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After a series of self-rescue measures, China Guanghui Auto, the country's largest automobile dealer group, ultimately failed to resist the risk of delisting.

On the evening of July 21, the company announced that it had received the "Preliminary Notice on the Proposed Termination of Listing of Guanghui Automotive Service Group Co., Ltd.'s Stocks and Convertible Bonds" issued by the Shanghai Stock Exchange. The daily closing price of the company's stock has been below 1 yuan for 20 consecutive trading days, and the company's stock and convertible bonds have reached the conditions for delisting. The Shanghai Stock Exchange will make a decision to delist the company's stock and convertible bonds.

"We can't even pay our customers in June, but customers still want more discounts," said Xiao Jie, a sales manager at a Guanghui Auto luxury brand dealership in South China. During the four hours that the First Financial reporter stayed at the scene, there were very few customers who came to the store to look at cars. The many sales staff sitting at the counter behind Xiao Jie were busy searching for job openings for new energy vehicle sales positions.

In recent days, Guanghui Auto has attracted intensive attention from the market due to many news such as wage arrears, difficulty for car owners to pick up their cars, closing price below 1 yuan, and change of control. Xiao Jie told reporters that in the era when luxury fuel vehicles such as BBA (Mercedes-Benz, BMW, Audi) had not yet encountered new energy vehicles, Guanghui Auto could make money "lying down", but starting from 2022, the days of "lying down and winning" for dealers operating luxury fuel brands and joint venture fuel brands are gone forever.

At the end of 2023, FAW Toyota reduced dealer inventory by reducing production, which sent a signal to the industry that the previously strong joint venture brands are facing market challenges. In 2024, the price war became more intense, and it spread to the first-tier luxury car sector. Porsche was bought for more than 400,000 yuan, and the terminal price of luxury brand mid-size cars fell below 200,000 yuan, which was a phenomenon that had never occurred in the automotive industry.

"There is no bottom line for price cuts, and cars are being sold at low prices." Wang Jia, a management member of a car company, told the First Financial reporter that the domestic car market is already a bloodbath, especially at this time when the main manufacturers of weak brands are suffering from heavy losses and debt risks, which is a time bomb for dealers.

According to a survey report by the China Automobile Dealers Association, 43.5% of dealers will suffer losses in 2023, while only 37.6% will make profits. In the first half of this year, only 18.4% of dealers completed their sales targets, 34.8% of dealers completed more than 80% of their targets, and 13.5% of dealers completed less than 50%.

"Currently, inventory is not a serious problem. The biggest problem is the security of the capital chain. The main reason is that the prices of new cars are seriously inverted, and cars are sold at a loss. Many dealers have negative cash flow." Lang Xuehong, deputy secretary-general of the China Automobile Dealers Association, told China Business News.

Thunderstorms

China Guanghui Auto’s impending delisting is a microcosm of the operational crisis facing Chinese auto dealers.

At the beginning of this year, Guangdong's long-established dealer group Yongao Investment Group encountered an operational crisis, and Jiangsu Yancheng Senfeng Group has also recently fallen into trouble. In addition to owing employees wages for many months, some car owners reported that they had not been able to register their new cars after receiving them at Senfeng Group's dealer stores in June because the car's certificate of conformity was mortgaged to the bank for a loan by the dealer group. At present, the Wenjie Experience Center of Senfeng International Auto City has been taken over by investors in Yangzhou.

A person from the Yancheng Chengde Automotive After-sales Department of Senfeng Group previously stated that the current vehicle sales are basically flat, with about 60 vehicles sold each month since 2023. Except for some electric vehicles that can make a profit, the sales of gasoline vehicles are basically loss-making. Since the outbreak, the company has lost about 5,000 yuan for each vehicle sold, but the wages and commissions of 60 employees are paid normally, and the company's operating costs are about 1 million yuan each month. Because of the large number of car owners and company employees, the company is not considering closing stores at this stage.

Guanghui Auto, Yongao Group, and Senfeng Group were once dominant players in their respective industries, but after dramatic changes in the industry, they were like dinosaurs encountering the Ice Age.

