BMW dealerships in China’s Guangdong Province are faced with a serious problem: they are swamped with 90 days’ worth of stock, double of what is optimal. The situation for their rivals, Mercedes-Benz, is not much better. An anonymous senior executive for a chain of Mercedes dealers said, “Our parking lots are full to the gills with unsold cars. We cannot go on like this.” International economic troubles, like the euro zone debt crisis, and domestic issues like slowing demands and the rescinding of tax and government incentives, have meant steep declines in profitability for car makers.
Car brands without domestic production capacity are the most affected. “At least the Germans locally produce some of their cars in China, and they have a cheap euro,” a Nissan executive in Tokyo said. “For us, we lose money with most products every time we make a sale.” This is likely to remain the case until Nissan begins production of some Infiniti cars in China in 2014, the executive said. Nissan recently revealed plans for a $785 million manufacturing plant to be located in Dalian.
But new cars are not going to solve the problem totally. Both Nissan and Daimler, Mercedes’ parent company, are now researching the used car business, a market that has hardly been tapped in China. According to Nissan, 60 percent of China’s new-car buyers replace their cars after three years, compared with six years for Japanese buyers. Many executives are seeing the growth potential of introducing used cars into the Chinese automobile buying cycle. “It is critical to capture those used cars ourselves and help guide customers to replace them with another Nissan car,” said Hideki Kimata, a senior sales executive for Nissan.
For the past ten years in China, auto makers and dealers have made as much as 90 percent of their profit from new car sales. In addition to used cars, areas such as financing, insurance, and maintenance must be explored for profit potential, which may make the Chinese auto market more like that of the United States.
Car sales in China attained growth of 46 percent in 2009, 32 percent in 2010, and a poor 2.5 percent in 2011. This year economic growth ranked at just 7.6 percent in the second quarter, a three-year low.