The Increase in China Dealerships Expected to Sap Profit image

Auto dealership returns in China will drop as automakers continue to open more of them, therefore increasing competition, according to Sanford C. Bernstein Ltd.

Foreign car makers have began to expand in Asian country’s western and central regions, as well as in the less-developed cities, currently dominated by domestic automakers, while local automakers are trying to attract higher-income customers with more expensive products. Those affected by this increase in competition will be the smaller companies.

“A crunch in returns is inevitable. For some of the weaker brands whose dealers sell relatively few cars even now, this could prove to be a disastrous development,” said analyst Max Warburton.

GM and Toyota have turned their attention on the northern, southern and eastern regions in China, because incomes here are higher, but they have also begun the expansion in the poorest regions. Zhejiang Geely Holding Group and BYD are the ones with the highest number of dealerships in China, even if most of them are located in the poorer cities and have lower profitability and sales.

Two months ago retail consulting company Urban Science said that the number of U.S. auto dealerships rose for the second consecutive year in 2012 and is expected to rise for the next few years. As of Jan. 1st, 2013, the U.S. dealership count increased by less than 1%, to 17,851, from 17,767 a year earlier.

Source: Bloomberg