Growth of Chinese light vehicle market to drop 15%

The average 19.3% annual growth of the Chinese light vehicle market, clocked since 2005 to 2014, will fall to a mere 4.1% annual growth until 2018, research by AlixPartners shows. The slowdown will come to affect dealerships as well as OEMs. One way to improve margins is for dealerships to capture a share of parts and services market, the report finds

Chinese light vehicle market
The Chinese demand for light vehicle has in recent years provided a massive boost to car manufacturers globally. Since 2005, the greater China area has enjoyed sustained light vehicle sales growth of 19.3% annually, while the rest of the world has seen a mere 0.7% growth in the same period.

The sharp double digit upward growth trajectory is about to come to an end however, research by AlixPartners finds. According to the firm’s ‘China Automotive Study’, annual growth will fall to 4.1% in China, while global growth increases slightly to 2.3%, between 2014 and 2018. In the even longer term, between 2018 and 2023, growth is expected to slow further in China to 2.9% annually, closing on the rest of the world’s 2.3% annual growth.

Overcapacity
The slowing rate of Chinese light vehicle sales is further complicated by overcapacity. According to AlixPartners’ analysis, slack in capacity below 85% shows a likelihood of an unprofitable operation for OEMs (original equipment manufacturers). Across the world, capacity remains high for major players: Japan’s Honda is at 95% capacity and Toyota at 87%. In Europe, plant utilisation rate is also high: BMW is at 96% capacity and VW at 92%. The American market provides a mixed picture, with Ford at 72% and GM at 95%. The big Chinese OEMs are all running considerably under capacity: Chery at 52%, FAW at 50% and SAIC at 61%.

Dealership consolidation
Besides decreases in sales for OEMs, the report also finds that the Chinese Auto dealerships landscape is changing. Since 2011, the share of the total market for the top 100 dealerships in China increased from 22.7% to 25.1%. Revenue since 2011 has also increased significantly for the top 100 dealers, with an average 13% yearly increase from ¥851 billion to ¥1232 billion in 2014. The reason for the revenue growth, the research finds, comes primarily from the market maturing, leading to the consolidation of dealer networks across the sector.

Profitability slowdown
Although revenue has been growing, profitability has been trending downwards for many dealer groups. Gross margins for the top 100 dropped from a high in 2012 of 8.2% to 6.1% in 2014. Net profitability has been relatively stable at 1.5% this year, after a recent high of 2.3% in 2011. Operating profitability hovers for the most part at an average of 1.5%, with outliers Baoxin pulling in a healthy 5.4% while YXQC drops below the line at -1.6%.

The decreasing growth in demand, shown by a decrease in OEM sales, will mean, according to the analysis, that dealers' inventories will increase – placing further pressure on profitability. Lian Hoon Lim, Managing Director of AlixPartners, explains: “Unless a strong turnaround is logged in the second half of the year, 2015 is likely to be a downbeat year for automakers and dealers since the market recovered from the 2008 global recession. Inventories are increasing, sales slowing and OEMs are starting to reconsider their production strategy – all signs of increasing competition and a much tougher environment.”

Capturing parts and services
Whereas sales in cars is expected to remain sluggish, there is one area in which dealers have seen increases in profitability: parts & services. The profitability of this segment of the dealerships’ offering has increased from 28% in 2011 to 44% in 2014 as car sales margins have been squeezed. The report highlights that the China passenger vehicle services & parts market is expected to grow at a 14% annually to 2018.

However, dealerships will need to carefully manage their offerings to customers to take advantage of their needs. As warranties expire customers are likely to move from dealers to specialised services. The effect is that the total market share of dealerships in the parts and services market is expected to drop from today’s 49% to 38% as the total market hits ¥1 trillion.

Stephen Maurer, Managing Director of AlixPartners, concludes:  “As the total number of vehicles in the car market keeps growing, it becomes increasingly important for dealers to attract repeat business to their service departments. To restore growth and profitability, auto dealers should consider several strategic actions to adapt to changes in the market, including improving the customer experience, strengthening aftermarket service, exploring opportunities to expand auto financing and developing capabilities in used car sales.”