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Will protests lead to better conditions for Chinese car dealers?

China Car Numbers

For years, annual passenger car sales in China have increased massively as the market with the world’s biggest population has continuously evolved.  This market growth is totally unlike the situation in Europe where annual sales remain flat and the car parc as a whole is comparatively older.  However, at the same time, Chinese dealers face big challenges in actually selling all the cars their OEMs are supplying, and especially in doing so profitably.  Recently, this has resulted in protests and compensation claims, but what has caused this situation?

Chinese dealerships face massive pressure due to aggressive and arguably unrealistic sales targets set by their OEMs combined with a strong stock push approach.  This is primarily the situation for domestic brands, and leads to big gaps in the numbers between cars wholesaled and cars registered.  Bernstein Research analysed industry volumes of 18 leading OEMs in December 2014, and revealed a surplus of 234,300 wholesaled units, the highest number on record, and nearly double that of the previous year.  Which brands are the worst affected, and which dealers can handle the situation best?  Clearly Chinese brands look to be in the worst position, selling more cars to their dealerships than they actually do to end customers.  In particular dealerships of the GAC (Guangzhou Automobile Group Co. Ltd.) and Honda joint venture, and of the Chinese government-owned manufacturer Chery Automobile Co. Ltd. face massive troubles.  For GAC Honda, wholesale deliveries of 103,300 units far exceeded registration volumes of 48,900 units in December 2014.  In contrast, German brand dealerships look best positioned, showing wholesale and registration volume approximately in line.

Thus the question is, why do manufacturers put so much pressure on their dealerships?  In most cases simply because they forecast higher sales targets for the company within the Chinese market.  As an example, Toyota is aiming to sell 1.1 million vehicles in 2015, the same number that could not be achieved last year.  The problem is that these targets appear to be unrealistic for the simple reason that they far exceed actual market growth.

As a result dealers are dissatisfied with the current situation, which is being monitored by the “Auto Dealers Satisfaction Survey” carried out by CADA (Chinese Automobile Dealers Association), and they have reported the views of 1,241 respondents selling 67 brands (including imported brands, JV brands and domestic brands) located in 6 regions.  Dealer satisfaction has dropped dramatically since the 2010 and 2012 surveys.  Dealers of domestic brands are the least satisfied, as a result of the highest wholesale versus registration gaps, followed by dealerships of joint ventures and imported brands.  The biggest sources of dissatisfaction are reported to be high sales targets (44.8%) and forced inventory (48.3%).

However, instead of supporting the dealers, many manufacturers have stuck to their large forecasts, resulting in protest and compensation claims, in the case of Toyota carried out by CADA, representing more than 500 dealers.  Reportedly, a letter was submitted to Toyota’s Chinese JV FAW Group Co. demanding 2.2 billion yuan, which corresponds to $354.14 million in subsidies, alongside a claim for more realistic sales targets.  According to CADA, approximately 95% of the dealer network has been losing money, presumably including two of the top 5 Chinese dealer groups Zhongsheng Group Holdings Ltd. and Baoxin Auto Group Ltd.  Finally, FAW Toyota agreed to negotiate with its dealers’ council and made compensation payments of 1.24 billion yuan ($200 million) to FAW dealers.  According to Song Tao, deputy secretary general of CADA, dealers appear to be satisfied with this partial compensation for their losses caused by excess inventory.  “The dealers are satisfied with the funding and so is the association and the automaker,” he has said.  However, it is not known whether Toyota have also reviewed their sales goals or adjusted their dealer contracts.  Another example is BMW, which has reportedly agreed to pay 5.1 billion yuan ($820 million) of subsidies to its dealers in China in order to help offset their losses, as retailers stopped ordering cars following a disagreement over targets.

These cases explain some of the difficulties Chinese dealers face at the moment and show that further evolution of the situation is inevitable.  In the future, this may require a number of brands to ‘reset’ the strategy and dealer relationships they have in China, and to move to more realistic sales targets and better two-way communication.  As CADA develops its position representing dealer interests, this will cause a shift in the balance of power in favour of the dealers, and OEMs will see their ability to dictate sales targets somewhat reduced.  But, in the short term at least, we can expect to see dealers continuing to protest in the face of what they see as an unsustainable situation.

 

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