Analysis
13 Jun 18

Chinese Dealer Networks: Trouble in Paradise

After years of prosperity, the Chinese car dealers of especially the mainstream luxury brands, have entered an era of change. Consumer behaviour has drastically shifted to digital, independent service and repair shops are gaining traction and the overall car sales bubble is starting to burst. Dealer bankruptcy is now a real threat and have the full attention of the OEM’s.

Back in the good days

Not that long ago, venturing into the luxury car brand retail business was pretty much a no-brainer. Sales were on the rise, the customer came uninformed to the showroom and the recognised dealerships were protected against independent service and repair shops. For about 8 million dollar, you’d build your dealership - investors were easy to find as it was generally possible to lift the investment in 4 to 5 years’ time, as net profits were extremely high.

Last year’s overall car sales results were still good, but for the first time in decades, the growth percentage was below 3%. Various reasons explain the decreasing results: limited availability of car plates, regulatory shifts and changing consumer behaviour. OEM’s and dealers have little or no impact on the first 2 factors, but they didn’t see the third one coming.

The (demanding) Chinese client used to visit the dealership 4 to 5 times before making a decision. It allowed the sales teams to build a relationship with their potential customers and fill in for the lack of understanding that the buyers used to have about the product they. It also allowed them to occupy a first-in-line position to negotiate pricing and fight counter-offers from other dealers.

The new consumer

Today, the client is better educated and wants more and better; PWC research reveals 3 demands: digitizing, experience and a better distribution of the touchpoints with the brand.

Nowadays, the consumer receives ample information through digital challenges. Previously, the client would research price indications, stock availability and a relatively generic information about brand and model. Today, an average car buyer will spend about a week’s time doing intensive research about their purchase and will have almost completed the sourcing cycle, having compared pricing and discounts from various dealerships.

As a result, the client will visit the dealership in average less than2 times. Gone is the relationship building, welcome to the “online to offline” synchro challenge. The sales teams not only have to make sure the client walks out with a contract, they also need to make sure that their information entirely matches what the client might have found on the web. If this is not the case, the client will lose confidence and leave the showroom.

The consumer has indicated that they desire a digital experience in the showroom as well. They want to see touch screens, interactive 3D configurators and even try out the car virtually. Briefly, they want to be impressed during their one-time visit to the dealership and demand different experiences from those obtained on their own devices.

The visit to the dealer needs to be an unforgettable moment and nothing can go wrong. To ensure this, the dealer needs to cater for all eventualities: when the customer visits the showroom with the kids, they expect a nursery or children’s play room, preferably supervised. They want food and drinks, a business centre and an entertainment room in case they’re visiting with friends or colleagues.

75% of the potential buyers want to test-drive and many of them, today, complain that the test experience was disappointing. The factors brought forward were: a messy process to obtain the key to a test vehicle, an unsatisfactory route design, not enough time to try the car in various situations or unskilled sales people who don’t understand that the test drive is an essential part of the sales process.

The distribution of sales and service points needs to be improved. The client requires their service point to be at less than 30 minutes from home or office and is not interested in cueing in an overcrowded middle-of-the-city centre type of dealership for a test drive in traffic jams.

The existing dealer networks seem not to respond to what the client wants. Due to the exponential growth over the last years, many OEM’s have paid less attention to the distribution of their sales and service points. Bigger cities have often multiple dealerships within a couple of kilometres’ reach of each other, creating unnecessary competition today. In addition, most of the dealers have centralised all services (sales, aftersales, parts, demo stock) into one big dealership. What today’s client want is a central flagship store with attractive facilities, decentralised service points able to compete with independent service providers and an off-site facility dedicated to test drives.

Cash-flow

The way most Chnese dealerships are structured, from a finance point of view, is based on uninterrupted double digit growth. During the golden era, this was not an issue and OEM’s increased production and multiplied the dealer network.

Today however, 70% of the mainstream luxury dealers are in deficit due to bad financial or operational management, have insufficient working capital and can’t offer what the new consumer demands in terms of service and experience. This is where OEM subsidies come in.

In too many cases, dealers count on subsidies from the OEMs to face their deficits. These subsidies were never meant to keep a dealer afloat, but are designed as incentives based on purely commercial metrics (sales volume, client satisfaction indexes,…) for dealers who have demonstrated success. As a result, the allocation of the subsidies is not flawless and OEMs give money to dealers with essential structural problems, such as debt issues and pressure from their investors, rather than sound dealerships with a temporary cash flow problem. Dealerships that are considered “too big to fail” are often in reality “too late to save”.

Never waste a good crisis

OEMs have understood most of this by now and are actively restructuring their sales strategies, dealer networks and subsidy allocations. Monitoring and advice processes are being put in place to avoid the dealers becoming cash-poor, networks are being restructured and services are being adapted to cater for the Chinese consumer.

Nevertheless, there’s still a risk that it’s too little, too late. There’s no reason why the Chinese car buyers won’t change their behaviour again in the near future. Will dealerships become completely irrelevant once China will adopt alternative mobility solutions? Will additional regulation continue promoting automotive retail?

China’s on the verge of a big change, that of an economy lifting up to the next level. What is described above are the growing pains in a single aspect of the automotive industry, but it demonstrates that China’s industry leaders need to have a future-proof vision and be able to translate it into strategy. It’s no longer possible to count on status-quo and rely on sales growth.

Authored by: Yves Helven