Pub. 59 2018-2019 Issue 1

33 SUMMER 2018 For the full article, read it on: http://thenewslinkgroup.com//clients/articles/TADA/ DealershipOfTomorrow2025Report.pdf guides means that credit is not generally available for used cars at all. Leasing is almost totally absent, due to this problem, and to issues with lease taxation. • After the “gold rush” that peaked in 2014 (which ended with OEMs stuffingdealerswithcars), inventory levels arenownormal- ized.The supplymodel is firmly one of supplyfromstock,asinthe US,butwithouttheOEMfloorplansupportweseeintheUSA. The Environment (Regulation, Competition) • The government is interventionist: it can impose new rules at short notice, with little consultation. › In service, recent rules have aimed to open up the aftermarket (e.g. “right to repair”). › In the area of franchiseagreements, these are being improved somewhat, but contractual defenses for dealers remains weak by European or US standards. › In used cars, regulatory activity is focused on allowing easier transfer of cars between geographic areas (as in the USA and the EU), and other market efficiency improvements. › On the vehicle front, pollution and congestion have led to rules which restrict new car sales by size and fuel type, and support the development of low-emission cars. • Online players are relatively unregulated, and represent a direct threat to dealers. As noted, most new car business for dealers is routed through Autohome and BitAuto, while Alibaba (the local eBay) is launching its own car sourced from SAIC (the Chinese JV partner of GM and VW). New entrants in sales and aftersales – often with significant financial backing—are constantly popping up. TheDealers Themselves • After years of good profits and quick returns on substantial invest- ments, dealer profitability has been hit by over-supply, leading to deep discounting. In 2015, 30% of dealers were reported as losing money, with only 22% “meaningfully profitable” ac- cording to CADA, the dealer association. • Although there is room to add dealers in developing parts of the country, there are too many dealers in many big cities, where marketgrowthhas stalled. Formany dealers, sales per store have been almost flat for the last 5 years. In support of the view that China is over-dealered, see the exhibit: 60 there aremoreGMand VWdealers in China than there are Starbuck’s or McDonald’s: • The top 100 largest dealer groups in China have over 25% of the new car market, a higher level of concentration than in Europe, but similar to that in the US. This is in part because the market has developed so rapidly that many owners have limited experience with more typical (softer) market conditions, and so are choosing to exit rather than step up to the challenge of a tougher business climate. Their selling out to more experienced rivals is fuelling consolidation. Thanks to recent years of very fast growth, Chinese dealers have been largely focused on the new car market, and in service do not yet retainmany customers beyond the war- ranty period. However, because the fleet is so young (and thus much of it is under warranty), dealers still have a 2/3 market share in service. This share will decline.  60 From “Chinese Autos: Would You Like Fries With That? The “McDealering” Of Chinese Cities...In 5 Charts,” from Max Warburton,AllianceBernsteinLP,December 16, 2015 release. Dealer versusRetailer StoreCounts inChina