The 4S stores (sale, spare parts, service, and survey) that comprise the sole channel of automotive distribution in China face serious challenges to business. According to Shawn Lou, project manager at Daxue Consulting, low profit hurts Chinese auto retailers, even causing them to reassess their operating model. This trend is mainly due to the lack of innovation within the sector, where traditional business models rule. However, there is no shortage of room for better performance. Closer cooperation with manufacturers and diversification could be the solution.
SUVs gain ground in China, steering the market past era of slow growth
The 2016 Chinese vehicle market seems to have recovered from the 2015 depression, when the market grew only 4.7% in 2015. The total number of Chinese cars sold increased 13.7% to 28 million units in 2016.
As for specific market segments, in 2016, normal passenger cars sales volume increased 3.8%, while the SUVs seems to have become a new favorite for Chinese customers. SUV sales increased 47.1% over the same period last year, and the MPV type also showed strong potential with a growth rate of 25.6%.
Imperfect bonus systems set by manufacturers mire retailers in dilemma
Chinese auto retailers mostly include 4S stores that belong to different car manufacturers, because almost all services provided by vehicle manufacturers are completed by, and at, 4S stores. Normally, besides their main business—vehicle sales—some retailers also provide service such as rentals, car servicing, license plates and used vehicle sales.
Profits, though, are severely threatened due to the abnormal profit structure. A sales expertise estimated that the bonus from selling cars contributes only 20% of their total income, while around 70% of their profit stream comes from after sales service.
In sales, faltering profits can even endanger trust between dealers and manufacturers because there will be a huge loss of bonus if their sales volume doesn’t reach the predetermined goal. Retailers will try everything possible to arrive such goal, often underperforming and charting a course to sell more vehicles to make up for the loss, worsens inventory and cash liquidity problems.
Our study showed that all sales managers expressed their discontent for the bonus they obtained in all business segments and wish to get more support from partners, manufacturers clearly have not fully realized this yet.
The future of the Chinese high-end automotive market is unpredictable
Recently, due to price competition, some retailers are relying on the high-end market to earn money. However, high-end cars are also facing a challenge. The “2014 car supplier and retailer report” shows that 55% of passenger car retailers don’t make any profit from the sale of new cars, in which 63% of luxury car retailers are losing their money.
Some experts also predict the demand for high-end vehicles is going to decrease. For example, in 2015, the sales volume of Rolls-Royce in China decrease 54% compared with 2014, and Audi’s domestic sales volume also decline by 1.4%.
In the 2016 market, although Chinese top 5 luxury car brands (Audi, BMW, Lexus, Mercedes Benz and Porsche) had an increase in their sales volume after the drop in 2015, the increase in sales last year was partially stimulated by a high degree of high-end car innovation. As we know, China’s growth has slowed as the country transitions to the “new normal” stage of economic maturity, so customers will become more cautious when making their purchasing decisions. Therefore, it’s hard to say whether the Chinese high-end vehicle market will continue its run.
In 2015, Rolls-Royce designed this retailed luxury car with top-level speakers.
Retailers and manufacturer should work to build trusting and stable relationships
There is a large improvement space for vehicle retailers to make profit. As we mentioned above, some trust risks come out between manufacturers and their retailers. Furthermore, some retailers even mention poor morale due to unsatisfactory bonuses.
We suggest top management of vehicle players should attach importance to such problems and get closer to their 4S stores. They should gather together to discuss a set of new bonus system containing better incentives. A higher bonus standard can efficiently encourage sales managers and gives manufacturers more profit in return.
Thus, Chinese auto retailers 4S stores can set an appropriate goal together with their manufacturers, which should be conspicuously ambitious. Also, an achievable goal, suggested by sales managers, should be set by quarter and associated with the current market conditions, which should not force retailers to manifest some impossible goals in a market downturn. In long-term, it’s necessary for both sides to rely on each other to have substantial development.
Organize strategic alliances with more partners to acquire customers
The Internet has been an important way for retailers to attract new customers because currently information on the Chinese car market is limited for customers by a simplistic distribution channel.
From Daxue’s survey, some vehicle retailers have begun to cooperate with relevant websites, BBS and social media platforms. Retailers present information about their cars and contact the potential customers who show interest in them. Around four of every ten online potential customers are willing to visit offline stores, go through test-driving and make a purchase. This cooperation is beneficial to both sides: with websites, retailers can provide useful and reliable information about their cars as well as interesting insights into the automotive industry, which current websites lack. High-end retailers that target younger consumers can also contact automotive KOL with a large number of followers.
Diversify in after-selling market performs as a new engine for retailers
For most of retailers, direct sales bonus only accounts for a small part of their total income. As profit tanks, other services are supposed to be a new engine. There is a general tendency toward making profits by financial products, such as car loan and insurance, which makes extensive use of their connection with customers. And other vehicle equipment is also a good choice of growing profits. For example, as a necessity, GPS navigator and drive recorder can be recommended to customers as well as selling their cars. Moreover, some retailers begin to operate in car rental and second-hand vehicle trading.
This perspective provides more development space to automotive retailers: they should take advantage of their official status to provide service representing their manufacturers. As an offline store, they can even involve the O2O model (Online-to-offline commerce), by collaborating with Internet companies and their apps. Those kinds of diversity in the after-selling market are supposed to simulate the increase in retailers’ profit.
Chinese auto retailers: conclusion
Chinese auto retailers face both internal and external challenges, namely profit decline and stronger competition.
For the internal profit dilemma, the key answer is to build a more trustful and stable relationship between manufacturers and retailers, and only this way can they compete in such a strong climate of price competition.
For the external competition, other retailers and rising commercial models challenge the traditional automotive market. For example, some O2O repair service platforms such as TaoQi Cloud Repair （淘汽云修）perform well and attract a part of 4S stores’ customers. But it’s also an opportunity for retailers, who can seek to expand the business line in car renting, used car trading, etc. Through diversifying in more areas and better managing their profit scope, Chinese retailers are expected to have a bright future.
To know more about Chinese auto retailers and the Chinese automotive market, please don’t hesitate to contact us.
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