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| Toyota dealer in Beijing |
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.
This should cause Toyota Motors here in Nagoya to take pause and consider its marketing and dealer contracting in China. Right now the Toyota dealers are barely profitable. This year looks bleak for dealers excluding Chinese manufacturing dealers as China sets greater regulations and higher taxes for non-Chinese auto dealers.
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 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 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.
Nagoya Business Weekly
Translated from Japanese by Dallas Brincrest and Charles Gannon
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