China auto dealers struggle for profit

Auto dealerships in China found it harder to make money last year because of the high inventory they have to stock due to pressure from carmakers who have a final say in the dealership franchise, according to a report.

With more cars sold at a loss last year, the decline in profitability threatens the survival and development of all distributors, said the China Auto Dealers Chamber of Commerce in a report published yesterday, without disclosing specific numbers. The losses will also affect the interests of the auto industry and consumers in general.

The report also said dealers had a more favorable view of domestic car brands.

The industry was rocked by a dispute between carmakers and distributors last year when BMW dealers demanded 6 billion yuan (US$960 million) in sales rebates from BMW China as they were hit by big discount rates due to high inventory pressure caused by the carmaker's high sales target.

BMW has agreed to pay 5.1 billion yuan to its dealers before February in what may become the biggest single compensation to car distributors in the country, according to the China Automobile Dealers Association that represented BMW car dealers in the negotiations.

The dealerships have their hands tied because carmakers require the dealers to hold inventory as they have a final say in the dealership franchise. The high inventory forces dealers to launch a big sell-out, which could lead to instant losses.

Zhu Kongyuan, secretary-general of the auto dealers chamber, said it has been studying the legal system, including the franchise model, on China's car dealer operations since the end of last year.