?Editor's Note

Driven by new technologies and intensified competition, the automotive market is undergoing a profound restructuring of its elements. With the shift from a seller's market to a buyer's market, the core ecosystem is transitioning from a focus on vehicle supply to customer demand. The industry is transforming and upgrading, with brands striving upwards and user experience demands reaching unprecedented levels. Traditional automotive channel ecosystems are evolving in response, with channel operations becoming increasingly diversified. Automotive industry enterprises must collectively face the new challenges posed by changes in channel ecosystems.

Focusing on changes in automotive channels, Auto Review has dedicated this issue's 'Cover Story' to special reports. This special report series comprises 7 articles, with the 3rd article published today. Stay tuned for more.

There is no need to be pessimistic about the auto dealer community. The current difficulties faced by auto dealers are mainly due to changes in the macroeconomic environment and profit models. Auto dealers can consider expanding their business scope beyond new vehicles, striving to transform from mere automobile traders to service providers.

As clouds gather over the river, the sun sets behind the pavilion, and the mountains tremble before the storm. Following the delisting of Pang Da and Guanghui, the auto dealer industry has witnessed another significant development. Recently, BMW's first global 5S dealership, Beijing Xingdebao Automobile Sales and Service Co., Ltd. (hereinafter referred to as 'Beijing Xingdebao'), posted a notice announcing its closure. Despite the challenging circumstances faced by auto dealers over the past two years, including high inventories and severe price inversions, dealers have been 'carrying heavy burdens' as a common industry phenomenon. However, even luxury car dealers, who once seemed to 'make money while lying down,' are now facing the risk of capital chain rupture, prompting deeper concerns within and outside the industry and even casting doubts on the dealership model itself.

'I don't think we should be pessimistic about the auto dealer community just because of the delistings of Pang Da and Guanghui. The current difficulties faced by auto dealers are mainly due to changes in the macroeconomic environment and profit models,' said Lang Xuehong, Deputy Secretary-General of the China Automobile Dealers Association, in an interview. She suggested that auto dealers consider expanding their business scope beyond new vehicles, including used cars, car washing and beautification, in-depth test drives, and even mobility services, striving to transform from mere automobile traders to service providers.

'Forcing the emperor's hand,' store closures, delistings...

Dealers frequently 'explode'

On October 23, Beijing Xingdebao issued a notice stating that due to severe financial pressure, the company was seeking capital injection or management by another group and had suspended new car and after-sales related businesses. The notice indicated that the BMW brand authorization had terminated on October 20, 2024, and to facilitate a smooth and rapid capital injection or management solution, the company had summarized relevant data and customer rights in accordance with corresponding procedures. Subsequent reports indicated that many BMW owners did not receive refunds for their prepaid maintenance deposits due to Beijing Xingdebao's closure, and several consumers stated that they had paid deposits of tens of thousands of yuan but faced indefinite delays in vehicle delivery. Other consumers reported that on the day of the announcement, the store's display cars had already been cleared out, with over 100 employees demanding payment of salaries at the store. Another employee revealed that the company had been in arrears for one and a half months of salaries.

According to public information, BMW was the first automotive brand to introduce the concept of 5S, with Beijing Xingdebao being the first 5S dealership. The so-called '5S' adds a requirement for sustainability to the traditional '4S', and as a result, Beijing Xingdebao made full use of various clean and renewable energy sources, including wind, solar, and geothermal energy, reducing overall energy consumption by 26% compared to typical commercial buildings. Of course, this required significant investment, with reports indicating that the total investment in the store exceeded 320 million yuan, increasing costs by about 10% to 20% compared to a 4S store of the same size.

Beijing Xingdebao is not the first auto dealer to 'explode' this year. In January, Guangdong Yong'ao Investment Group Co., Ltd. was exposed to have multiple 4S stores under its umbrella that had closed down. On February 29, the company publicly stated, 'Due to poor management and heavy debt, the company's business cannot operate normally... It has been decided to officially close down from March 1, 2024.' In May, multiple car owners reported that FAW-Volkswagen and SAIC Volkswagen 4S stores in Hebi, Henan, suddenly closed and withdrew from the network, with repayment deposits for car purchases unable to be refunded. In June, Senfeng Group, a well-known large-scale auto dealer in Jiangsu Province, experienced a financial crisis. The company stated on its official website that since the group's financial situation had arisen, it had proactively communicated with OEMs, financial institutions, and customers, striving to overcome the difficulties and emerge from the crisis. On August 28, Guanghui Auto, the second-largest auto dealer group in China, was officially delisted from the stock market due to its daily closing price being below 1 yuan for 20 consecutive trading days, with a market value of only 6.471 billion yuan on the day of delisting, a decrease of nearly 94% compared to its peak value of over 100 billion yuan.

