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September 14, 2015

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Home » Business » Autotalk Special

Dealerships in a mad dash to diversification

By Anna Lu | September 14, 2015, Monday | Print Edition

China’s car dealerships are being forced to look beyond traditional showroom sales amid a slowdown in the nation’s car-buying.

They have begun diversifying into related businesses, such as car parts, servicing and financing. It’s a good thing, too, as the impact of this year’s slowing market knells a sharp warning, according to the 2015 China Automotive Study compiled by consulting firm AlixPartners.

Dealership groups in China are getting bigger as the market matures and their networks merge. But economies of scale haven’t translated directly into increased profitability for the leading players in the market.

The gross margin of the top 100 auto dealership groups dropped from 8.2 percent in 2012 to 6.1 percent last year. Revenue growth slowed down from 17 percent to nine percent.

It seems that consolidation hasn’t been strong enough to offset softening sales, and heavy discounts haven’t boosted volumes to compensate for lost profits.

AlixPartners said it expects mounting inventories to keep adversely affecting industry cash flow. Since the beginning of 2014, the Vehicle Inventory Alert Index of Auto Dealers has been hovering, with few exceptions, above the dangerous benchmark of 50, according to China Auto Dealers Association.

The share of new car sales in dealership profits plummeted from 65 percent in 2011 to 42 percent in 2014. If China’s car market continues slower growth, estimated by AlixPartners to be an annual 4.2 percent through 2018 and only 2.9 percent through 2023, dealerships will have to look more seriously for other revenue streams.

Income from car parts and maintenance services has remained flat, around 9 percent, in the past four years, but its contribution to profit has surged from 28 percent to 44 percent.

AlixPartners said it expects China’s vehicle parts and services market to grow at a 14 percent compound annual rate until 2018, when it will be valued at 1 trillion yuan (US$156.9 billion). That’s some consolation for dealerships but it’s no return to the glory days of the past.

The market share held by dealerships in this segment is actually reckoned to fall, from 49 percent in 2014 to 38 percent in 2018, as large numbers of car owners seek other, cheaper sources for parts and servicing after their warranties expire.

The last spike of cars purchased in China is still under warranty, sending car owners to dealerships for repair and maintenance. But that source of customers will slowly tail off.

“Because dealerships charge way more than others do, customers with not-so-new cars don’t want to pay so much,” said Xu Qian, director of AlixPartners.

He explained that the expensive part of servicing is not the labor but the parts. Their quality can be unreliable and their availability arbitrary in China. In mature car markets abroad, where the market for spare parts is much more transparent and consumer-friendly, the situation is the other way around.

Another stark contrast with Western car markets is China’s low ratio of used cars to new cars. It stood at about 0.26 in 2014, compared with 2.2 in Japan and 2.55 in the US.

That may portend another growth portal for China dealerships if a more mature market here means more people purchasing used vehicles. China’s ratio is forecast to rise to 1 by 2020.

“Dealerships should also consider improving productivity and efficiency through store footprint optimization, labor efficiency and cost controls, as well as adapting to the changes of booming Internet and online-to-offline sales,” said Steve Maurer, managing director AlixPartners.

Autotalk Special


 

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