A survey of automotive dealerships in China conducted by JD Power has found that dealers are reporting lower profits due to the ‘changing economic and regulatory environment, coupled with more products and dealerships’.

The study suggests that the profitability problems are most acute in entry-level market segments and are hitting domestic brands in particular.

JD Power surveyed 1,605 dealers of 38 different brands in 59 cities in China and said that they reported lower profits on 2011 operations, compared with 2010. The percentage of dealers reporting they were profitable in 2011 fell to 63%, compared with 81% a year ago, and 20% of dealers reported that they lost money on their operations – up from 9% in the 2011 study.

“These profit findings are troubling to more than just dealers,” said Charles Mills, vice president, global retail experience at JD Power and Associates. “Brands need dealers to continue to invest to meet their market potentials, and China customers increasingly expect more from their dealership experiences. This puts brands with lower dealer profitability at a disadvantage relative to competitors.”

JD Power also noted that overall market demand growth in China has slowed with entry-level segments hit hardest. China new vehicle sales in the first quarter of 2012 increased by just 2% from the same period last year. JD power maintains that the sluggish sales growth has affected entry-level vehicle segments more than other segments, despite a continued increase in retail gas prices in China. Fuel prices in China are now more than 20% higher than the average price in the United States.

Typically, consumers trade down to smaller, cheaper and more fuel-efficient vehicles when gas prices rise, but current China market dynamics are challenging this trend, JD Power says. 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-facing transaction prices’. By contrast, JD Power says entry-level vehicles are falling victim to the gas-price hype as consumers exhibit a greater level of price sensitivity.

The three entry-level vehicle segments – minicars, sub-compact and compact – account for 55-60% of China passenger vehicle sales, according to LMC Automotive’s China analyst, John Zeng. Sales of entry-level vehicles in the first three months of 2012 declined by 5% from the same period last year. Minicars led the deceleration among these three segments, with a 30% decline in sales versus the same three-month period in 2011. China domestic-brand sales have been strongly impacted by this situation, as has their dealerships’ profitability, JD Power says.

On average, dealerships in China currently derive 40% of their profits from new vehicle sales, a proportion significantly higher than in mature markets. As the China automotive market continues to evolve, it is expected that dealerships will gain greater profits from vehicle financing, used-vehicle sales and service and parts. These revenue streams tend to be more profitable than new-vehicle sales, enabling dealerships’ profitability to better weather any sales volatility.

The world’s largest auto market shifts gear

Currently, JD Power says that new-vehicle shoppers in China have the world’s widest range of choices, with 94 brands and 476 models from which to choose from. That compares with fewer than 40 brands and nearly 100 fewer models available in the US market, the second-largest automotive market in the world in 2011.

LMC Automotive forecasts a 9% growth in passenger vehicle sales in 2012, a much lower rate than in previous years when China’s new vehicle sales surged at double-digit rates. China’s passenger-vehicle market is expected to grow at a compounded annual rate of 12.4% during the next four years and will reach an estimated 20.9m units annually by 2015, according to LMC.

Other findings from the JD Power 2012 Dealer Attitude Study provide indicators for what dealers perceive is required for improved profitability. Greater support from automakers, in the form of marketing and incentives; continued focus on product quality; and personnel training are all areas of great importance to dealers this year. The importance of automaker support is emphasized by a finding that indicates there is a strong relationship between dealer perceptions of automakers’ performance and dealer profitability, with dealers who are “delighted” (providing a satisfaction rating of 10 on a 10-point scale) with their brand indicating they are more profitable, compared with dealers who provide lower ratings for satisfaction. The brands with the highest level of dealers who are “delighted” also tend to perform well in JD Power studies on China automotive customer satisfaction.

“Great products are critical, but are only one part of the long-term success equation. Healthy, vibrant dealerships that help differentiate products in this incredibly competitive market are also critical to protecting automotive investments,” said Mills.