Furthermore, more than one auto brand's dealers have faced increased inventories and heightened sales pressure due to declining sales and the burden of meeting corporate vehicle delivery targets, leading to capital flow issues. They have resorted to extreme measures such as suspending vehicle deliveries and 'forcing the emperor's hand,' causing quite a stir.

It is evident that the 'meal' of auto dealers is becoming increasingly difficult to 'eat.' Statistics show that from 2020 to 2023, more than 8,000 4S stores withdrew from the Chinese auto market, with an expected number exceeding 2,000 this year. In other words, over the past five years, the number of auto dealers withdrawing from the market may exceed 10,000.

Facing the quagmire into which dealers have fallen, the China Automobile Dealers Association issued a statement on September 23, stating that it had officially submitted an 'Urgent Report on the Current Financial Difficulties and Shutdown Risks Faced by Auto Dealers' to relevant government departments. The report pointed out the two major issues currently facing auto dealers: one is being forced to sell at low prices due to factors such as excessive inventories, and the other is the risk of capital chain rupture caused by losses. Therefore, the China Automobile Dealers Association appealed to relevant government departments to pay close attention to the current financial difficulties and shutdown risks faced by the auto dealership sector and to decisively adopt phased financial relief policies and measures.

An Inevitable Stage That Cannot Be Avoided

It is undeniable that auto dealers have become increasingly difficult in recent years, closely related to the 'price war' within the current automotive market.

Industry insiders point out that for a long time, dealers have served as 'reservoirs' for OEMs. OEMs wholesale vehicles to dealers, who then adjust prices based on local market conditions before selling to consumers. Generally, based on annual sales targets and market conditions, OEMs set sales targets for dealers. Some more dominant manufacturers also continuously pressure dealers with excessive inventories. If these targets are not met, dealers find it difficult to receive year-end rebates from manufacturers, which are an important source of profit for dealers. As the 'price war' intensifies, to achieve sales performance, dealers have to follow suit by lowering prices to sell cars and offload inventories, leading to severe price inversions between purchase and sales prices. The more cars dealers sell, the more losses they incur. At the same time, dealers generally have very high asset-liability ratios. With poor profitability, dealers also face pressure to fulfill financing expiration commitments, leading to capital chain ruptures.

In fact, the delistings of Pang Da and Guanghui are also somewhat related to capital chain ruptures. Lang Xuehong told reporters that the forced delisting of Pang Da was mainly due to violations in the securities market, leading to withdrawals of loans and store seizures by banks and other financial institutions after receiving an Administrative Penalty Notice from the China Securities Regulatory Commission. In other words, Pang Da's 'defeat' was due to an inadequate understanding and profound grasp of capital market rules, leading to inappropriate investments, rather than solely poor management. Regarding Guanghui, the core issue is not insolvency. Lang Xuehong believes that the decline in Guanghui's share price is more due to the global stock market downturn, particularly severe in domestic A-shares, where the market values of a large number of listed companies have halved. Frankly speaking, Guanghui's overall operating status among listed companies is relatively healthy, but the persistently low share price led to its forced delisting.

'We should not be pessimistic about auto dealers because of the delistings of Pang Da and Guanghui, as well as recent events,' said Lang Xuehong. In fact, besides the large dealer groups in our field of vision, some regional leading small and medium-sized dealers have considerable anti-risk capabilities, outperforming previous 'top students' in the industry. Based on this, Lang Xuehong believes that against the backdrop of a structural transformation in China's overall economy, a large number of industries are facing structural adjustments, and auto dealers are no exception. Therefore, the current 'explosion' events are more related to the intensified survival of the fittest stage during the transformation and upgrading of auto dealers. This is a necessary path for upward upgrading. After traversing this stage, auto dealers will enter a relatively stable and orderly new era.

Recently, Cui Dongshu, Secretary-General of the Passenger Car Market Joint Meeting, also expressed a similar view in public. 'The automotive industry is facing unprecedented changes brought about by new energy vehicles, and the transformation of automobile sales is also accelerating,' said Cui Dongshu. He pointed out that auto dealers possess a complete automobile marketing and service system, including sales, after-sales, finance, insurance, used cars, and various other businesses. Car sales account for only a small portion of dealership gross profit. Dealers can enhance profitability by expanding into used cars, finance and insurance, after-sales services, and other businesses to revitalize the entire sales industry chain. The traditional dealership model still has tremendous vitality.

