Auto Industry

Driven by China ambitions

Famous hong buys into leading Chinese car dealership

Merc w

Touch of class: Jardine and Zhongsheng both distribute Mercedes cars

As one of the original hongs or trading companies that stirred the Opium Wars of the nineteenth century, Jardine Matheson’s history in the Far East is a storied one.

In Hong Kong the link lives on through streets named in its honour, as well as the daily firing of the Noonday Gun for tourists. Jardine’s connections to the UK establishment seem to have endured too – British leader David Cameron even did a three-month stint for them in Hong Kong as a ‘ship jumper’ (or clerk) in the 1980s. (According to his biographers Francis Elliott and James Hanning, the job “was administrative, requiring no great talent, but it did require someone presentable and personable.”)

But its ties with China suffered in the following decade when it moved its primary listing from Hong Kong to London. In response Beijing was said to have blocked its bid for Hong Kong’s ninth container terminal and Jardine moved its Asian stock listing to Singapore shortly afterwards, provoking further consternation across the border.

However, there was news of a major investment in China this week, when Jardine Strategic, a Singapore-listed subsidiary, announced a HK$2.6 billion ($332 million) bid for about 11% of Zhongsheng, a prominent car dealership. It will invest a further HK$3.1 billion in convertible bonds, raising its potential stake to 20%.

Zhongsheng’s shares responded positively, rising almost 9% on the news of the multinational’s investment.

Jardine already sells Mercedes-Benz cars in southern China, primarily in Hong Kong through its car dealership Zung Fu. It also runs Jardine Motors Group, a major dealership in the UK, and sells and services a series of other car brands through Jardine Cycle & Carriage, another subsidiary, in Southeast Asia.

HSBC says that synergies with Zhongsheng aren’t clear yet but that the arrangement will grant the British firm a better understanding of the Chinese market.

“We have joint ventures in China but this would be the first material stake in a listed company,” spokesman Neil McNamara told the South China Morning Post. “We are looking at areas of business that we operate in regionally, and to see if we can expand those into the mainland.”

Zhongsheng has more than 170 outlets in China distributing Mercedes, Audi, Lexus, Porsche, Jaguar and Land Rover in the luxury segment, and Toyota, Nissan and Volkswagen to mid-to-high end customers. It says it will use the Jardine investment to grow its network.

Sales of passenger cars to Chinese customers reached close to 18 million in 2013, better than expected and ten times stronger than India, where they fell by almost 10% in unit terms. Sales dropped for the first time for a decade in Brazil too, the fourth largest market.

Despite the robust results, the leading Chinese dealers are readying themselves for a fuller switch into “4S” operations (sales, service, spare parts and surveys) that promise more diverse revenues. They also want to respond to growing interest in second-hand vehicles. Currently, just one used car is being sold for every five new purchases in China, significantly less than more than two second-hand cars for every new buy in the US, according to McKinsey, the consultancy.

While second-hand sales grew to 4.8 million units in 2012, licensing issues have made it harder to establish scale across provincial boundaries. Customers have also been cautious, lacking information on pricing and worried about buying vehicles without warranties.

The industry is already evolving. Bitauto, a provider of advertising services to car industry clients, has tied up with AutoTrader Group, an American specialist in car listing information. Australia’s Southern Cross Warranty is starting to sell maintenance coverage for second-hand cars to dealerships.

The timing also looks encouraging, says McKinsey. Generally, Chinese drivers keep their cars for about five years, which means that millions of newish models are soon going to become available for the first time. Smarter carmakers will grab the chance to keep their customers brand-loyal with trade-in offers. The second-hand market also sounds positive for marques with the best reputations (the foreign ones again) as drivers will want to buy models with better resale values. Customers previously priced out of the market for foreign cars will get a new opportunity with second-hand sales too.

According to Associated Press, half of Ford’s 500 dealerships in China are approved to sell ‘certified’ used cars with warranties, for instance, and the company now has six showrooms selling only second-hand vehicles.

Zhongsheng is already offering trade-ins for some of its brands and says it is focused on boosting returns from after-sales service and add-ons like insurance. Jardine’s experience could be useful in helping it to make the wider transition. Sales of new cars make up about 90% of dealership income in China, says AlixPartners, an advisory firm. But the mix will move closer to the United States in the longer run, where 55% of business comes from new car revenues, about 30% from sales of used vehicles and the rest from parts and servicing.

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