Since 2018, the automobile market has entered a slow growth phase, and the competition in the stock era has become more intense. Most OEMs have over-optimistically estimated the market development and expanded production capacity and channels. Some automobile projects were blindly launched, and the excess automobile production capacity was gradually transmitted to the terminal. The excess brand channels raised the operating risks of dealers. Pangda Automobile, once the "first stock of automobile dealers", began to go downhill from this period until it was delisted in 2023. On the other hand, the fuel vehicle market has continued to shrink, the penetration rate of the new energy market has risen rapidly, the market structure has been reshaped, and the market share of some brands has shrunk rapidly. Dealer groups that have not made structural adjustments in time face huge challenges.

For many years, Guanghui Auto has been the largest dealer group in China. Guanghui Auto started with mainstream joint venture brands such as Toyota, Honda, GM, and Volkswagen. During the period of rapid development of the auto market, operating joint venture brands once made Guanghui Auto a fortune. Against the backdrop of the shrinking market of fuel vehicles, the market share of joint venture brands has continued to shrink. In the first half of this year, the market share of mainstream joint venture brands was only 27.2%, and the sales of brands such as Toyota, Honda, and GM in the first half of the year all fell by double digits year-on-year. In 2023, Guanghui Auto closed at least 50 4S stores, but its performance in the first quarter of 2024 still saw a decline in both revenue and net profit, with liabilities as high as 69.254 billion yuan.

The more intense price war in the auto market this year has exacerbated the operating crisis of dealers. BYD took the lead in price cuts at the beginning of the year, and the price war has spread since then. Both the brand scope and intensity are greater than in 2023. Joint venture brand B-class car products are sold at the price of A-class cars, even down to less than 150,000 yuan. Some luxury brand products are often discounted by more than 100,000 yuan, and the price of second-tier luxury terminals has dropped to the price range of mainstream joint venture brands.

The All-China Federation of Industry and Commerce Automobile Dealers Chamber of Commerce conducted a survey on price inversion and rebate issues on 27 brands. The result showed that among the models with the most serious price inversions of all surveyed brands in 2023, the average price inversion ratio was 23.05%. This figure rose to 26.26% in the first quarter of 2024.

Many traditional fuel car dealers expressed "helplessness and compulsion" when talking about the price wars that have occurred one after another in recent years. Li Dong, a Porsche dealer, told reporters that dealers have been under pressure from Porsche to keep inventory. "If you don't deliver enough cars as agreed, Porsche will use various methods to clamp down on dealers, such as reducing subsidies, slowing down the delivery of popular models, or giving priority to "obedient" stores with good relationships, etc."

In May this year, Porsche was collectively protested and boycotted by many dealers, including demands for no cars and refund of subsidies, among which Li Dong was one of the "resisting" dealers. Li Dong told reporters that because the cars were not selling well and the inventory was piling up, dealers often adopted the simplest and most effective way of price reduction to clear the inventory, especially in the face of the pressure of price war in the auto market, the discounts of fuel car dealers would only increase.

"Even if we are unwilling to lower prices, more brands are willing to do so, and consumers will naturally be poached by other brands, so we can only follow the trend, even if it means losing the dealers' own profits." Li Dong said that in the current market environment of price wars, luxury fuel vehicle brands such as BBA and Porsche often cut prices by 100,000 yuan, and the direct losses are also the dealers' profits.

Structural changes

As Li Dong said, the substantial loosening of terminal prices of first-tier luxury brands is one of the most obvious changes in the auto market this year. In the first half of this year, OEMs such as BMW and Mercedes-Benz provided large subsidies to dealers in various ways. In order to achieve sales targets, dealers turned around and invested part of the subsidies in price wars, making the terminal prices of first-tier luxury brand products unprecedentedly "low".

"The cost advantage of new energy vehicles is much higher than that of fuel vehicles. In addition, favorable policies for new energy vehicles continue to emerge. In recent years, domestic brands of new energy vehicles have launched a price war, and many customers are attracted by domestic brands of new energy vehicles." Xiao Jie said that in the face of the offensive of new energy vehicles, fuel vehicle dealers can only be forced to join the price war and adjust selling prices. At present, the bare car price of Audi A4L in the store has dropped to the 180,000 yuan range. Sales in June have rebounded compared with previous months, but monthly sales do not exceed 80 vehicles.

Shen Jinjun, president of the China Automobile Dealers Association, said that luxury brand dealers are beginning to suffer losses on a large scale. "Some cars are even discounted by 50%, which is terrible."

