In China’s automobile market, fierce competition among car manufacturers has led to a price war as they strive to capture market share. This price war has resulted in difficulties for luxury car dealerships, with some even facing closure, and the era of easy profits for dealers of luxury brands is becoming a thing of the past.
According to data from the China Association of Automobile Manufacturers, in the first three quarters of this year (January to September), luxury brands sold a total of 1.98 million vehicles, a decrease of 8.5% compared to the same period last year. Reports from “First Financial Daily” indicate that the price war in the automotive industry has also affected luxury car dealerships.
Under the influence of the price war among car manufacturers, in the first half of this year, companies like BMW and Mercedes-Benz provided substantial subsidies to dealers through various means. A senior executive at an automotive sales company revealed to the media, “The price war is intense. For example, an Audi car financed by a dealer with 400,000 yuan only sells for 320,000 to 350,000 yuan. The profit margin per car sold ranges from 50,000 to 80,000 yuan, and there is a certain delay in the rebates provided by the manufacturers.” In order to make profits, dealerships typically rely on methods like aftersales services and rebates from manufacturers.
Furthermore, manufacturers implement various commercial policies for dealers, including sales rebates, financial interest subsidies, monthly promotions, and quarterly promotions. Seduced by the favorable policies of car manufacturers, some dealerships have ended up stocking more vehicles than there is demand in the market. In a situation of severe supply-demand imbalance, dealerships with excess inventory find it challenging to offload those vehicles. Consequently, dealerships selling cars at high purchase prices and low selling prices has become the norm. In order to achieve sales targets, dealerships often engage in price wars by investing some of the subsidies back into reducing prices, resulting in unprecedentedly “affordable” prices for top luxury brand products and causing losses for many luxury brand retailers.
“First Financial Daily” noted that all these factors have further worsened the operational conditions of dealerships to a certain extent.
Shen Jinjun, President of the China Automobile Dealers Association, stated in June at the 16th China Automobile Blue Book Forum that luxury brand dealerships have started to experience widespread losses.
The losses incurred by dealerships have slowed down the turnover of their funds. To repay bank loans, some dealerships have resorted to borrowing from private sources, leading to a gradual increase in the cost of capital and ultimately resulting in a breakdown of the fund chain.
Recently, reports have emerged from various parts of China regarding multiple luxury brand 4S dealerships suddenly going bankrupt. On October 23, the world’s first 5S BMW dealership and Beijing Xindebao Automobile Sales Service Co., Ltd. closed down. Similar situations have also occurred at Fuzhou Zhongbao BMW 4S store.
E.g. Tianjin Yonghao Group Co., Ltd., which operates Audi, Hongqi, and Dongfeng Honda 4S stores, announced on November 17 that due to recent loan recalls by cooperating banks, the company’s fund chain broke, leading to bankruptcy.
In response, Lang Xuehong, Deputy Secretary-General of the China Automobile Dealers Association, told “First Financial Daily,” “Dealerships are facing significant operational risks this year, with tight liquidity. Looking at the external environment, overall economic downturn has been observed since the second quarter, leading to weak demand in the circulation industry market, forcing dealerships to engage in low-priced promotions. Moreover, luxury brands require larger capital amounts, exacerbating liquidity issues. On the other hand, the phenomenon of inverted luxury car pricing has become more conspicuous this year, with dealerships operating at a loss. The fundamental reason for the inverted pricing is the imbalance of supply and demand in the market. With high leverage ratios for luxury brands, once bank policies tighten, liquidity problems intensify, posing even greater risks for luxury brand dealerships.”