Car dealerships in China, formerly highly profitable, have been hit by tighter cash flow and the sales networks of many brands are deteriorating

China’s car dealers switch tack as cash flow tightens

Staff Reporter

2013-09-08

Car dealerships in China, formerly highly profitable, have been hit by tighter cash flow and the sales networks of many brands are deteriorating, reports the Guangzhou-based 21st Century Business Herald, citing Shen Jinjun, president of the China Automobile Dealers Association. According to a Sinotrust market survey of 109 car brands, in the first quarter of this year dealers withdrew from 764 sales networks, higher than the 386 in the previous quarter. They either cannot survive or are transferring to other businesses with higher profit returns, said Gasgoo CEO Chen Wenkai.Pangda Automobile Trade on Aug. 30 announced plans to issue 634 million shares to raise funds of no more than 3 billion yuan (US$490 million), 90% of which will be used to repay bank loans and supplement working capital, while using only 300 million yuan (US$49 million) to build new sales networks. Shanghai Greenland Group general manager Lu Hongwen also said the company will be cautious in expanding networks.

Pangda will use its limited funds to invest in high-end brands amid the tightening cash flow. Car groups which have more than 10 4S (sale, spare part, service, survey) clusters, are all re-planning their own brands and regional operations, Shen said. Some have turned to luxury brands, while others choose to shrink the front lines, and instead, to strengthen layout in the cities which form their key markets.

In Shanghai, a Dongfeng Nissan dealer of 11 years has recently turned to selling Lincoln cars. Zhongsheng Group has sharply reduced its 4S shops for Japanese brand cars and has turned to selling luxury brands.

Luxury brands such as Infiniti and Jaguar Land Rover have announced goals for domestic production in China, triggering a new round of expansion plans. Mercedes-Benz will add no fewer than 50 dealerships a year for the next two years. BMW, which already has around 380 dealerships in China, is accelerating expansion to reach a goal of selling “one million cars in three years.”

As of the end of last year, Yongda Group covered 11 provinces and 31 cities with its 106 sales networks, 52 of which are for luxury brands. Meanwhile, Yongda added more than 20 networks last year, almost all of which are selling luxury brands.

Previously, investing in a 4S shop could mean breaking even in two to three years with high profit returns, but recently the profitability of a 4S shop has clearly suffered. For example, Zhongsheng Group’s 2012 net profit fell 47% to 750 million yuan (US$122 million), while Yongda’s net profit slid 6.9% to 470 million yuan (US$77 million).