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Dealers to face multi-modal competition

by Lan Chaohui, Qian Yu and Wang Wanli

China’s major auto dealer groups have started a new round of expansion by various means since the beginning of the year. Faced with the auto market’s slowdown, leading dealer groups like Yongda Auto and Huitong Luhua Auto Sales have readied themselves to enter the capital market, while Pangda, China’s largest automotive distributor, has been exploring the so-called “automotive supermarket” concept, like outlet stores. In addition, dealers such as Grand Auto, Yuntong Auto and JYT Car have major acquisition plans.

“As a capital-intensive industry, the domestic auto distribution sector will face a trend of expansion and acquisition among dealers,” said Luo Lei, deputy secretary-general of China Automobile Dealers Association (CADA). “Dealers have to be bigger and stronger to avoid losing out on sales.”

Capital market: surging undercurrent

According to a recent report from auto163.com, Yongda Auto, the biggest auto dealer group in Shanghai, will be publicly listed in Hong Kong in an effort to raise about $5 million-$6 million.

Within the last two years, a total of seven auto dealers, including Pangda and Zhengtong Auto, have become public or are near the end of the IPO process.

An industry insider indicated that even lesser known auto dealers are preparing to go public, including an estimated 20 dealers in Beijing.

CADA’s Luo said that going public can not only relieve a dealer’s financial strain, but also allow it to better prepare for expansion, with the help of added capital.

Grand Auto predicted that it could allocate over ¥7 billion ($1.1 billion) in acquisition capital per year if it could raise ¥30 billion through its public offering. Future annual sales could reach ¥35 billion after these acquisitions, while the number of dealers it owns will also significantly increase.

In fact, the surge in profits from sales and aftersales service has made some dealers rich with capital, providing a solid foundation for a public listing. On the other hand, the growth of consumer demand, sound development prospects in second- and third-tier cities and favorable national policies have attracted capital markets to automotive distribution. All of these conditions provide opportunities for the dealers to become bigger and stronger.

Waves of acquisitions

According to a report on cnstock.com, Grand Auto, China’s second largest automobile dealer group, plans to invest ¥1.4 billion to acquire Sanroad Automotive Co., Ltd. (Sanroad), the second largest automobile dealer group in Sichuan Province.

If the deal goes through, the new emerged entity would replace Pangda to become the largest auto dealer group in China.

Grand Auto sold more than 410,000 vehicles in 2011, with sales revenues of over ¥63 billion.  It owns 400 4S dealerships in 20 provinces and regions serving nearly 40 automotive brands.

Meanwhile, there have been two major mergers and acquisitions involving large dealer groups. In 2011 China Zhengtong Auto Service Holdings Ltd. purchased SCAS Investment Co., Ltd. for ¥5.5 billion and Lentuo Group invested ¥28.5 million to acquire a 50 percent stake in the Toyota agency in Zhejiang Province.

“China’s auto distribution sector is now experiencing structural changes, with future competition to be decided by economies of scale and profitability,” said Su Hui, former president of Beijing Asian Games Village Automobile Mart.

In 2011, the number of dealer M&As increased significantly. For example, Grand Auto successively acquired more than 30 automotive sales and service companies, while Pangda took over seven such companies, Luo said.

Enclosure movement: expanding market

Although acquisitions have become the hot trend, many dealer groups still choose to build new dealerships to expand market presence.

Zhang Jianhua, president of Yuntong Auto, said that the company is applying to build 15 new dealerships including Audi, BMW, Infiniti and FAW-Volkswagen in major cities like Beijing, Chengdu and Hangzhou.

He said that developing across regions, especially in cities with good economies, high consumer purchasing power, and focusing on medium and high-end brands there will lower investment risks.

However, Pangda is placing its bets on construction of its “automotive business zones.” The company last year opened its Pangda-Outlets Auto Park in Beijing, signaling the emergence of an “automobile supermarket” requiring low investment.

An executive from Pangda claimed that it has no major M&A plans in 2012 and will mainly grow by creating new dealerships.

Guidelines for distribution: dealers with sales of ¥100 billion to emerge

At the end of last year, China’s Ministry of Commerce released the Guidelines to Promote Development of Auto Distribution in the 12th Five-Year Plan Period (Guidelines).

Based on the Guidelines, by 2015, sales of the top 100 auto dealers should take up more than 30 percent of total industrial sales, and there should emerge 30 dealers with sales of ¥10 billion and 3-5 large national distributors each with sales of more than ¥100 billion.

However, in 2010, Only Pangda and Grand Auto had sales revenues of over ¥50 billion, a far cry from the target environment set forth in the Guidelines.

For now, the concentration ratio of the auto distribution sector is not as high as expected, and there are over 60,000 auto dealers registered with China’s State Administration of Industry and Commerce, three quarters of which are single-shop operators.

“During the 12th Five-Year Plan period, the auto distribution sector will be reshuffled, and mergers and acquisitions will be in full play,” said Luo. “The pace of development of these dealers will be much faster than the OEMs, and their dependency on a single brand will become weaker.”

Rewritten by Frank Shi based on authors’ article in Beijing Business

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