China: dealer blight seen worsening as profits slide image

Chinese automotive dealers have seen the end of bonanza sales and record profits and are now bracing for “calamity” business as the sales have slowed in the planet’s biggest auto market.

The dealers have seen a drop in first-half profits as sales were lower than expected because of the country’s economic woes and the recent stock market rout – and the threat is even higher, causing a cascade effect on sales and automaker margins. The eight largest Hong Kong-traded Chinese car dealers have seen a combined net income drop of 29 percent during the first six months of the year, according to figures from Bloomberg. The recess has cut the chance that profits would meet expectations for a 21 percent growth for the entire year. Car dealer shares have been some of the lowest performers this year in Hong Kong and the manufacturers might need to put the pin on 2015 as the year of complete turnaround for the Chinese automotive industry, says Sanford C. Bernstein Co.

“If dealers’ profits keep worsening, carmakers will have to bail them out by offering rebates and lowering inventory,” comments Robin Zhu, an auto analyst at Bernstein. “They can’t let dealers die. This could further erode their margins and affect sales.”

Automakers such as Germany’s VW AG or BMW AG have been relying massively on the Chinese market and had to deliver an unprecedented level of financial assistance to their dealer networks during recent months. And things could take a turn for the worse as the economy is forecasted to grow at its slowest pace in 25 years and since mid-June the largest stock market plunge in China since 1996 further impacted consumer confidence and lowered available cash for large-ticket acquisitions.

Via Bloomberg