Will Dealers’ Protests Help End Overstocking?

Now BBA (Mercedes Benz, BMW and Audi) have all adopted new manufacturer-dealer relations, but will this be enough to convince other auto makers in the industry that it is time to put an end to the overstocking-dominated development mode? Will they start to explore new business development models? These are the key questions.

There is an old Chinese saying “Past experience, if not forgotten, is a guide for the future.” In accordance with a previous agreement, FAW-VW Audi Sales Division is working on dealers’ losses and negotiating with dealers on subsidies. At the same time, the two sides are going to keep open long-term communication channels on how to maintain stable profitality in the long run.

History repeats itself. At the end of 2014, BMW’s dealers asked the manufacturer for subsidies; at the end of 2012, a price war started in the Mercedes-Benz’s dealer network. In order to solve these problems, manufacturers in the end had to establish dealership associations, involve dealers in the development of business plans, and create effective communication mechanisms. If all goes well, FAW-VW Audi, the No.1 luxury brand in China, will also adopt the “new normal” manufacturer-dealer relationship and explore new sales models together with the upcoming SAIC-Audi organisation so as to achieve a win-win result.

Now BBA (Mercedes Benz, BMW and Audi) have all adopted new manufacturer-dealer relations, but will this be enough to convince other auto makers in the industry that it is time to put an end to the overstocking-dominated development mode? Will they start to explore new business development models? These are the key questions.

“Bloody” stocks

“Overstocking is the root of all evil,” a veteran told International Business Daily.

“Sitting at the front end of the market, the sales company and the dealers are most sensitive to changes, but the decision makers on the board of directors are far from the market and thus can easily be deceived by market appearances and previous performance. What is more, they are often ambitious and thus regularly set unrealistic sales targets no matter what the actual market conditions are. This is especially so in multinational companies.”

A luxury brand dealer does the math for International Business Daily: for a mainstream luxury brand, the average annual sales per store are 1,000 vehicles. If inventory reaches the 1.5-month alert level, it means 125 vehicles are in stock. Based on an average price of RMB 400,000 Yuan per vehicle, the inventory carrying cost will be RMB 50 million Yuan, and at the same time, the financing cost per vehicle will be about RMB 10,000 Yuan. In addition, there will be other inventory costs and regular maintenance costs.

Inventory carrying cost is not the only burden on dealers.

In a mature auto market, the operating cost of a dealer is usually covered by profits from aftersales services and financial derivatives. However, the Chinese market, especially the luxury car market, has seen booming growth in recent years, resulting in the intensive growth of dealer networks in the past five years. Lacking a solid customer base, dealers have to make their profits from new cars and year-end rebates from manufacturers.

However, the precondition for obtaining rebates is completing the sales target assigned by the manufacturer at the beginning of the year. “If the target is 2,000 vehicles, but at the end of year the actual sales are still 100 short, the dealer will not get the rebate,” the abovementioned dealer told International Business Daily. In addition to the double pressure of inventory carrying costs and year-end targets, dealers still have to resort to competitive measures such as reducing the prices of new cars and after-sales services to attract customers for new stores. Price reductions have already become an inevitable route to promoting sales, and the increasing market competition has further intensified this price war.

Since 2014, the retail-end prices of mainstream luxury brands have fallen by 10-15%, and some brands have even offered 20% discounts or more. Considering that there is a 6% profit margin between a dealer’ buying price and the MRSP, and that the manufacturer offers a 6% year-end rebate, if the price is reduced by 12%, the dealer is selling at a loss.

“However much the profit from aftersales, it will not cover the loss from new car sales.” Two years ago, a manager of a luxury brand dealer shop that had been in business more than 10 years was already telling International Business Daily that “dealers are bleeding”.

“Dealers are the most vulerable group and thus they are the first to be affected by market changes,” said the veteran. “But dealers also represent the brand image and are responsible for ensuring that services are provided to the end-customer. Long-term losses will damage the brand and affect customers. and in the end it is the auto maker who will pay the price.”  

Of course, auto makers have also realized the gravity of this problem. Since 2013, a number of luxury and mainstream brands have offered “unofficial rebates” in addition to the year-end rebates, i.e. subsidies amounting to billions of Yuan offered or committed to dealers in mid-year or at year-end based on retail prices, dealers’ sales and auto makers’ profits. This is to make up for dealers’ operating losses on one hand, and on the other hand to ensure dealers will continue to pick up cars according to auto makers’s established sales targets.

However, this is not a long-term solution. Since 2014 till now, there have been a number of dealer protests, all arising from insufficient ““unofficial rebates” or a failure on the part of the auto makers to provide such rebates. According to partial statistics from International Business Daily, at the end of 2014 alone, BBA committed or provided subsidies amounting to RMB 8 billion Yuan to their dealers in China.  

Huge subsidies can meet the most urgent needs of dealers, but at the same time they will reduce the profits of the auto maker and damage the brand image.  “For the decision-making level, the most important thing is to move away from this overambitious state of mind and shift their focus from pursuing unrealistic sales and profit targets to achieving business continuity,” said our veteran source. “In an ever-changing market like China, good decision makers should adjust sales targets more often, from what was previously once a year to once every half a year, quarter or even month, so as to adapt to these market changes.”

