2014 China Auto Dealership Performance Study

The viewpoints / key findings

In the last few years, China automotive market experienced an overall slowdown after a “golden decade”. The market has entered a “modest growth” era. The contradiction between the production and sales is becoming prominent. The anti-monopoly investigations and newly released regulations are the means to tighten the control of auto dealer's operation, which adds another layer of uncertainty to the dealers' operation risks. The following points are the major findings from the study:

• As the industry reform is speeding up, the risks of violating the new regulations have increased significantly. To facilitate a fair competition environment and regulate the industry operations, the government authority has initiated a large scale antitrust investigation in the auto industry; and at the same time, modified and released a series of important policies specific to the automotive industry in 2014. The changes in the regulatory environment have forced the OEMs and the dealers to face the legal consequences for their long-standing unfair business conducts. In the long run, the competitive landscape of the China automotive industry will look rather different than what it is today.
• Under the tension of capital shortage, the dealers' capability in getting financing varies. In 2014, the contradiction between car makers’ aggressive expansion of production capacity and sluggish sales performance became more apparent. The dealers’ inventories were high, which occupied a huge amount of the operation capital. For the dealer group, the group’s diversified expansion consumed a large amount of capital, which intensified the situation of capital shortage for the single shop, and therefore resulted in more borrowing activities among the inter-group dealers. With the progression of China's interest rate liberalization reform, the dealers’ operation ability and credit condition will affect their financing capability. As a result, different dealers' financing costs could vary significantly.
• The prospect of auto dealers' profitability is not optimistic, meanwhile many dealers face challenges to upgrade the business model. Since the second half of 2014, the sales on new cars have given little reason for optimism. Though dealers are actively adjusting their business structures to respond to the changes in the marketplace, the situation is still grim. In terms of the cost control, high inventories, inefficient management, and the scarcity of managerial talents are driving dealers finance, sales, and administrative expenses high. Most dealers are struggling to break even.