While foreign markets are thriving
Chinese dealers struggle internally and face severe losses
It’s well-known that China’s car market keeps growing in size. However, it has now become clear that this growth casts a dark shadow. Car dealership profits in China are rapidly declining. The main cause is excessive discount competition, driven by extremely low actual demand.
The China Automobile Dealers Association released the National Auto Industry Status Report for July 2024 last week, which included this information. The report surveyed 1,164 dealerships across the country and revealed that in the first half of this year, the overall satisfaction score of car dealers was 69.7 points. This is the lowest satisfaction score since 2013.
Dealers’ Profit Margins Are Declining
The More They Sell, The More They Lose?
The biggest issue reflected in the satisfaction score is the decline in profit margins. According to statistics from the China Passenger Car Market Information Joint Conference, retail sales of passenger cars in the first half of this year reached 9.841 million units, a 3.3% increase compared to the same period last year. However, the China Automobile Dealers Association survey showed that 50.8% of dealers reported losses.
During the same period last year, 43.5% of dealers reported losses. Despite the increase in car sales, more dealers are suffering losses. A staggering 26.5% of dealers said they incurred losses from new car sales. In simple terms, one out of four dealerships faces a strange situation where the more new cars they sell, the more money they lose.
Excessive Discounts on the Rise
Desperate to Earn Rebates
One of the most significant factors increasing the burden on dealers is the skyrocketing discount rates. According to a recent report by CITIC Construction Investment, in January 2022, China’s average car discount rate was around 11.4%. However, by January of this year, it had risen to 20%, reaching 22.2% in May and 23.2% in June.
The reason behind these soaring discount rates lies in the unique rebate structure between Chinese car manufacturers and dealers. Dealers set annual and quarterly sales targets and share them with the manufacturers. If they meet these targets, the manufacturers provide rebates. However, if dealers offer high discounts but fail to meet their targets, they miss out on the rebates and suffer significant losses.
Domestic Market Stagnates
Dealers Face Growing Challenges
Despite the severe profit decline, about 30% of the dealers surveyed exceeded their sales targets, thanks to the high discount rates. While the situation slightly improved in the first half of this year, China’s domestic car sales decreased for three consecutive years until last year.
Although the transition to electric vehicles is happening quickly, bottlenecks are emerging due to insufficient charging infrastructure. Even for those needing a car, the frozen consumer sentiment makes it difficult for households to commit to purchasing new vehicles. In this challenging environment, dealers are forced to raise discount rates again, worsening their financial situation to maintain sales.
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