Unafraid of "chip shortage" and supply-demand reversal, more than 50% of car dealers are making money

After auto sales returned to a positive growth track last year, auto dealers in the terminal market also delivered impressive results. On February 10, the China Automobile Dealers Association (hereinafter referred to as the "Distribution Association") released the "2021 National Auto Dealer Survival Status Survey Report" (hereinafter referred to as the "Report"), which showed that dealer profitability rose to 53.8% last year, and dealer operating conditions are gradually improving.

However, the domestic auto market has entered a new normal of "stock", and auto dealers are also facing challenges under the impact of repeated epidemics and chip shortages. Lang Xuehong, deputy secretary-general of the Circulation Association, said that thanks to insufficient supply, dealers can sell at a guaranteed price and increase their profitability, but dealers are also facing pressures and challenges such as staff loss, insufficient resources due to chip shortages, and declining after-sales profits.

Loss-making dealers dropped to 17.5%

Last year, due to the shortage of supply chain, the terminal market was once in a situation of insufficient supply and demand, but this did not affect the overall operation of offline dealers. The report shows that despite the impact of chip shortage, 70% of dealers still completed more than 80% of the annual task indicators last year. The relevant person in charge of the circulation association revealed that the proportion of dealers who completed the annual sales target was 29.4%. Among them, the annual target completion of luxury/imported brand dealers was relatively good, and nearly 40% of dealers completed the annual sales target.

While meeting the target, dealers also saw an increase in profitability. The report shows that last year, dealers’ profitability rose to 53.8%, while the loss-making rate fell to 17.5%. Among them, nearly 80% of luxury/import brand dealers achieved profitability.

In contrast, Beijing Business Daily reporters noted that only 29.7% of dealers were profitable in 2019, while 41% were loss-making. Among them, only 35.8% of luxury/imported brand dealers were profitable; in 2020, 34.4% of dealers were profitable, while 33.8% were still loss-making.

However, with the improvement in profitability, dealers' operating conditions in 2021 are much better than in the previous two years, and dealers' overall satisfaction with manufacturers has also increased significantly. The report shows that dealers' overall satisfaction score last year was 82.7 points. In terms of brand type, luxury/imported brands scored the highest, at 84.8 points, joint venture brands scored 83.6 points, and independent brands scored 78.7 points. A joint venture brand dealer said that last year's inventory level was not high, and manufacturers were also adjusting and optimizing product production in a timely manner. Coupled with changes in market supply and demand, operating pressure has been significantly reduced.

Breaking out of the vicious circle of “trading price for volume”

The improvement in profitability and dealer satisfaction is closely related to stable market prices and reasonable inventory levels. The report shows that the proportion of dealers that did not experience price inversion last year increased by 2.9% to 29.4%, and the proportion of dealers with price inversion of more than 20% was less than 7%. "The performance of domestic brands is relatively good, and half of the dealers have not experienced price inversion." Lang Xuehong said that in the dealer profit structure, new car revenue still accounts for the highest proportion, exceeding 80%. Although the phenomenon of price inversion still exists, it is significantly better than in 2020.

The main reason for the improvement in price inversion is the change in the market supply and demand relationship. It is worth noting that after the chip shortage problem in the automotive market last year, the decline in production of OEMs led to insufficient terminal inventory, and dealers could only begin to reduce discounts to correspond to market changes. A person in charge of an independent brand dealer admitted that the main reason for the previous increase in losses in 4S stores was that the OEMs blindly increased volume, unilaterally pursued market share, and had a strict assessment system for dealers. But at that time, market demand was not high, and some dealers were in serious inventory pressure. They could only relieve pressure by exchanging price for volume, resulting in selling cars at a loss. However, while market demand was released after the epidemic, there was a shortage of chips and insufficient supply of cars. At this time, the supply and demand relationship reversed, and terminal prices began to rise, thereby improving profitability.

In fact, the current shortage problem in the market has been alleviated to a certain extent, but some hot-selling models are still in short supply, so dealers' "price reduction" is still not obvious. The reduction in price discounts has also increased dealers' overall new car gross profit margin. The "Report" shows that dealers' new car gross profit margin rose from 1.3% in 2020 to 1.5% in 2021. Yan Jinghui, a member of the Expert Committee of the Circulation Association, said that although various factors affect the consumer market, the "supply and demand" of automotive products caused by chip shortages has narrowed the terminal discount range, and dealers' new car sales profits have been improved.

Used cars may become a "new driving force"

In addition to new car sales, the report shows that the proportion of used car business revenue of 4S stores also increased by 2.8% last year. Among them, the proportion of luxury/imported brand used car business revenue to dealers' total revenue reached 6.9%. A used car dealer said that last year, due to the chip shortage, 4S dealers had no car sources, and some luxury car brand dealers began to purchase quasi-new cars at invoice prices to meet some consumer demand. The prices of these quasi-new cars are lower than the prices of new cars, which has attracted the attention of many consumers, which has increased the revenue of many luxury brand used car business segments.

In addition, the increase in the used car business revenue of 4S stores is also closely related to the increase in the national used car transaction volume. Data shows that the national used car market transaction volume last year was 17.5851 million vehicles, a year-on-year increase of 22.62% and a 17.84% increase compared to 2019. Luo Lei, deputy secretary-general of the Circulation Association, predicts that my country's used car transaction volume will exceed 19 million this year and will hit 20 million.

"The Chinese auto market has entered the era of replacement purchases, and the number of used car models is increasing, gradually releasing the consumption potential of the used car market." Cui Dongshu, secretary general of the Passenger Car Market Information Joint Conference, said that in the past two years, the state has adjusted the value-added tax on used cars and promoted the "cross-provincial handling" of used car transfer registration to simplify the process of buying cars in different places. Many policy supports have also promoted the development of this market, which has also provided more opportunities for dealers with used car business.

Although the survey results of the report show that the overall operating level of dealers has improved significantly, the domestic auto market has entered a new normal of "inventory", and auto dealers are also facing challenges due to the repeated outbreaks of the epidemic and chip shortages. Lang Xuehong said: "Looking back on 2021, multiple factors such as repeated local outbreaks and untimely vehicle supply due to chip shortages have disrupted the sales rhythm and increased the difficulty for dealers to cope with market changes. At the same time, the high cost of acquiring customers and the reduction in customer flow are the core pain points for dealers."

Many dealers said that factors such as reduced supply and increased customer acquisition costs are affecting the conversion of potential customers. In addition, the high rate of after-sales customer churn and the reduced number of accident vehicles entering the store for repair are also challenges that must be faced. In addition, the rapid development of the new energy market, the rise of new power brands, and the substantial growth in sales of new energy passenger vehicles have had a great impact on the fuel vehicle dealer group.

In this regard, the relevant person in charge of the Circulation Association said that in the survey, many dealers mentioned that they hope that manufacturers can appropriately adjust their business policies, increase the publicity of brands and products, and help dealers stabilize their operations. In particular, in the face of many uncertainties in the automobile market in recent years, they hope that manufacturers can respond quickly and take favorable measures to help dealers improve their profitability.