Many cars being sold at a loss in China market

Shanghai, November 5 (Gasgoo.com) The global financial crisis has made many Chinese customers tighten the purse strings. As big consumer goods, an increasing number of cars have to be sold at a loss in the Chinese market.

With less than two months to go for this year, auto dealers across the country are eager to clear their inventories of old models while selling newly launched cars at a discount to achieve their sales targets of 2008.

It has been nothing new for dealers to sell cars at a loss as a temporary shortcut to reaching the yearly sales goal, but this year would witness the first time for the "shortcut" of this loss-making nature to be widely used for unexpected several months. The persistent downturn in the auto market has forced some dealers to close or resell their stores.

The profit margins for many auto dealers have narrowed to about 3%, some to zero. And car-selling is becoming a loss-making business in China. That's why some dealers are trying to throw away this heavy burden. It is getting more and more difficult for the car dealers to make profits in the Chinese market, which now has shown no sign of revival in the coming few months.

In addition to the prevailing financial crisis, the practices of cutting prices and selling at a loss among auto dealers are also partly caused by the excessive sales target and mounting stockpiles. At the beginning of the year, most automakers in China set their ambitious sales goals for the year, without anticipating the market downturn in the second half. And now they order the dealers to make room for new cars in a last-ditch attempt to attain the sales goal.

As a direct result, the slow sales of cars from the high inventory would block the cash flow for the car maker and dealer alike, and this will pose huge risks to their operation chain. One solution to this problem is to sell the "long-stocked" cars at a loss and the new cars at a discount. A recent industry survey shows that more than 40% of car dealers in China are not making any profits in their business.

It is estimated that nearly one third of the current auto dealers in China will shut their shops by the end of this year, and some will be merged or acquired. Some after-sales services of many well-known auto brands, such as FAW, Buick, Ford, Nissan and Changan, are becoming idle as fewer customers are willing to buy or drive cars now.

China's auto market has seen rapid growth over the past few years, which has stimulated the fast expansion of most carmakers' sales networks and consequently fierce competition between their dealerships. Later, the price war ensued, characterized by sharp price cuts and discounts, sometime even to an unreasonable degree, and the resultant low profits would put the vehicle quality and services at risk.

It is time for this vicious cycle to stop now. And the current global financial crisis may serve as a wake-up call to car makers and dealers in China, who are expected to realize that they should explore more sensible approaches to the growth of their operations.

To survive this crisis, every auto dealer also has an uphill battle to fight. Still, "If winter comes, can spring be far behind?"