BEIJING — Reuters News Agency reports that unsold cars are piling up on Chinese dealers’ lots as demand slows in the country’s car market, forcing companies that once commanded premium prices to offer discounts instead.
But a sharp slowdown in sales growth since last year has left a supply glut, hurting luxury brands as well as mainstream nameplates, both foreign and Chinese. Economic growth in China cooled to a three-year low of 7.6 percent in the second quarter.
75-120 day's supply of cars in stock
Interviews with several car industry officials, as well as executives at three midsize and large dealer groups, including one that operates more than 100 dealerships across China, helped gauge how the slowing economy is affecting the industry.
The dealers did not want to be named for fear of upsetting the automakers they work with. Car company executives declined to be named because inventory and discounting information is not public, as it is considered competitive and speaks directly to how much money they are making or losing.
BMW dealerships in Guangdong Province, an export hub in southern China that has been hurt by the euro zone debt crisis, have as much as 90 days’ worth of stock, more than double normal, and the 5-series now carries a discount of 25,000 renminbi, or $3,900 — 5 percent of list price, dealers say.
For dealers that sell Mercedes-Benz, a rival German luxury brand, there is similar pain. “Our parking lots are full to the gills with unsold cars,” said a senior executive for a chain of Mercedes dealers. “We cannot go on like this.”
He said that many Mercedes dealers across China had 75 to 105 days’ worth of stock and that his dealerships had to offer discounts of almost 30 percent to tempt customers to buy the flagship S-Class 300 sedan.
Declines in profitability have meant carmakers and dealers are scrambling to diversify their revenue sources. Some are invading rivals’ territory to try to take market share. Others are developing used-car markets and high-margin services like custom parts and maintenance and repair.
China's market growth down to 7.6% in 2nd quarter, from 46% in 2009
The inventory problem is in many ways a turning point for a market where carmakers and dealers were able for much of the past decade to make as much as 90 percent of their profit from the sale of new cars. And in time, the car market may become more like that in the United States, where most of the money is made in financing, insurance and maintenance.
Chinese brands began hurting last year, when industrywide car sales volume growth sputtered to 2.5 percent, compared with 32 percent in 2010 and 46 percent in 2009, when tax and other government incentives bolstered demand. Most of the incentives have now been canceled.
Sales weakened for upscale foreign brands this year. In some cases, the inventory problems seem to have been exacerbated by aggressive sales goals, industry executives say. BMW, for example, is aiming to increase its annual sales volume in China 25 percent to 30 percent this year.
Asked about the inventory levels cited by some of its China dealers, BMW said its average inventory levels were in a reasonable range, although the situation might be different at some dealers. Mercedes-Benz, which also has double-digit sales targets for this year, said its inventory throughout China was on target and that generally discounts did not go beyond a target range.
Some luxury brands are at a disadvantage because they lack domestic production. The Nissan Infiniti, for example, faces import taxes, as well as unfavorable currency rates because of the strong yen.
“At least the Germans locally produce some of their cars in China, and they have a cheap euro,” said a Nissan executive in Tokyo. “For us, we lose money with most products every time we make a sale.”
Non-luxury inventories climbing too
This is likely to remain the case until Nissan begins production of some Infiniti cars in China in 2014, the executive said. He declined to be identified, as inventory and profitability levels are not usually made public.
Nonluxury brands are also having to deal with rising inventories, car executives and dealers say. Rajeev Chaba, a senior sales and marketing executive in Shanghai for General Motors, the U.S. carmaker, said average inventory levels for the industry had ballooned to 60 to 75 days, up from the 30 to 45 days generally seen as desirable. G.M. executives said their inventory levels in China were below the industry average, although they declined to provide figures.
Although industrywide sales are expected to pick up this year to a growth rate of 7 percent or 8 percent, the slowdown in growth, compared with the huge jumps in 2009 and 2010, has alarmed automakers that had been garnering easy profit.
The search for new revenue opportunities has exacerbated a turf war, accelerating efforts by some foreign automakers to move outside of the half-dozen regional strongholds around the factories where they build cars with their local Chinese partners.
Used car market boosted by 3-year replacement cycle
Nissan’s recent plan for a $785 million manufacturing plant in the northeastern port city of Dalian is a case in point — it would be in direct competition with Volkswagen and Toyota, which also have factories in that area. The move is a tit-for-tat response to Volkswagen’s attempts to expand sales in southern China, where Nissan and other Japanese automakers are strong.
Nissan and Daimler, the parent of Mercedes, are also putting much effort into developing used-car businesses, which so far have had little input from automakers in China.
Used cars are important in establishing a car model’s residual value and can help promote new-car sales and build brand loyalty — underscored by China’s fast replacement cycle. According to Nissan, 60 percent of China’s new-car buyers replace their cars after three years, compared with six years for Japanese buyers.
“It is critical to capture those used cars ourselves and help guide customers to replace them with another Nissan car,” said Hideki Kimata, a senior sales executive for Nissan.––Paul Duchene
