“Going to a Lincoln dealership in China is an experience,” the brand’s president Kumar Galhotra tells Detroit News. “People bring their whole families.”
The US luxury car manufacturer is a late arrival to China. But Galhotra has high hopes that he can break the stranglehold of the big three German marques (BMW, Audi and Mercedes), which control 80% of the luxury sector. Having opened its first three sales outlets in late 2014, Lincoln hopes to have 60 dealerships in place by the end of 2016.
To keep clients entertained the dealerships will typically provide LED television screens, elaborate tea selections and comfy sofas from which customers can view their cars being fitted out. But Lincoln will not be footing the bill for this. The dealers themselves will. And according to National Business Daily many are already losing money since car sales are no longer on a double-digitgrowth tear. The China Automobile Dealers Association (CADA) believes only 30% of dealers made money in 2014, compared to 90% five years ago.
The figures are correct, says Li Qi, a dealer with Renault, which has a joint-venture with Dongfeng Motor, China’s second largest car maker.
He tells National Business Daily that 2014 was his worst year ever and blames the French firm’s “blood and iron” policy – setting unrealistic sales targets which the dealers simply cannot meet. He says that after selling 200 Renault cars in the first half of the year, the company upped his target to 300 for the second half.
Unable to shift them, he started discounting cars by up to Rmb30,000 ($4,802) each. Given that his gross profit was only Rmb10,000, this meant he was operating at a loss. But he did so in order to collect the typical 5% to 6% performance-related bonus or rebate per car, which is only triggered if dealers meet their targets.
Other dealers, if they didn’t resort to price-cutting, ended up with record inventories of unsold cars. One of Dongfeng Renault’s biggest dealers told the National Business Daily that at the end of 2014 his inventory equated to five months of normal sales, tying up Rmb100 million of capital. This led some dealerships to refuse to take any more cars. Some in eastern China quit being Dongfeng Renault dealers altogether.
Renault’s local sales head, Chen Wei, argues that at least half of the dealerships are profitable, though he admits feeling pressure to report high sales figures to his global bosses so they’ll increase their investment in China.
Rising inventory levels explain the dichotomy between slowing national car sales (growing an estimated 9.9% in 2014) and the high sales volumes reported by the brands themselves. BMW, for example, recorded 17% sales growth from January to November and Audi 16% over the same period.
But the dealers are fighting back. Helped by CADA, they have been pushing the car manufacturers to increase rebates.
And so far they have been very successful, with BMW agreeing to provide Rmb5.1 billion in subsidies, payable this February. Analysts believe this will cut BMW’s China EBITDA by 25% (a material move given that China is estimated to account for up to 45% of its global net profit).
Other car makers have also fallen into line including Renault. Earlier this month, the group agreed to “improve dealers’ profitability through additional and faster rebates,” as well as moderate its sales targets so the “majority can keep up”.
Meanwhile, pollution controls present another roadblock for carmakers. In December, Shenzhen said it would only issue 100,000 new licence plates in 2015. By contrast, car sales in the city in 2014 topped the 500,000 mark. Half of these licence plates will be issued at auction (meaning they are likely to go to wealthier bidders). This is to the advantage of luxury vehicle brands. While overall car sales are forecast to rise by 8% in 2015, the luxury sector is still expected to register double-digit growth at around the 12% level. This could be a problem for Dongfeng Renault which is battling it out in the mid-market segment. And not with great success: the Sino-French JV holds just 0.2% of the Chinese passenger car market.
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