According to official data, in the first half of this year, both BMW and Mercedes-Benz showed a downward trend in China, and Porsche's decline was as high as 33%. "Luxury brands are also facing huge challenges in their operations. New brands have a more obvious substitution effect on traditional luxury brands, and consumers can spend less money to buy products with more complete functions. At present, consumers are more rational and are no longer willing to pay for excessive brand premiums, which has caused an impact on luxury brands." Lang Xuehong told reporters.

Cui Dongshu, secretary general of the China Passenger Car Association, said in a statement that in recent years, the average transaction price of the automobile market has been increasing. This price increase is mainly due to the higher prices of hybrid and extended-range electric vehicles, which has formed a structural price pull in the market. At the same time, as fuel vehicles in major markets gradually deviate from the mainstream, fuel vehicles gradually begin to differentiate into the high-end market, and traditional fuel vehicles also show a general increase in sales prices. Its high-end trend has also significantly pushed up the average selling price level.

In addition, the continued shrinkage of the entry-level market has become one of the key factors driving the increase in average prices. This shrinkage is mainly due to the lack of purchasing power of grassroots consumers, coupled with the continued wait-and-see attitude. This means that even if the price war in this market segment is fierce, it is difficult to significantly increase sales, and it is already difficult to maintain stability.

The "2023-2024 China Automobile Distribution Industry Development Report" shows that in 2023, the growth rate of 4S stores slowed down. As of the end of the year, the number of 4S stores nationwide was 34,000, with a growth rate of 0.6%, which was basically the same as in 2022. Among them, the growth rate of the number of fuel vehicle channels was -2.7%, and only the number of new energy vehicle channels increased by 17.2%.

In the past three years, the share of domestic brands' 4S network has continued to grow, and by the end of 2023, the share has exceeded 60%; at the same time, the share of joint venture brands has shrunk, and luxury brands have remained relatively stable. Among the stores that have withdrawn from the network, domestic brands account for a large proportion, mainly because some brands have optimized their networks, and new car manufacturers such as WM Motor have withdrawn; followed by joint venture brands, which have shrunk their networks across the board.

In June, the news that BYD's two sub-brands, Denza and Fangchengbao, were recruiting dealers for the first time caught Li Dong's attention. Although he was also worried about the risk of being overstocked by manufacturers, Li Dong still wanted to give it a try. "Instead of being forced to withdraw from the network in the end, it is better to take the initiative to switch to new energy vehicles earlier. Denza and Fangchengbao brands are not cheap, so you can also consider them." Li Dong said that many of his friends who work as fuel vehicle brand dealers have chosen to withdraw from the network or switch to new energy vehicles.

Wang Wei, who used to run a Volvo store in Zhongshan, chose to withdraw from the network in early 2023 due to poor management. "The original business of running a dealer step by step is not feasible. Now I have not paid off the overdue wages of employees. I am fighting a lawsuit and considering selling land to repay debts." Wang Wei told reporters that there are many dealers like him who have withdrawn from the operation of luxury fuel brands. A small number of dealers have turned to joint venture brands such as GAC Toyota, and a larger number of dealers have turned to independent new energy brands.

Data from the China Automobile Dealers Association also shows that in 2023, the top 100 dealers opened a total of 555 stores, of which new energy brands accounted for 60%, and their partners were mainly independent new energy brands such as BYD and GAC Aion. At the same time, 333 stores were closed, most of which were mainstream joint venture brands.

After the contract with Volvo was terminated, Wang Wei opened a new store for its own new energy brand. Although the work intensity was greater than before, the store's sales performance was better than the previous Volvo store. "The sales of new energy vehicles in the store are increasing, and the employees are more motivated. Some of my former colleagues in the Volvo store also followed me to the new energy vehicle industry. Although they have to work overtime, everyone feels that there is hope," said Wang Wei.

Difficult transformation

Recently, a dealer investor in Wuhan had the idea of ​​switching to new energy. He plans to build a new energy vehicle city and invite multiple brands to settle in.

The shrinking market share of fuel vehicles is inevitable. It is difficult for dealers to compete in a shrinking stock market, and switching to new energy seems to be the only way out.

Dealers operating new energy vehicle brands are mainly divided into two categories. One category is dealers operating brands such as BYD and Nezha. Similar to the traditional distribution model, they still bear sales tasks and inventory pressure, but at the same time, after-sales and other businesses can also bring them profits; the other category is dealers who operate supermarkets under the agency system, and their profits mainly come from commissions.

