On November 26, Caijing News reported (journalist Xu Hao) that three 4S stores under Tianjin Yonghao Group suddenly closed, the world's first 5S store, Xingdebiao, also closed, and Guangdong auto dealer Yongao Investment Group suffered a 'blowout'... As the penetration rate of new energy vehicles continues to rise and the ongoing 'price war' in the automotive market persists, the traditional 4S store model is facing huge impacts from industry changes.

Lang Xuehong, Deputy Secretary-General of the China Automobile Dealers Association, recently estimated that 'this year the authorized model of 4S stores is facing a wave of exits, with the total number expected to reach 4,000 for the year, and the second half will exceed the first half (about 1,500).'

'In addition to being forced to close, some large group dealers have begun to proactively transform traditional 4S stores into new energy vehicle brand stores.' On November 25, a luxury brand dealer told Caijing News.

'The price war has led to serious inversion of procurement and sales.'

Data from the China Automobile Dealers Association indicates that from 2020 to 2023, more than 8,000 auto 4S stores have closed nationwide, with an average annual exit volume of over 2,600.

'With the rapid development of new energy vehicles and the ongoing impact of the price war, traditional manufacturers and dealers are facing unprecedented difficulties, market risks are rising, competition is intensifying, and large-scale losses are already seen across the industry,' said Wang Du, Vice President of the China Automobile Dealers Association, at the 2024 Automotive Finance Industry Summit held recently.

From the perspective of the profit model of traditional dealers, the services provided by auto 4S stores, such as complete vehicle sales, spare parts, after-sales service, and information feedback, have always been an important part of the traditional business model for rbob gasoline vehicles. Automakers typically wholesale vehicles to dealers, who then open channels through 4S stores for retail, thereby achieving capital flow; at the same time, annual sales targets and phased rebates are used to constrain and motivate dealers.

However, due to the impact of the 'price war', with 'high stock price when purchasing and low stock price when selling', the serious divergence between the terminal transaction price and the manufacturer's guide price has become a common phenomenon in the industry. Lang Xuehong believes that the price inversion for luxury brands generally reaches 30%, with a maximum of 50%. When the price inversion reaches 30% or 40%, dealers can no longer bear it. Although manufacturers use commission and other business policies for subsidies, the actual rebates are quite vague. Lang Xuehong stated that there have been instances of dealers 'exploding', leading financial institutions to raise the risk rating of auto dealers, resulting in a contraction or cutoff of loan business for dealer inventory financing and further exacerbating 'funding liquidity tension.'

On September 23, the China Automobile Dealers Association issued a statement indicating that recently, the association has received numerous reports from member companies reflecting that the persistent 'price war' and other factors have caused drastic changes in the automotive market, leading to extreme liquidity issues for car dealers. The association has submitted an 'Emergency Report on the Current Fund Dilemma and Shutdown Risks Faced by Auto Dealers' to relevant government departments, urgently requesting the formulation of phased financial relief policies in the automotive sales field.

'The report' mentioned two major problems currently faced: firstly, the dual pressure of weak consumer demand and manufacturer's wholesale volume keeps dealer inventory at a high level, forcing dealers to sell at low prices to reduce financial pressure and financing costs; secondly, the 'price war' has severely worsened the trade inversions, causing dealers to lose more as they sell more, while also facing difficulties in honoring financing maturities, leading to risks of cash flow interruptions in operations and potential breakage of the cash flow chain. Currently, the liquidity of existing funds for dealers has been compressed to the limit.

'When business conditions were relatively good, some dealers would invest funds in areas outside the automotive industry, such as real estate, finance, etc., but currently, the investment conditions in those areas are also quite sluggish, leading to a chain reaction.' The aforementioned luxury brand dealer noted that some dealer groups have engaged in improper investment behaviors, which in turn dragged down their automotive business.

Traditional 4S stores are shifting towards new energy.

According to data from the Passenger Car Association, as of October, the domestic retail penetration rate of electric vehicles has exceeded 50% for four consecutive months, and the automotive industry’s transition towards new energy is an undeniable fact. In the face of the current predicament, many traditional dealers have begun to actively 'embrace change.'

'This year, the number of dealers exiting the network will definitely exceed 4,000, or even surpass 10,000, but this does not mean a complete withdrawal from the automotive dealership business; instead, they are shifting towards the new energy sector.' A senior industry insider informed the reporters.

'The data disclosed by NIO's Senior Vice President Wei Jian confirms this to some extent. According to Wei Jian, more than 40 traditional luxury brand dealers have chosen to shift to NIO within the past year, including renowned global luxury brand dealers such as Porsche, Maserati, BMW, and Mercedes-Benz.'

Earlier, there were reports in the market that zhongsheng hldg secured 50 "Huawei Smart Selection Cars" authorizations, conducting store renovations in two phases, with the first batch of brands including first-tier luxury brands such as BMW, Mercedes-Benz, Audi, and Jaguar Land Rover. As a result of this news, zhongsheng hldg's stock price increased by approximately 50% over the first two trading days. On November 11, zhongsheng hldg announced that it had signed a preliminary agreement with chongqing sokon industry group stock, and both parties agreed to further discuss cooperation in distributing electric vehicles.

It has been proven that collaborating with leading electric vehicle companies is helping traditional dealers break through. As a dealer that started its electric vehicle business relatively early, yongda auto has established 36 independent new energy brand outlets, partnering with independent electric vehicle brands such as Hongmeng Zhixing, Zhida, Xiaopeng Motors, and Zhiji Motors. According to financial reports, yongda auto’s independent new energy brand maintenance revenue in the first half of 2024 was 0.12 billion yuan, a year-on-year increase of 73.2%; the average per-vehicle output value was 2,958 yuan, increasing by 19.4% year-on-year.

"Groups like yongda, which started engaging in the electric vehicle business early and have a very large scale, can indeed profit," said the luxury brand dealer.

"Regarding the market's concerns over the after-sales electric vehicle business, the per-vehicle output value for yongda's independent new energy maintenance is not much different from that of luxury brand after-sales," according to a research report by CICC. It believes that from the current survival status of luxury brand dealers, traditional luxury and joint venture brands are struggling to change their declining trends in quantity, price, and profit; the new car gross margin may have little chance for reversal; meanwhile, new energy brands are still in an upward cycle, and the competitive landscape is becoming clearer, with a relatively stable and optimistic outlook for quantity, price, and profit.

A report shared by ubs group’s head of automotive industry research in china, Gong Min, on November 25, indicated that over the past decade, joint venture automakers potentially earned about 150 billion yuan in net income annually in the chinese market, but this dropped by about one-third in 2023 and further declined nearly 50% in the first half of this year, with their profits in china under threat.

"As the penetration rate of electric vehicles and the market share of domestic brands increase, the integration of china's automotive industry has already begun," Gong Min stated.