Manufacturing News

Dealers face inventory glut as growth cools

China's biggest dealership association said carmakers need to scale back their sales targets or sweeten incentives because the worsening glut of vehicles across the nation's dealerships is unsustainable.

The average vehicle inventory at Chinese dealerships rose to 60 days' supply by the end of May, compared with 45 days at the end of April, said Luo Lei, deputy secretary general of the state-backed China Automobile Dealers Association.

That's forcing dealers to deepen discounts and sell cars at a loss to meet automakers' mandatory sales targets, he said.

"Dealers can't shoulder the burden anymore," said Luo, whose association represents 2,100 dealership groups. "Their backs are broken."

Luo's warning is a contrast to the jump in sales reported by automakers including General Motors and Honda Motor Co., which only disclose wholesale vehicle sales to Chinese dealers instead of retail sales to consumers.

Wholesale passenger-vehicle deliveries rose 12 percent in May, according to analyst estimates compiled by Bloomberg, after rising more than expected for two straight months.

Auto rebound
GM doesn't share Luo's concerns. Kevin Wale, head of China operations, predicted in a May 31 interview that the country's auto industry is poised to rebound from its worst four-month slump in 14 years as consumers return to car dealerships during the second half.

"I can't see anything in the Chinese environment that's leading to an unusual decline in consumer confidence," he said.

GM said this week that vehicle sales in China rose 21 percent last month, driven by demand for its Wuling minivan and Chevrolet models. Honda reported a 92 percent surge from a disaster-affected May last year.

GM and Honda didn't immediately respond to requests for comment.

Wen Yuzhen, a spokeswoman for Honda's China joint venture with Guangzhou Automobile Group Co., could not immediately comment on the issue. Jerry Ma, a spokesman in Shanghai for Shanghai General Motors Co., did not comment.

Surging dealership inventories will lead to intense price competition, forcing out weaker dealerships that can't absorb losses, Luo said.

There were about 21,000 dealership outlets in China as of the end of 2011, compared with 16,000 the year before, according to Luo.

'Pretty dangerous'
The association said in a previous interview on May 17 that dealerships for Honda, Chery Automobile Co., BYD Co. and Geely Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts.

"Two months of inventory is pretty dangerous for the industry," Harry Chen, an analyst in Shenzhen with Guotai Junan Securities Co., said in a telephone interview. "The most direct way to digest inventory is to cut prices."

Automakers should realize the difficulties that dealerships are facing and not put too much pressure on distributors, said Luo of the association.

"The picture we have is very different from what the automakers are painting," he said. "The sales increases they're reporting are achieved by loading dealers with stock."

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