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Dealerships in a mad dash to diversification
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China鈥檚 car dealerships are being forced to look beyond traditional showroom sales amid a slowdown in the nation鈥檚 car-buying.
They have begun diversifying into related businesses, such as car parts, servicing and financing. It鈥檚 a good thing, too, as the impact of this year鈥檚 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鈥檛 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鈥檛 been strong enough to offset softening sales, and heavy discounts haven鈥檛 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鈥檚 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鈥檚 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鈥檚 some consolation for dealerships but it鈥檚 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.
鈥淏ecause dealerships charge way more than others do, customers with not-so-new cars don鈥檛 want to pay so much,鈥 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鈥檚 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鈥檚 ratio is forecast to rise to 1 by 2020.
鈥淒ealerships 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,鈥 said Steve Maurer, managing director AlixPartners.
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