Will Dealers Jump In?

Auto makers, suppliers and lenders worldwide are investing billions of dollars in China, a country of 1.3 billion people holding the promise of untold profits.

Is there any room for U.S. new-car dealers in this rush? Is it feasible or wise for American dealers to consider it?

Yes, says Michael Dunne, president of Automotive Resources Asia. “It's prime in terms of opportunity. But there are some regulatory issues to work through.”

For dealers with strong stomachs, signs point to potential profits. But the price may be a chaotic and wild ride as China's economy and auto industry evolve into a modern system.

A foreign business venturing into China needs an investment of at least 50% from a Chinese business or individual, reducing an outside investor's risks — and potential profits.

One American dealer, Frank Rodriguez and his partner, Carl Atkinson based in Orlando, FL, have already jumped on board, opening a Ford Motor Co. dealership in Shanghai.

Atkinson says being in China “certainly comes with substantial risk, but for the dealer who can stay in long enough to survive and start turning a profit, the opportunities are great.”

Currently, China has 3,000 “dealerships” and 2,000 makeshift sales points, according to Dunne. However many of those dealers are merely car brokers, not full-fledged automotive retailers as are U.S. franchised dealers.

Although a lucrative business, the automotive retail system in China is a fragmentation of businesses overseen by city and provincial governments.

The government is trying to make it cross-regional and more nationally focused by establishing guidelines for a revised retail distribution network. That future is uncertain because many of those policies have yet to be released.

Some of the impending policies will include stringent licensing requirements for would-be dealers, making it difficult to operate a dealership. The China Automotive Technology and Research Center (CATRC) reports that, should the new regulations take effect, most of the so-called dealerships would be outlawed.

“Many of these dealerships are brokers — one-man shops selling few vehicles,” Atkinson says. “They'll more than likely have to sell out to larger, more established dealerships.”

Some retailers are worried the new policies will push the industry toward a retail system where auto makers exert full control, instead of a market where independent dealers thrive.

Atkinson, however, believes that dealership operations in China eventually will mirror those in the U.S.

“It is a new and immature market,” he says. “There are a lot of players trying to write the playbook, but the manufacturers realize they need a strong retail network to survive.”

Already, Chinese dealers are taking a page from the playbook of U.S. dealers, and talking about forming an association such as the National Automobile Dealers Assn. to protect and represent their interests.

Rodriguez says other U.S. dealers have shown interest in China, asking about his and Atkinson's venture.

Some other Ford dealers have inquired about the possibility of doing business in China, but discussions are “preliminary” and it's too soon to know if anything will result from such talks, says Ken Zino, a Ford Motor Co. spokesman.

Daphne Zheng, a spokeswoman for the General Motors China Group, says some U.S. GM dealers have asked about potential business opportunities in China, but none have invested there yet.

The United Auto Group, the only U.S.-based dealership chain that has a foreign presence (in the United Kingdom and South America) has deferred on any China initiatives.

“Everyone talks about how hot that market is, but it is very difficult to get into,” says Tony Pordon, UAG's vice president-investor relations. “At the moment, we're not comfortable with it because we don't really understand it.”

Regardless of what form the Chinese automotive retail network will take or whether U.S. dealers will get involved in it, global auto makers are actively investing in developing strong sales channels there.