Unsold cars are piling up on Chinese dealers' lots as demand slows in the world's biggest auto market, forcing companies that once commanded premium prices to offer discounts instead.
China's auto market was so hot a couple of years ago that someone looking to buy a BMW 5-Series sedan had to pay as much as one-fifth more than the listed purchase price just to drive the car off the dealer's lot.
But a sharp slowdown in sales growth since last year has left a supply glut, hurting luxury brands as well as mainstream nameplates, both foreign and Chinese. China's economic growth cooled to a three-year low of 7.6% in the second quarter.
Auto companies rarely disclose detailed data on inventories, discounts and profitability. Reuters interviewed executives at three mid- to large-size dealer groups, including one which operates more than 100 stores across China, and several auto industry officials, to try to gauge how the slowing economy is affecting the industry.
BMW stores in Guangdong, an export hub in China hurt by the euro zone debt crisis, have up to 90 days of stock, more than double what would be considered normal, and the 5-series now carries a discount of around US$3,900 or 5% of its list price, dealers say.
For Mercedes-Benz, similar pain.
"Our parking lots are full to the gills with unsold cars," says a senior executive for a chain of Mercedes-Benz car dealers. "We cannot go on like this."
He says many Mercedes dealers across China now have 75 to 105 days worth of stock, and his stores have had to offer discounts of almost 30% to tempt customers to buy Mercedes' flagship S-Class 300 sedan.
Falls in profitability have meant carmakers and dealers are scrambling to diversify revenue sources. Some are invading rivals' territory to try to take market share. Others are developing used car markets and high-margin services like custom parts and vehicle maintenance and repair.
The inventory problem is in many ways a turning point for a market where carmakers and dealers were for much of the past decade able to make much as 90% of their profits from the sale of new cars. And in time, the market may become more like the United States where most of the money is made via financing, insurance and after-sales maintenance.
Chinese brands began hurting first, hit last year when industry-wide auto sales volume growth sputtered to just 2.5%, down from 32% in 2010 and 46% in 2009, when tax and other government incentives spurred demand. Most of the incentives have now been cancelled.
Sales weakened for upscale foreign brands this year. In some cases, the inventory problems seem to have been exacerbated by aggressive sales goals, industry executives say. BMW, for example, is aiming to boost its annual China sales volume by 25 to 30% this year.
Asked about inventory levels cited by some of its China dealers, BMW says its average inventory levels were in a reasonable range although the situation may be different at some dealers. Daimler's Mercedes-Benz, which has double-digit sales targets for this year, said its inventory throughout China is on target and that generally discounts do not go beyond a target range.
Some luxury brands are at a disadvantage because they lack domestic production. Nissan's Infiniti, for example, faces import taxes as well as unfavourable currency rates.
"At least the Germans locally produce some of their cars in China, and they have a cheap euro," says a top Nissan executive in Tokyo. "For us, we lose money with most products every time we make a sale."
This will likely remain the case until Nissan begins production of some Infiniti cars in China in 2014, the executive adds. He declined to be identified as inventory and profitability levels are not usually made public.
Mainstream brands are also having to deal with rising inventories, auto executives and dealers say. Rajeev Chaba, a Shanghai-based senior sales and marketing executive for General Motors, says average inventory levels for the industry have swollen to 60 to 75 days, up from the 30 to 45 days generally seen as desirable.
GM executives say their China inventory levels are below the industry average, although they declined to provide figures.
Although industry-wide sales are seen picking up a notch this year to 7 to 8%, the slowdown in growth compared to the huge jumps in 2009 and 2010 has been a wake-up call for automakers garnering relatively easy profits.
The search for new revenue opportunities has exacerbated a turf war, accelerating efforts by some foreign automakers to move outside of the half-dozen regional strongholds built up around the locations of their local Chinese partners.
Nissan's recent plans for a US$785-million manufacturing plant in the northeastern port city of Dalian is a case in point — one that puts it in direct competition with Volkswagen and Toyota, which also have factories in that area. The move is a tit-for-tat response to Volkswagen's attempts to expand sales in southern China, where Nissan and other Japanese automakers are strong.
Nissan and Daimler are also putting much effort into developing used-car businesses that so far have had little input from automakers in China.
Used cars are important in establishing a car's residual value and can help juice new car sales and build brand loyalty, and China's fast replacement cycle has underscored this need. According to Nissan, 60% of China's new-car buyers replace their cars after only three years, compared with about six years for Japanese buyers.
"It is critical to capture those used cars ourselves and help guide customers to replace them with another Nissan car," says Hideki Kimata, a senior sales executive for Nissan.