Various aspects of the “new normal” in various aspects

More sales or sustainable development? This question has forced itself onto the agenda of the auto makers. But assessed against the experience of some auto makers,  it seems that the two need not necessarily be in conflict.

On December 7th, Lexus completed a historic step in China – its annual sales exceeded 100,000 vehicles for the first time. “For Lexus, selling a hundred thousand vehicles was a long-held dream. It was like mission impossible without overstocking,” the veteran said. “But Lexus did it.”

An insider from Lexus told International Business Daily that in the first ten months of the year, dealers’ average inventory was 0.6 months (about two weeks) and market prices were stable. Dealers even increased the prices of some hot-selling products. “Our goal is to achieve zero inventory,” said the insider.

Compared with the industry average, the Lexus performance is really outstanding. This can be attributed to multidimensional communication between Lexus and its dealers. The insider told International Business Daily that currently Lexus is holding annual, quarterly, and monthly dealer communication meetings and a lot of regional and sub-regional meetings. For example, there are regional meetings for East China and sub-regional meetings covering Shanghai, Jiangsu and Zhejiang. Through these meetings, Lexus can get to grips with consumers’ habits and car model requirements in a more detailed way.

Lexus develops sales plans on a monthly basis, while most auto makers in the industry adopt quarterly sales plans. In order to implement monthly plans, Lexus must have a lot of flexibility in its production and supply system. In addition, the Lexus factory was located in close geographical proximity to China, making logistics easier – it takes only two days to deliver products, which is just as efficient as domestic transport between South and North China.

“More importantly, Lexus’s communication mechanism is the result of long-term practice, so it is mature and effective,” the insider stressed.

“Lexus established its dealer association and communication mechanism right back when it first entered China,” said the insider. Under the “growth-ring operation” philosophy, the dealer communication mechanism has been improved every year. For example, Lexus holds various annual and regional meetings with dealers, and with the market being more segmented, it also holds sub-regional meetings. As time has gone by, Lexus has improved its communication level by level and maintained close and effective contact with its dealers.

“Lexus has figured out a good communication mechanism. It holds different meetings to discuss different issues and reach different solutions.”Alongside Lexus, Mercedes Benz is now also getting along very well with its dealers, after it learned a hard lesson from its dealers’ protest.

At Guangzhou Auto Show this year, Ni Kai, President and CEO of Beijing Mercedes-Benz Sales Service Co., told International Business Daily that although Mercedes was still No.3 in the luxury car ranking in China, it was expected to get back to first place in the global ranking this year. “However, we never regard sales as the only performance indicator. We are more focused on how to further enhance Mercedes-Benz’s brand influence and vitality, strengthen dealers’ operating capabilities and profitability, and improve customer experience.”

In specific terms, after adjustments, Mercedes Benz in China started to discuss quarterly sales expectations with its dealers rather than issue hard targets. Currently, the inventory of Mercedes-Benz dealers is far below the 1.5-month red line. “For those models that are difficult to sell due to intense competition, we don’t push our dealers; instead, we allow them to sell these models at their own pace, and we have been telling ourselves and these dealers not to resort to extreme measures just to maximize sales.”

How important is it for Mercedes Benz to adjust manufacturer-dealer relations in its big product year? The veteran told International Business Daily that if dealers kept struggling with overstocking and product mix, their complicated price matrix would confuse customers and they could not achieve their current levels of good sales and provide good services.

In the first ten months of this year, Mercedes Benz saw sales of 387,015 vehicles, a year-on-year increase of 29.3%. This number was even greater than the whole year sales of 2015 (which were 373,459 vehicles).

BMW is also making changes. The previously mentioned luxury brand dealer told International Business Daily that though BMW is waiting to launch its new-generation products, it has already changed the unpredictable unofficial rebates to explicit rebates. Being certain about the profit margin, dealers will be able to consider by how much they can reduce the price so as to ensure their own profitability. “This helps stabilize the retail prices of BMW cars.”

At the same time, BMW has achieved initial success in adjusting manufacturer-dealer relations. An insider from BMW says that the luxury car maker is building the manufacturer-dealer relationship in 5 aspects:

1. Improving capital liquidity – reducing the initial investment in 4S stores and providing flexible retail formats to meet local market needs;

2. Simplifying KPIs, helping dealers improve operational efficiency and providing wholesale and retail support for dealers through auto financial services;

3. Adjusting the pace of new car sales and the car model mix according to market conditions;  

4. Strengthening dealers’ resistance to risk through the development of after-sales, second-hand car sales, and financial services. Judged against the average performance of BMW dealers throughout the country, the revenues from after-sales services can almost cover all operational costs;

5. Further strengthening communication with dealers – BMW has established a multi-platform and multi-channel regular communication mechanism.

FAW-VW Audi has also begun to make changes. An FAW-VW Audi dealer indicates that the dealers are now discussing with both the Chinese and the foreign sides of Audi about establishing a multi-dimensional communication mechanism to communicate on network construction, pricing, and business policies so that Audi and its dealers can build and maintain the Audi brand  together in an ever more competitive market.   

“A car brand and its dealers should go through thick and thin together,” said the dealer.