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Dealer bankruptcies indicate OEM troubles?

Dealers in China have been facing declining profit over the past two years and their plight hit a bottom last year when 70 percent of them had a loss and more than 170 dealers were forced to close shop.

People seem to be concerned about how much subsidy OEMs should offer to dealers in order to make up for their losses. “But the real issue is,” said Ge Shuwen, vice president of FAW-Volkswagen’s Audi Sales Division, “what would happen if one day an OEM no longer has the money to subsidize dealers.”

Ge hit the nail on the head in describing the current market condition in China. Dealers are most sensitive to the changing consumer market and tend to bear the brunt of the declining market much earlier than OEMs. If most dealers of a certain brand go into mergers and acquisitions or close shops, he said, it may mean the end of the brand.

This is because dealers and OEMs depend on each other and if an OEM operates against the interests of its dealers, it would hurt itself. The best example is Mercedes-Benz China. Three years ago in 2012, Benz sales were up only 1.5 percent because dealers had been forced to clear high inventories at a loss. After major reshuffles and the establishment of a new sales company, Mercedes-Benz China realized a 29 percent growth in sales in 2014.

To Nicholas Speeks, president of Beijing Merceds-Benz Sales Service Co., Ltd., the success in sales was the result of “solid mutual understanding” between the carmaker and its dealers. “Dealers will charge ahead together with us only if their interests are fully taken care of,” Speeks said at a news conference.

“In order to make customers happy, the dealers must be happy. Customers, dealers and the carmaker must have a win-win-win relationship.”

The problem with some carmakers is that they have not realized the importance of such a relationship or even if they do, they are under pressure from either their group corporations or the government to force inventories on dealers in order to reach annual goals.

For both dealers and OEMs, they must understand the changing market in China and act accordingly and quickly in order to compete and survive. They should not even pin hopes on the possible revision of the Implementation Methods of the Administration of Automobile Brand Sales.

No doubt China has entered into a period of consolidation in the automobile sector. The consolidation of dealers will come much faster because dealers are mostly private and smaller enterprises compared to OEMs. But unlike the U.S., where the 100 or so automakers were consolidated into the Big Three in a relatively short period of time, the process of consolidation in China may take longer due to the vast number of country’s population and tremendous differences in regional development.

State-owned OEMs are the assets of local governments and it would be difficult for their mergers and acquisitions. Private OEMs also contribute heavily to local GDP and employment and are therefore unlikely to consolidate.

Consolidation of the automobile sector in China may take a much longer time. But sooner or later it will happen driven by market forces. When it does happen, it may incur tremendous cost. Call it the so-called “consolidation with Chinese characteristics.”

(Rewritten by Wayne Xing based on author’s article published on Guoji Shangbao or International Business Daily)

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