China Proposes Overhaul of Car-Sales Regulations – Wall Street Journal

Posted: Thursday, January 07, 2016

Buicks are assembled at a GM plant in China in January 2015.

SHANGHAI—China moved to allow automobile dealers more leeway to acquire new cars, steps that would weaken the power of car makers to decide who can sell their cars and at what price in the world’s largest vehicle market.

In drafted rules published on Wednesday, the Ministry of Commerce proposed to permit dealers to sell domestically made branded cars without permission from manufacturers and would prohibit auto makers from imposing sales targets on authorized dealers.

The ministry’s proposal also would require dealer contracts with manufacturers to run for at least three years. Currently auto makers usually sign yearly contracts with their dealers, which dealers say puts them at a disadvantage.

The rules would also bar auto manufacturers from forbidding dealers from selling car parts to each other, and ban forced selling of insurance to consumers. The draft rules are open for public comment through Feb. 6.

The move represents China’s latest step toward shaking up its auto industry at a time when sales growth has slipped and competition has intensified.

Analysts say the rules could pose a greater challenge for global auto makers’ profit in the country. China’s rapid economic gains have been a boom for international auto makers.

It is a “breakthrough” to shatter auto makers’ monopoly over car sales, said Li Yanwei, an analyst at China Automobile Dealers Association, an industry group comprising more than 22,000 dealers.

The current legal framework, which has been in place since 2005, requires dealers to get permission from auto makers to legally sell their cars.

The framework has effectively allowed auto makers in China to dictate the prices that their dealers pay for new cars and branded replacement parts, say dealers. New-car sellers here earn scant margins on new-vehicle sales, a change from the past, and some say they now are selling vehicles at losses. Car makers have provided subsidies to cover those losses.

“At present, wholesale car prices are usually higher than retail prices, and the losses are mostly undertaken by dealers,” said the dealer association’s Mr. Li. “Once the new rules take effect, dealers can sell cars to each other, circumventing the manufacturers,” he said.

In October, wholesale shipments to dealers were 11% greater than new cars registered that month. In November, they were 8% more, according to research firm Sanford C. Bernstein. More inventory means dealers will likely have to discount cars.

China has more dealerships than the U.S. after years of furious expansion. China had over 26,000 dealers at the end of 2014, 60% more than the U.S. market, the research firm said.

“We’re convinced that the dealer networks in China are too dense, too fragile, and will act as a catalyst for declining pricing and profitability in the industry,” Bernstein analyst Robin Zhu said in a recent note.

China passenger-vehicle sales registered a roughly 6% gain in the first 11 months of 2015, compared with a 9.2% year-to-year rise in the year-earlier period and booming double-digit percentage growth in prior years.

In October, China slashed a purchase tax on small-engine cars to lift the car market, which had fallen into a recession as a worse-than-expected economic downturn and plummeting stock prices scared off buyers.

Chinese officials have accused foreign car makers of earning exorbitant profits by dominating the market and controlling the sale of auto parts. In 2014 China’s top economic planner, the National Development and Reform Commission, began an investigation into foreign car makers’ parts pricing. The investigation led to a $46 million fine on Audi


and Chrysler, and prompted car makers including Volkswagen AG


and General Motors Co.


to cut prices on new cars and auto-parts.

Car prices in China are high by international standards, even as the country’s economy is growing at its slowest pace in 25 years. As of November, the same midsize sedan and big sport-utility vehicle were pricier in China than in the U.S., according to car makers’ websites. For example, an Audi A6 sedan with a 2.0-liter engine is priced at least 400,000 yuan ($61,255) in China, compared with $50,000 in the U.S.

The drafted rules issued on Wednesday said auto manufacturers can’t forbid dealers from selling car parts to each other, and ban forced selling of insurance to consumers.


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