Profits Await Beyond Showrooms, Chinese Dealers Told

WUHAN, China – U.S. dealers at the retail distribution session during a recent conference here would have heard a familiar refrain: Dealers need to embrace the Internet.

Problems in the dealership world in China are more basic than that, however. Chinese dealers need to improve on traditional dealership skills such as customer retention.

Aftersales service and used-car sales also need to become more important revenue streams.  As market growth slows in China, those tasks are becoming more urgent.

“Moderated profit is the new normal,” Liu Zhifeng, executive deputy general manager-Beijing Hyundai, told conference attendees.

In the past, the fast growth of China’s car market – for years in the high double digits – meant dealerships didn’t have to focus on aftersales service. This year, however, the car market may grow only about 7%.

Meanwhile, Chinese dealerships profits heavily depend on new-car sales. But gross profit for a new vehicle may be only 1% or 2%, says Chee Tuck Yap, managing partner at auto retail consultancy Sewells Group China. Gross profit can be 25% for parts and up to 70% for service, he says.

“There is not enough attention paid to aftersales as a retention and revenue opportunity,” says Yap.

According to Sewells, new-vehicle sales account for 92% of a typical Chinese dealership’s revenue mix but only 50.4% of its gross profit mix. Parts comprise 5.4% of revenues but 21.7% of profits, while body-shop business and aftersales service make up 1.6% and 1% of revenues and 16.4% and 11.5% of profits, respectively.

To be sure, dealers are becoming more focused on customer service, which generally boosts customer loyalty and aftersales service business.

According to the 2014 J.D. Power and Associates China Customer Service Index Study, customer satisfaction with aftersales service improved for both luxury and mass-market brands.

But the improvement is uneven. “Dealers are weakest in the Tier 2 and Tier 3 cities,” says Beijing Hyundai’s Liu.

Anti-Monopoly Ruling Threatens Profits

Dealers have more to worry about than just a slowing market. A recent anti-monopoly ruling may cut into their aftersales-service profit margins, Wu Gang, general manager-Sinomach Automobile, tells conference attendees. Sinomach imports luxury vehicles and also owns a large dealership group.

Under the ruling, automakers no longer can prevent independent repair shops from selling original-equipment-brand parts.

Automakers also must give those repair shops access to the maintenance and repair information for new models. Independent repair shops theoretically now will be able to offer the same-quality parts as a dealership.

“The auto dealer, to survive in this highly competitive market, will need to build up its strengths and improve its services,” wrote Xu Jing, a partner in King and Wood Mallesons’ Beijing office, in an online comment.

Another neglected profit area in China: F&I.  “Dealers need to seize opportunities in the financing and leasing market,” says Beijing Hyundai’s Liu.

Used cars are another missed opportunity in China.

The number of used cars in China in 2013 rose 8.6% to 5.2 million units, but dealers sold only one used car for every three new cars.

“Used-car percent in the revenue and gross-profit mix is negligible when looking at the overall dealer performance,” says Yap. Only a few big dealer groups have a well-developed used-car business, he says.

Poor government regulation hurts efforts by dealers to develop that profit area.

Indeed, used-car auction giant Manheim set up operations in China in 2006 only to be frustrated by the chaotic market. It quietly exited China a few years later.