"Different brands have different commissions, which are mainly composed of basic commissions and step-by-step bonus commissions. Basic commissions are usually between 2% and 4%. As sales increase, step-by-step bonus commissions will increase. For example, when sales reach a certain amount, the commission ratio will increase. In addition, different models have differentiated commissions. For example, some models may have additional promotional incentives. Overall, a 200,000 yuan car can bring in about 10,000 yuan in commissions, with a gross profit margin of about 5% to 6%. Dealers can also obtain comprehensive gross profits through insurance, loans, etc. If managed properly, the comprehensive gross profit can reach 8% to 10%." New energy vehicle expert An Yang told reporters.

Wang Wei said that although the rebate commissions of independent new energy brands are less than those of luxury fuel brands, and the profit margin is compressed, he believes that "small profits but quick turnover" means that even if the rebate profit of a new energy vehicle is low, it can be made up by the volume, not to mention that the rebate commissions given by luxury fuel brands have been discounted and are not as good as before.

In addition to the rebate commissions from car companies, another major source of profit for dealers is the business of high-quality products and maintenance services, among which the body repair and painting business has become the main focus of this type of business. "The after-sales of new energy vehicles do not have many maintenance contents like fuel vehicles. According to the data from our stores, new energy vehicles basically only have one major maintenance a year, including tire replacement, air conditioning filter replacement, etc., and the profit that dealers can obtain does not exceed 5,000 yuan. Under normal circumstances, the maintenance of new energy vehicles can be basically ignored." The person in charge of a GAC ​​Aion dealer told reporters that although the profits brought by the after-sales maintenance services of new energy vehicles are negligible, maintenance businesses such as body repair and painting still have room for growth. The person in charge said: "Whether it is a fuel vehicle or a new energy vehicle, 55% of the vehicles in the maintenance business need body repair and painting, and body repair and painting can bring a profit margin of more than 40%."

The reporter learned that under normal circumstances, it takes a long time to acquire a new brand. It takes about a year from early communication with the OEM to store site selection and formal operation. It is difficult to increase sales in the early stage of new store operation, especially in non-core automobile business circles. The operation cycle takes half a year to a year to enter a virtuous cycle. These dealer groups that have gone bankrupt are also trying to transform continuously. Take Guanghui Auto as an example. As of the end of 2023, Guanghui Auto has successfully applied for authorization for 54 new energy stores, built and put into operation 26 stores, and is applying for 15 stores.

On the other hand, although there are many brands in the new energy vehicle market, the differentiation phenomenon is also quite obvious. New energy brands with low operating voice are also facing the risk of delisting.

It is worth noting that this year, Ideal Auto was rumored to have registered a large number of vehicles and exported them as nearly new cars in order to falsify sales. Although the official has refuted the rumor, it is an indisputable fact that the current auto market is under great pressure.

An industry insider told reporters that direct-sale stores do not have inventory pressure in the traditional sense, but front-line sales staff may create false orders by cooperating with used car dealers or auto trade companies to increase sales and commissions, which actually increases internal pressure. Xiaopeng Motors has also been reported to have asked dealers to reserve inventory. Odyssey Consulting believes that Xiaopeng's move is to use inventory as a tool to drive dealers to sell cars, and at the same time, it can also alleviate Xiaopeng's cash flow pressure to a certain extent.

The wave of quitting the Internet is coming

"Dealer groups use loans of three to five years to invest in a business that will take 10 or even 15 years to recoup the cost. In a rapidly developing auto market, they can pay the interest on investment and financing. The auto market began to grow slowly after 2018, but some dealers optimistically predicted the development of the auto market at the time. Now the growth rate of automobiles has slowed down. Some dealer groups have an oversupply of fuel vehicle brands and a shortage of new energy brands, resulting in a decline in profits, excessive financial costs, and ultimately a break in the capital chain." Anyang told reporters that the fundamental reason for the capital rupture is short-term loans and long-term investments, which will lead to continued bankruptcies in the next three years, or selling some stores for survival will also become a common phenomenon.

In order to encourage dealers to carry higher inventories, OEMs usually offer preferential policies such as interest subsidies, rebates, and discounts to attract dealers. In the context of fierce market competition, dealers with high inventories are prone to business crises. "Due to market and product competitiveness factors, a relatively weak brand may not be able to sell its cars even at a very low discount. Dealers with high inventories will have higher and higher capital costs, which will eventually lead to a break in the capital chain," said Wang Jia.