Actively Explore Non-New Car Businesses

In 1998, with the launch of 'Guangzhou Honda Automobile Special Sales Service Store,' 'Shanghai GM Automobile Sales and Service Center,' and 'Fengshen Automobile Exclusive Store,' the 4S store model, with brand management at its core, officially landed in China. At that time, auto dealers possessed branded, standardized, and normalized hardware and software standards and service processes, which could unify the brand image while providing customers with high-standard experiences, representing an upgrade for the automotive sales and service industry. Over the following three decades, auto dealers enjoyed a period of prosperity where they could 'make money while lying down.'

However, since Tesla introduced the direct sales model in 2014, coupled with the rapid expansion of the domestic new energy vehicle market, the impact of the COVID-19 pandemic, and the 'price war,' traditional auto dealers have begun to face unprecedented pressures and challenges. Where lies the way out?

'Over the past two to three decades, most domestic dealers in China have primarily relied on new car businesses for profit. However, new cars are ultimately just a product-centric retail business,' said Lang Xuehong. Given that the share of 'intangible' services in China's future economic structure will increase, dealers also need to follow the general trend and continuously increase the proportion of service businesses in overall revenue.

Some auto dealers have already recognized this. Recently, Zhongsheng Holdings, the largest luxury car dealer group in China, released its semi-annual financial report for 2024. In the first half of the year, its total revenue was 82.42 billion yuan, with a net profit of 1.58 billion yuan, a year-on-year decrease of 47.5%. However, the gross profit figures are worth delving into. In the first half of this year, Zhongsheng Holdings' total gross profit reached 4.93 billion yuan, of which the gross profit from new car sales was -1.99 billion yuan, but the gross profit from after-sales services reached 5 billion yuan, a year-on-year increase of 12.7%, fully covering the group's total gross profit.

It is reported that Zhongsheng is implementing a branded operation strategy, creating a series of automotive service brands such as Zhongsheng Maintenance Service Center, Zhongsheng Car Wash and Beautification Center, and Zhongsheng Used Car Center, integrating after-sales services and reaching and converting customers through multiple channels. Financial report information indicates that Zhongsheng Holdings operates 20 maintenance service centers in 15 cities, equips over 90% of its stores with a full set of car wash and beautification services, and has established 49 Zhongsheng Used Car Flagship Stores. In the view of Zhongsheng Holdings, to maintain customer loyalty, it is necessary to seek more touchpoints with customers and new profit growth points beyond new car businesses.

Transform into a Mobility Service Provider

Lang Xuehong stated that in the past, the used car business of Chinese auto dealers was not only a weakness but practically a blank slate. However, observing the development patterns of mature automotive markets abroad reveals that the used car business should play a crucial role in dealers' revenue. Fortunately, with the relaxation of some domestic policies and lower thresholds, auto dealers now have a better atmosphere and environment for expanding their used car businesses. Lang Xuehong believes that with this shortcoming addressed, the profitability of existing auto dealers can be effectively improved.

However, in Lang Xuehong's view, most domestic auto dealers are still expanding around their inherent business value chains, such as used cars and after-sales services. But looking globally, European auto dealers have already started deploying in areas such as ride-hailing, car-sharing, car rental, and even bike-sharing, actively transforming into mobility service companies.

'Among the current domestic auto dealer community, we have yet to see any that have truly proposed transforming into mobility service companies,' Lang Xuehong said bluntly. Of course, one can also observe changes in service concepts and models among some domestic dealers, including organizing self-drive tours. Individual dealers have even ventured into mobility-related hotel and camping businesses. However, only by fully integrating different business segments, expanding from serving solely new car purchase customers (e.g., car clubs) to more user groups' travel scenarios, including driving schools, car-sharing, and other diversified areas, and repositioning from being mere automobile retailers to service providers, can dealers better face challenges and stand out.

Examining the present, the transformation and upgrading of auto dealers are imperative, and elimination and reshuffling are inevitable. However, looking ahead, the auto dealership model still possesses advantages and strengths that the direct sales model lacks, such as a deeper understanding of local markets and a greater proficiency in formulating sales strategies tailored to regional differences. There is reason to believe that after this round of 'growing pains' during transformation, auto dealers will present a brand-new landscape, and those that 'survive' will undoubtedly possess greater vitality and competitiveness.

Note: This article was originally published in the 'Cover Story' column of the November 2024 issue of Auto Review magazine. Stay tuned for more.

Related Reports: Cover Story (1): The Transformation of Automotive Channels Amidst the Restructuring of Ecological Elements

Cover Story (2): Industry Transformation and Baptism, Automakers Explore 'New' Paths for Sales Channels

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Article: Auto Review

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