Auto Dealers' Financial Crisis and Closure Risks

On September 23rd, the China Automobile Dealers Association (hereinafter referred to as ‘the Association’) submitted an official report to the government departments titled ‘Urgent Report on the Current Situation of Auto Dealers Facing Financial Difficulties and Risks of Closure’ (hereinafter referred to as ‘the Report’). The Report analyzes the widespread issue of auto dealers facing financial strain leading to an increased risk of closure and proposes related policy recommendations. It timely reflects the urgent and pressing issues faced by auto dealers and provides an effective basis for government decision-making.
The Report mentions that currently, auto dealers are experiencing significant losses in new car sales, with a general situation of cash flow deficits and an exacerbated risk of supply chain disruptions, making it difficult to escape the survival dilemma. The Association stated that the two main issues faced at this stage are, first, the dual pressures of weak consumption and factory wholesale volumes, leading to high dealer inventory levels.

To reduce financial pressure and financing costs, dealers are forced to sell at low prices for survival; second, the ‘price war’ has led to a severe situation of purchase and sale reversal, with dealers losing more the more they sell, while also facing the pressure of financing maturity and fulfillment difficulties, leading to a sharp increase in the risk of operating cash flow and supply chain disruption.

At the beginning of this year, the domestic car market initiated a price ‘hot war’, which lasted longer and involved more models than last year. According to statistics, in the first eight months of this year, the total number of domestic market price reduction brand models was 173, exceeding the total number of price reduction models last year. The Association disclosed that it has received a large number of member companies reflecting that the intense changes in the automobile market brought about by the continuous ‘price war’ and other factors have plunged auto dealers into a quagmire, facing an outstanding problem of extremely tight capital liquidity. At present, the time that dealers’ existing working capital can be maintained has been compressed to the limit.

The ‘Market Pulse’ monitoring data released by the Association shows that as of August this year, the highest data of purchase and sale reversal for dealers has reached -22.8%. In addition, according to the relevant data analysis by experts of the Association, in the first eight months of this year, the ‘price war’ caused a cumulative loss of 138 billion yuan in the overall retail of the new car market.

Among them, the overall discount rate of the new car market this year has reached 17.4%. Yan Jinghui, a member of the Expert Committee of the Association, believes that the fierce market competition and frequent ‘price wars’, car companies and dealers compete for the market through price promotion means to achieve sales targets. The ‘quantity for price’ strategy also makes manufacturers and dealers have to face the severe challenge of declining profit levels.

In fact, since the beginning of this year, auto dealers have frequently ‘exploded’, including Guanghui Auto, Yongao Investment Group, and Senfeng Group, all of which have been exposed to operational difficulties. In May this year, Porsche also encountered collective protests and boycotts from multiple dealers, including demands for not taking delivery of cars and returning subsidies.

The report highlights that the primary cause of ‘explosions’ is mostly related to liquidity issues, rather than the direct operations of dealers. The rupture of the capital chain ultimately leads to the halt of businesses. The Circulation Association believes that the automotive distribution industry is capital-intensive and has a high proportion of private enterprises. Financial stability is crucial for the vitality of circulation.

Further improving the financial service’s guarantee for circulation, especially increasing financial support for the development of private dealers, is of great significance for expanding automobile consumption, upgrading the automotive industry, and constructing a ‘dual circulation’ new development pattern. Therefore, the Circulation Association calls on government departments to pay close attention to the current financial difficulties and shutdown risks in the automotive distribution field, and to decisively adopt phased financial relief policies and measures to effectively prevent systemic risks in the automotive distribution field.

‘We urgently request the relevant departments to take action as soon as possible and study the introduction of phased financial relief policies and measures in the automotive distribution field.’ The Circulation Association stated that measures should include the relevant departments organizing special research on the financial environment of the automotive distribution field as soon as possible, sorting out the financial needs of the top 100 automotive dealer groups, regional leading dealer groups, and small and medium-sized automotive dealers, and studying and formulating financing support policies for the automotive distribution field.

This would guide financial institutions to increase support for the automotive distribution field under the premise of legal compliance and controllable risks, thereby further enhancing the function of financial services for circulation. In addition, financial institutions and automotive dealers should jointly promote the stability of the automotive market, not to withdraw, cut off, or suppress existing loans, allowing flexible ways for extension and continuation, and gradually increasing the credit limits for dealers, expanding the scope of loan use, and encouraging policy banks to establish special credit policies for automotive dealers.

Urgent Report on Auto Dealers’ Financial Struggles and Closure Risks

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