Dealers that mainly deal in fuel vehicles can make considerable profits from their after-sales business, but some dealers still cannot cover the high financing costs. A long-established store has at least 3,000 after-sales customers. According to a mid-range joint venture brand, each person can contribute 1,500 yuan in after-sales business, and the monthly after-sales output value is about 4.5 million yuan, with a net profit of at least 900,000 yuan. If accident vehicles are included, the profit will be even higher, with a yearly after-sales profit of 10 million yuan. For a store that has been open for three to five years, the after-sales output value is more than 2 million yuan per month. Even if it loses money selling new cars, the after-sales business is enough to support a store after considering the manufacturer's rebate at the end of the year.

"I'm afraid the cars won't sell well and the after-sales service will be poor. The inventory backlog will take up high financial costs and the capital chain will eventually break," said Anyang.

Especially for small and medium-sized dealer groups, unlike large-scale dealer groups that own 4S stores of different automobile brands such as independent, joint venture, and luxury, they are limited by factors such as funds. They often operate multiple sub-brands under the same main manufacturer. Therefore, they face higher risks and signs of systemic crisis have emerged.

"A few years ago, dealers were unable to complete the assessment of the OEM's sales tasks, and their authorization was terminated and they withdrew from the network. The situation is now very different. Due to the serious losses of the brands they operate, dealers have taken the initiative to choose to withdraw from the network." Anyang told reporters that 4S stores usually choose to withdraw from the network when they are not profitable or are not doing well. In addition to the serious losses of the brands they operate, there are three most common reasons for dealers to withdraw from the network. One is to change brands, such as obtaining authorization for new energy brands. The second is that the heirs of the dealer boss are unwilling to continue to operate the automobile business. The third is that the dealer is not doing well and closes the store after a thunderstorm incident. Dealers who withdraw from the network suffer great losses, mainly including the loss of the original brand customer group, which affects the after-sales output value. Withdrawal from the network will also involve manufacturer deposits, store decoration costs, employee compensation, and the handling of inventory vehicles and parts, which will cause high economic losses.

In recent years, the number of new and withdrawn 4S stores has been basically the same. According to data from the China Automobile Dealers Association, from 2020 to 2023, more than 8,000 4S stores in the Chinese auto market will withdraw from the network, and it is expected that the number of withdrawals will exceed 2,000 this year. As a result, the number of auto dealers withdrawing from the network in the past five years will exceed 10,000. Among the 3,273 outlets that will withdraw from the network in 2023, independent brands account for a large proportion. For example, BEIJING, Haval, Wei Brand, Changan Oushang, Dongfeng Fengxing, etc. have carried out network optimization, and the Weimar brand has withdrawn from the market. At the same time, the market share of joint venture brands has shrunk across the board. Mainstream joint venture brands such as FAW-Volkswagen have adjusted their channel strategies. The sales of joint venture brands such as GM, Honda, Toyota, Hyundai, and Kia have shrunk significantly, which has also brought about a significant reduction in the corresponding brand dealer data.

Structural changes in the market and dealer groups have also led to staff turnover. Lang Xuehong told reporters that in recent years, the staff turnover problem in 4S stores has been quite serious, which has caused talent loss. Many stores hire new people who lack professionalism in sales and after-sales services. At the same time, dealers still optimize their staff in order to reduce costs. In terms of staff sales efficiency, mature auto markets such as Europe are two to three times that of the Chinese market, and there is still a lot of room for improvement in staff efficiency.

"As early as the beginning of the epidemic, some dealers with poor performance or small and medium-sized groups began to reduce staff to reduce labor costs. At the same time, some outstanding sales managers and consultants turned to new energy brands. Now most 4S stores have the most streamlined staffing." Anyang told reporters.

He believes that the number of dealers will undergo a significant change in the future: a reduction of several thousand. First, the disappearance of weak brands will lead to a reduction in the number of outlets, and second, poor operation will wash out some dealers.

Anyang said that the past three to five years have been an important transformation period for auto dealers, and turbulence will become the norm during this period. When competition among auto brands is relatively stable, the situation of dealers will tend to stabilize.

(At the request of the interviewees, Xiao Jie, Li Jia, Wang Wei and Li Dong are pseudonyms in this article)