the same time Fiat and Chang’an PSA will be eager to get their networks up and running.

Bloomberg news have also picked up on the issue, reporting that Honda, Chery and BYD dealerships are carrying around 45 days of stock, a little over the industry standard of 30 days:

Dealerships for Honda Motor Co., Chery Automobile Co., BYD Co. and Geely Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts, said Su Hui, vice president of the auto market division at the state-backed China Automobile Dealers Association.

Are we going to see a massive round of discounts on cars to kick start the market? It seems likely, luxury car manufacturers in tier one cities have cut prices dramatically, the outgoing BMW 3-Series has discounts of around 60,000RMB, and the Mercedes C-Class is down some 70,000RMB in certain dealerships around 1st tier cities.

 

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8 Comments

  • Anon
    June 2, 2012

    What’s needed now is for Chinese companies to start an aggressive price war and start pushing non-domestic companies out of the market.

    Combined with an equally aggressive programme for all Chinese government related organs to only buy exclusively domestic products.

    The pain threshhold of the Chinese is much higher, in every sense…

  • hk
    June 2, 2012

    The problem is ALL those in power are found sitting in NON-DOMESTIC mades………

  • I _ H a t e _ C h i n a
    June 2, 2012

    @ Anon

    A price war only hurts Chinese brands, as Chinese consumers who can afford cars priced 100,000 yuan and up do not consider Chinese brands regardless of prices.

    Chinese brand automakers already make almost no profit to begin with, and a price war will wipe out what little they have.

  • joninchina
    June 3, 2012

    The answer to this is quite simple…..China is OVER SATURATED with auto dealerships! What makes it even worse is that some of the companies want to add MORE dealers – NOT a good idea. The auto industry in China (foreign and domestic) simply expanded too aggressively, assuming that double digit economic growth would exist forever….welcome to reality. What the companies SHOULD do is stop building more dealerships, and focus on BETTER CUSTOMER SERVICE…….convert some of the under-performing dealerships into “customer service centers”. A place to ask questions, sell accessories, and SIMPLE auto service like oil changes, tire pressure adjustments, etc. These service centers could also offer driving seminars for better driving skills, seminars to teach people better auto care (like checking fluids, tire pressure, things like that)………get the idea? The chinese companies should REALLY think about something like this, because the end result can be – better customer service = better brand image = more sales. Most of us know that the quality of chinese cars has improved A LOT the last few years, but the BRAND IMAGE of most chinese companies still suffers because of a bad reputation in the past. A good example is Hyundai in the USA……their image suffered greatly in the 1990′s because of the poor reputation caused by the Excel. What turned it around for them? Simple – the 10year/100,000 mile warranty they started to offer customers. No company had ever done anything like this before, and it made people open their eyes and look at Hyundai in a different way. This ONE THING helped to repair their image and went a long way to earning the customers trust in the BRAND again. So………….NO MORE DEALERSHIPS, and BETTER CUSTOMER SERVICE AND EDUCATION – I just hope that the chinese companies out there are reading this! :)

  • Ash
    June 3, 2012

    I see dealer pull outs as a good thing right now. Those that wish to make a quick profit are coming to an end and those that are in it for the long term will spread around the product mix and aim for greater revenue from other ‘S’ areas. I think some brands need to move away from pure 4s dealerships away from city centers and open more boutique sales shops (1S) in shopping malls and the like.

  • Ash
    June 3, 2012

    actually does the long warranty tie you into servicing with the dealerships?

  • joninchina
    June 3, 2012

    Ash, the answer to that is no, but is is usually much easier to have the car serviced at the dealer. The 10 year/100,000 mile warranty usually covers the chassis and powertrain against breakage during the warranty, and the it’s also a “whichever comes first” warranty. In other words, if you drive an average of 20,000 miles a year, your warranty is done in FIVE years and not ten since you’ve reached 100,000 miles. Now, as far as servicing done at the dealer…..it’s not required, but it’s easier because the dealer will keep service records on the computer – this verifies that you’re following the dealer recommended service schedule to maintain the warranty. IF you use a third party service shop for things like oil changes, you need to keep receipts and show the dealer in case you DO need the car fixed under warranty – your warranty can be voided if you can’t verify that you are maintaining the proper service schedule for your car. Dealers can also offer a premium service package (usually around $500.00) that gives you free servicing of your car during the life of the warranty – it will cover fluid changes, tune ups, tire rotation and balancing, replacement of brake pads, etc. Basically, it’s another revenue stream for the dealers, but it ALSO provides “peace of mind” for many customers that want ONE place to take their car for all their service needs.

  • dogtucker
    June 29, 2012

    Welcome to the real world China! Same as any other market-demand driven.

    Suffer and learn.

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