China’s auto dealers run for cash, not profit

China autoJun12.pngChina’s auto sales picked up in May at 1.18m. This was the highest-ever sales rate in May, and meant 2012 sales are now up 5% versus 2011 (green line).

Beneath the surface, however, China’s Automobile Dealers Association reported that inventories of new cars continue to build. They now average a record 2 months, versus 45 days in April, as China continues to ramp up its production levels. And in China retail sales are measured by when cars are sold to the dealers – not when they are bought by a customer.

As a result, dealers’ margins have seen a major squeeze. They are just 1%, compared to normal levels of 4% – 6%. Essentially, dealers are now simply running for cash – they have to sell cars, at any price, in order to meet their bills.

Analysts JD Power report only 63% of dealerships made a profit last year, down from 81% in 2010. Presumably this level will be even lower in 2012, if current trends are maintained.

The problem is that manufacturers are expanding total capacity to an expected level of 31m vehicles by year-end. This was planned in the euphoria surrounding China’s lending and stimulus boom, when vehicle sales jumped 46% in 2009 and 32% in 2010. But they then rose just 2.5% in 2011, to 18.5m.

Presumably these cars will still be made, as China will always prioritise employment over profit. And if they can’t be sold in China, as seems likely, then exports will be the only alternative. This will not be good news for other Asian manufacturers in H2.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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