China’s car dealers are in open revolt over industry practices that have slashed profits, threatening growth prospects for companies such as General Motors Co. and Volkswagen AG in the world’s biggest auto market.
Retailers are banding together under the state-backed China Automobile Dealers Association to demand lower sales targets and a bigger share of profit from vehicle sales. Bayerische Motoren Werke AG’s agreement last week to pay 5.1 billion yuan ($820 million) to its dealers has emboldened distributors for VW and Toyota Motor Corp. to demand similar concessions.
The rising tensions means companies like VW and GM will face the choice of narrower profit margins or slower growth in China, a market that increasingly determines the fortunes of global automakers. China vehicle sales in 2014 rose at half the pace of the preceding year, a “new normal” according to BMW after surging growth in past years triggered by government subsidies.
“We can’t just keep on sucking it up,” said Richard Li, 40, a Toyota dealership owner who lost about 300,000 yuan last year after offering markdowns of as much as 16 percent on some models. “We have to negotiate with them and defend our rights. I will stop buying cars from them unless they step up their financial support.”
Total vehicle sales are forecast to rise 7 percent this year, little changed from 2014, because of cooling growth and as more cities impose purchase restrictions to fight pollution, according to the China Association of Automobile Manufacturers.
Almost all retailers in the country are offering discounts and selling some models at losses to meet sales targets set by automakers, according to a survey by the China Auto Dealers Chamber of Commerce.
Sales targets are crucial because dealers must meet them to qualify for year-end bonuses, which account for more than half of their annual profit from selling cars, according to the trade group.
“When auto sales were booming in China, dealers would do anything the automakers asked them to do in order to gain their authorization to sell cars,” said Han Weiqi, an analyst with CSC International Holdings Ltd. “With the expected slowdown in demand growth, manufacturers and dealers will have to find a way to make peace and secure their common interests.”
Distributors are also vulnerable because they have no say over the number of new outlets that a manufacturer adds to its sales network, says businessman Carson Guo, 41, who invested 82 million yuan to set up a two-story Mini dealership in Beijing in 2012.
“There are so many Mini stores in China now and dealers have to cut prices to sell cars otherwise we won’t be able to meet sales target,” said Guo, who estimates he has lost more than 20 million yuan since opening the 10,000-square-meter outlet. “Selling cars is costing us money instead of helping us make money. If automakers are not helping us out here, their interests will ultimately be undermined.”
BMW, which owns the Mini brand, said it has reached a consensus with its dealers in China and cannot comment on individual cases, according to an e-mailed reply.
CADA, the dealer association, is asking FAW-Toyota Motor Sales Co., the joint venture between Toyota and FAW Group Corp., for 2.2 billion yuan in subsidies to help meet cost of excess inventory. Ma Chunping, a FAW-Toyota spokeswoman, didn’t respond to a request for comment on the negotiations.
“Vehicle demand growth has been falling and dealers have been taking the hit,” said Song Tao, a deputy secretary general of CADA. “As the organization of dealers, we need to help them out. Dealers need to make a living as well.”
Talks were held last week between dealers selling imported VW models and the automaker, according to CADA, which is facilitating the negotiations. The Wolfsburg, Germany-based automaker delivered more than 10 million vehicles for the first time in 2014, reaching the milestone four years earlier than originally targeted on the back of strong growth in China.
VW believes in having a financially sound dealer network as “satisfied dealers create satisfied customers,” Larissa Braun, a company spokeswoman, said in an e-mailed response to questions about the negotiations.
A slowing economy and expansion of automakers’ distribution networks means that fortunes are unlikely to improve soon for dealerships, according to Ole Hui, a Hong Kong-based analyst at Mizuho Financial Group Inc. He predicts profit margins at Chinese dealerships will more than halve from 2011 to 4 percent this year.
“They were printing money,” he said of auto distributors in China. “Those kinds of margins were never sustainable.”
— With assistance by Tian Ying, and Alexandra Ho