Carmakers Aggravate China Glut as Dealers Struggle
China’s biggest auto-dealer association said carmakers need to scale back their sales targets or sweeten incentives because the worsening glut of vehicles across the nation’s dealerships is unsustainable.
Average inventory carried at Chinese dealerships bloated to a level exceeding two months of sales by the end of May, compared with more than 45 days at the end of April, Luo Lei, deputy secretary general of the state-backed China Automobile Dealers Association, said in an interview yesterday. That’s forcing dealers to deepen discounts and sell cars at a loss to meet mandatory sales targets set by automakers, he said.
“Dealers can’t shoulder the burden anymore,” said Luo, whose association is authorized by the central government and represents 2,100 dealership groups. “Their backs are broken.”
Luo’s warning is a contrast to the jump in sales reported by automakers including General Motors Co. (GM) and Honda Motor Co. (7267), which only disclose the number of vehicles sold to Chinese dealers -- instead of consumers. Wholesale passenger-vehicle deliveries increased 12 percent in May, according to analyst estimates compiled by Bloomberg, after rising more than expected for two straight months.
“Two months of inventory is pretty dangerous for the industry,” Harry Chen, a Shenzhen-based analyst with Guotai Junan Securities Co., said in a telephone interview. “The most direct way to digest inventory is to cut prices.”
The China Association of Automobile Manufacturers, which compiles the monthly wholesale figures from automakers, plans to release the May numbers this week.
SAIC Motor Corp. (600104), GM’s Chinese partner, declined 1.8 percent to the lowest close in more than two months in Shanghai trading. Dongfeng Motor Group Co. (489) fell 3.1 percent in Hong Kong, while the benchmark Hang Seng Index gained 0.9 percent.
GM, the world’s largest carmaker, doesn’t share Luo’s concerns. Kevin Wale, head of China operations, predicted in a May 31 interview that the country’s auto industry is poised to rebound from its worst four-month slump in 14 years as consumers return to car dealerships during the second half.
“I can’t see anything in the Chinese environment that’s leading to an unusual decline in consumer confidence,” he said.
GM said this week that vehicle sales in China increased 21 percent last month, driven by demand for its Wuling minivan and Chevrolet models.
Honda reported a 92 percent surge from a disaster-affected May last year. Wen Yuzhen, a spokeswoman for Honda’s China joint venture with Guangzhou Automobile Group Co. (2238), said in an e-mailed response today that its dealer inventories are at “good levels.”
The company has seen some dealers exiting its network lately, Wen said. They had been asked to leave as they did not meet certain standards required by the company, and such dealer movements are common in the industry, she said.
The difficulties have spread to luxury-car dealers and carmakers will eventually have to share the burden of the discounts seen in showrooms, according to analyst at Mizuho Financial Group Inc. (8411)
Bayerische Motoren Werke AG (BMW)’s 5 series is seeing a 5 percent to 8 percent discounts and currently much of the price cuts are being born by the dealers, Ole Hui and Jeremy Yeo, Hong Kong-based analysts at Mizuho, wrote in a note today.
“The distribution channel is full and dealers must discount in order to reach the sale targets,” they wrote.
Jerry Ma, a Shanghai-based spokesman for Shanghai General Motors Co., didn’t answer calls to his mobile phone nor respond to an e-mail.
In the showrooms, surging inventory will lead to intense price competition, forcing out weaker dealerships that can’t absorb losses, Luo said. There were about 21,000 dealership outlets in China as of the end of 2011, compared with 16,000 the year before, according to Luo.
The association said in a previous interview on May 17 that dealerships for Honda, Chery Automobile Co., BYD Co. (1211) and Geely Automobile Holdings Ltd. (175) carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts.
Dealer checks are showing inventory for foreign joint venture brands approaching the two-month level, and domestic brands are carrying about 60 days to 80 days in stock, UBS AG (UBSN) analysts wrote in a report yesterday.
Stiff competition and more model choices have led to falling profits at Chinese vehicle dealers, according to an annual survey by J.D. Power Asia Pacific. A fifth of the 1,605 dealers polled by the industry researcher said they were unprofitable, versus 9 percent a year ago, J.D. Power said in April.
Stocks of Chinese auto dealerships have fallen in Hong Kong trading this year as slowing economic growth weighed on consumer sentiment.
Zhongsheng Group Holdings Ltd. (881), a Beijing-based retailer of luxury auto brands, has declined 13 percent this year, compared with the 1.3 percent gain in the Hang Seng Index. China Zhengtong Auto Services Holdings Ltd. (1728) and Baoxin Auto Group Ltd. (1293) have fallen 40 percent and 20 percent respectively.
Last month, China Yongda Automobiles Services Holdings Ltd., China’s biggest distributor of BMW cars, shelved plans to raise as much as $430 million in an initial public offering in Hong Kong.
Automakers should realize the difficulties that dealerships are facing and not put too much pressure on distributors, said Luo of the association.
“The picture we have is very different from what the automakers are painting,” he said. “The sales increases they’re reporting are achieved by loading dealers with stock.”
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