Cooling China creates problems for Car Manufacturers

According to reports being carried by the various wire services this week, Audi is set to offer a financial aid package worth a whopping 193 million US dollar to their network of dealers across China, as demand for luxury vehicles cools in the world’s largest vehicle market. According to anonymous sources, the money will be paid out soon and is testament to the increasingly cut-throat competition that all auto manufacturers are experiencing in their dealer networks.

"In an increasingly competitive market environment, Audi puts a strong focus on a financially healthy dealer network, guaranteed service quality and stable prices," Audi China said, without confirming the subsidy. "We steer the market in close alignment with our dealers." Earlier in the year, reports surfaced of a rebellion in the BMW dealer network that ended up costing BMW some 183 million US dollars in rebates. This happened after dealers in China effectively went on strike when they failed to meet their targets and thus did not get the rebates that they were counting on to bring them into profit. (see also: Toyota set to lose top spot to VW.)

In fact auto manufacturers are now having to live with dealers banding together to demand lower sales targets and a bigger share of profits as demand wanes. "The days of dealers having to beg the automakers for cars to sell are over," said a spokesperson for IHS Automotive. "Probably other premium automakers will follow suit in the coming months and offer subsidies as well.” In fact, Audi has lowered their sales target for the year, although details have not yet been forthcoming.

For the first time since 2005, the VW Group is reporting a drop in sales in China, due to the ever slowing economy in the once-hot emerging market. VW China offered about 1 billion Yuan in rebates along with cutting the cost of their vehicles and securing some very attractive zero-percent financing, but this hasn’t stopped their sales from dropping by 3.9% to 1.74 million vehicles in the first six months of the year. 

The German auto giants are not alone though, as announcement follows announcement detailing rebates, price cuts and other incentives designed to support the dealer networks and aid the sell-through of excess inventory. Toyota has announced its very own 1.24 billion Yuan programme, according to the China Automobile Dealers Association, and Renault will also announce a package to alleviate economic hardship amongst its dealers.

Audi will remain the number one luxury car supply in China, ahead of BMW and Mercedes, but will be looking at ways they can start to add value to the customer experience by providing a greater level of excellence in the service and maintenance of vehicles, according to another unnamed source.

For the rest of the Asian region, the overcapacity for vehicle manufacturing in China will probably mean a boom for consumers, as the need to keep manufacturing plants running puts downward pressure on prices. But it will make the business of being a franchised car dealer all the more difficult as profit margins are continuously eroded.

image: blog.wsj.com