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The dilemma faced by domestic auto dealers has been a long-standing issue, but the situation has worsened this year, with many dealers struggling to stay afloat. Finding a solution to this dilemma is no easy feat.

Produced by | Heyan Automobile Reading Studio

Written by | Zhang Dachuan

Edited by | Heyanzi

Total words: 2132

Reading time: 4 minutes

At present, the survival status of domestic auto dealers is not optimistic.

Recently, the China Automobile Dealers Association (CADA) has officially submitted an "Emergency Report on the Current Financial Difficulties and Shutdown Risks Faced by Auto Dealers" (hereinafter referred to as the "Report") to relevant government departments based on feedback from a large number of its members. This report analyzes the common difficulties faced by auto dealers and puts forward certain policy recommendations.

△ The "Emergency Report on the Current Financial Difficulties and Shutdown Risks Faced by Auto Dealers" has been submitted

Auto dealers are at a critical juncture

Currently, domestic auto dealers are on the brink of extreme difficulties. On August 28 this year, Guanghui Auto, the largest auto dealer group in China, failed in its efforts to maintain its listing status and was forced to delist from the stock market. Its turning point in declining performance began in 2020. At that time, Guanghui attributed its performance decline to the impact of the pandemic, but the pandemic did not completely bring Guanghui down; instead, the price war among domestic automakers became the final straw that broke the camel's back. If the largest auto dealer group in China cannot withstand the market shock, the situation for other dealers is even more dire.

Since the beginning of this year, some regional dealers of Porsche and Beijing Hyundai have jointly submitted petitions, with Porsche dealers' pressure tactics even becoming one of the "triggers" for the change in leadership at Porsche China. As is well known, auto dealers, as downstream entities in the automotive industry, often have little say in negotiations with OEMs, so they would not refuse to take delivery of vehicles unless absolutely necessary.

△ Guanghui Auto fails to maintain listing status

There are two main reasons why auto dealers refuse to take delivery of vehicles:

Firstly, OEMs constantly pressure dealers to take on more inventory in order to meet their sales targets set at the beginning of the year. However, with the current sluggish auto sales and China's auto market already saturated, emerging players continue to erode the market share of traditional automakers. This puts significant pressure on dealers.

Secondly, China's excess auto production capacity forces automakers to engage in price wars to compete for market share. Dealers sometimes have to swallow losses to meet OEM targets, with selling cars at a loss becoming the norm in the industry. While dealers used to rely on after-sales services and insurance to make up for sales losses, increasingly savvy consumers and internet capital entering the after-sales field are gradually eroding dealers' last source of profit.

△ The once-lucrative maintenance and repair sector of auto 4S stores is gradually being eroded by other capital

According to data released by CADA, as of August this year, the inventory-to-sales ratio for domestic dealers has reached -22.8%, a further expansion of 10.7 percentage points compared to the same period last year. The price war in the first eight months of this year has resulted in a cumulative loss of 138 billion yuan for the entire new car sales market.

Limited effectiveness of relief policies

In the "Report" submitted by CADA, the association urges relevant departments to act quickly and study and introduce phased financial relief policies for the auto dealership sector.

△ For auto dealers, relief policies cannot fundamentally solve the problem

However, regardless of whether the government will provide financial relief policies, financial support, or guarantees for auto dealer groups, even if such policies are implemented, their effectiveness will only be temporary. Phased financial relief policies can only help auto dealer groups avoid bankruptcy due to cash flow disruptions. However, the two major challenges facing domestic auto dealer groups, namely inventory pressure from OEMs and price wars in the domestic auto market, cannot be resolved through financial relief policies. To some extent, such policies are primarily aimed at protecting consumers who have purchased vehicles and ensuring that they can register and license their vehicles despite the fact that dealers may have pledged vehicle certificates as collateral to banks.

Auto dealers urgently need to save themselves

Despite the current challenging environment, auto dealer groups still need to remain optimistic about the domestic auto market. China remains a market with annual sales of over 20 million new vehicles and a vehicle parc of over 400 million. Together, these figures represent a substantial market. The current situation is a result of severe overcapacity among OEMs. Correspondingly, there is significant room for consolidation among auto dealer groups.

△ China's auto market remains vast in size

Intense market competition is a process of eliminating backward capacity. Once capacity is cleared, the domestic auto market will enter a relatively healthy state. The same applies to auto dealers. In the next step, dealer groups with larger scale advantages can often leverage greater synergies to reduce costs, thereby increasing their chances of survival. Smaller dealer groups need to leverage their agility and accurately grasp customer needs, enhancing customer loyalty through superior service and building a moat for themselves. Those dealer groups that fail to make breakthroughs in cost or service are likely to face bankruptcy or acquisition.

Another piece of good news for auto dealers is that new-energy vehicle (NEV) makers that once insisted on direct sales are gradually introducing more dealer groups. For NEV makers, the financial pressure remains significant. Collaborating with dealer groups can significantly reduce upfront investment in store construction and quickly recruit an experienced, ready-to-use sales and after-sales team. For auto dealer groups, leveraging this opportunity to find new growth points for their business is a strategic direction that needs to be prioritized on their agenda.

△ NEV makers are beginning to introduce more auto dealer models to rapidly expand their network layout

Commentary

The once-booming direct sales business of automakers is now far less vigorous than it was two or three years ago. In the short term, auto dealers will remain an indispensable part of the domestic automotive industry. However, how to leverage their past sales and after-sales experience, network layout, and customer resources to maximize their value in the industry is a topic that every auto dealer group needs to seriously consider. Continuing to sit back and wait for customers to come to them, as in the past, will likely lead to elimination in the wave of industrial transformation.

(This article is originally created by Heyan Automobile Reading Studio and may not be reproduced without authorization)