Survey in 59 cities shows one-third now unprofitable

The number of profitable auto dealerships in China dropped by 18 percentage points last year, according to a recently released survey by JD Power Asia Pacific.

JD Power surveyed 1,605 dealers for 38 brands in 59 cities in China, finding that 63 percent of the dealers were profitable in 2011 compared with 81 percent a year previous. About one-fifth reported losses, more than double the number in 2010.

"These profit findings are troubling to more than just dealers," said Charles Mills, vice-president for global retail experience at JD Power and Associates.

"Brands need dealers to continue to invest to meet their market potential, and China customers increasingly expect more from dealership experiences. This puts brands with lower dealer profitability at a disadvantage relative to competitors."

The entry-level vehicle segment has been affected more than other segments due to the sluggish new vehicle sales. In the first quarter of 2012, sales of new vehicles only grew 2 percent from a year ago.

Typically, consumers trade down to smaller, cheaper and more fuel-efficient vehicles when gas prices rise, but the current China market dynamics are challenging this trend.

Luxury vehicle sales are continuing to surge, driven by consumers with deep pockets who are less price sensitive, and manufacturer-provided dealer incentives have lowered consumer transaction prices.

By contrast, entry-level vehicles are falling victim to the gas price increase as consumers exhibit a greater level of price sensitivity.

Fuel prices in China are now more than 20 percent higher than the average price in the United States.

The three entry-level vehicle segments - minicar, subcompact and compact - account for 55 to 60 percent of China's passenger vehicle sales, according to John Zeng, an analyst at LMC Automotive China.

Sales of entry-level vehicles in the first three months of 2012 declined by 5 percent from the same period last year, he noted.

Minicars led the decline with a 30 percent drop in sales compared to the same quarter in 2011. Domestic-brand car sales have been strongly impacted by the trend, which has in turn hurt dealer profitability.

On average, dealerships in China currently generate 40 percent of their profit from new vehicle sales, a proportion significantly higher than in mature markets.

As China's automotive market continues to mature, JD Power expects that dealerships will see greater profits from vehicle financing, used car sales, and services and parts - revenue streams more profitable than new vehicle sales.

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