It goes without saying that if one country is on top of the EV game right now, it’s China. Unsurprisingly, Chinese consumers have been flocking to homegrown EVs, and this has caused a crisis for European luxury car dealers in China that automakers are trying to mitigate. Amid changing industry tides, Automotive News reports that European luxury automakers are pumping hundreds of millions of Euros into their Chinese dealerships just in the hopes of keeping retail networks afloat.
BMW said it spent “three-digit-million” euros to subsidize its retail network in China, and Mercedes-Benz and JLR also say they have financially supported dealers there.
“There’s been very large discounting of vehicles and overstocking at retailers, and this has led to a series of collapses in the retail networks over in China,” Richard Molyneux, CFO at JLR, told analysts on the company’s earnings call Nov. 8.
Indeed, the situation is quite severe, as Automotive News reports that 2,000 dealerships in China are expected to close next year. While this might just sound like reduced competition for the dealers that remain successful, the knock-on effects from mass dealership closures could put additional pressure on those that haven’t.
See, dealerships almost never buy their stock of new vehicles with cash. Instead, they rely on floor plan financing, short-term lending with vehicles as collateral, and grace periods to sell new vehicles purchased without incurring any interest on them. Think of it like a revolving line of credit. The more dealerships that close, the riskier floor plan financing seems as a product for lenders to offer, meaning it could be harder to maintain for successful dealerships.
So, if all of this comes on the back of declining sales figures, how much of a slide are we looking at? Well, Automotive News reports double-digit sales declines for many European luxury automakers in China, with some serious margin reductions to boot.
BMW’s third-quarter China deliveries slid 30 percent to 147,839 compared with the same period in 2023, while its overall profit margin during the latest three months slid to 2.6 percent from 10.9 percent the previous three months. BMW blamed lower consumer confidence in China as well as a recall of vehicles with a potentially faulty brake system.
JLR’s third-quarter retail sales fell 17 percent in China to 22,785, contributing partly to a decline in its profit margin to 5.1 percent from 8.9 percent the month before. “What concerns me the most is China,” Molyneux said.
Mercedes’ third-quarter margin fell to 5.7 percent from 10.3 percent during the same quarter the year before. Almost half of that decline came from “the effects of BEV stock clearing and dealer support in China,” CFO Harald Wilhelm said on the company’s earnings call Oct. 25.
It’s worth noting that even at those volumes, Chinese sales usually vastly outstrip U.S. sales. After all, BMW Group sold 83,412 vehicles in America during Q3, which is nowhere near the 147,839 deliveries made in China during that same period. It’s a similar deal with Mercedes-Benz, with the group delivering 276,025 vehicles in America through the first nine months of 2023 compared to 512,200 in China. On the other hand, the United States was actually a larger market for Jaguar Land Rover than China during the last quarter, with 30,669 deliveries. This might seem like a weird question to pose, but could more European luxury automakers end up like Jaguar Land Rover? Perhaps.
With China’s intense subsidization of homegrown EVs, the market has shifted to the point where European luxury automakers just don’t seem to be fulfilling the Chinese market’s desires as they previously did. It also doesn’t help that many premium European EVs appear uncompetitive in this space, not offering quite the same mixture of slick in-car tech, range, and pricing as Chinese premium EVs like the Nio ET7 and Xiaomi SU7. Sure, performance-focused models like the Porsche Taycan have some advantages over their Chinese competitors, such as being fit for high-performance braking, but that doesn’t matter to most people because most people aren’t driving in that manner. Instead, price wars and advances in technology mean that Chinese luxury EVs are highly competitive and usually cheaper than their European competition, forcing deep discounting from European automakers.
At the same time, it’s hard to see major Western markets embracing Chinese luxury EVs in the medium term. Let’s start with consumer perception. A July 2023 Statista study with 9,400 European participants across nine countries asked a simple question — “Do you have a good or poor opinion of cars of brands from China?” While the percentage of respondents with a good opinion of Chinese cars is considerable, it was a minority for respondents from every country save for Portugal, which reached equilibrium. On the other end of the spectrum, only 39 percent of French respondents had a positive opinion of Chinese cars, indicating that there’s still a long way to go. Add in regulatory pressures such as tariffs and America’s proposal to ban automotive software and hardware from “countries of concern” including China, and the playing field in the West could favor Western automakers for quite some time.
The bottom line is that China is still a big market for European luxury automakers, but this dealership crisis suggests that it might not be one they can rely on forever. With the slump over there, other major markets like America and Europe become more critical for financial success, and in an extreme case, this could result in almost a return to old paradigms. If there’s one constant in this world, it’s change, and with the Chinese car market continuing to diverge from what we’re used to in the West, expect more change to come.
(Photo credits: BMW, Mercedes-Benz, Nio, Land Rover)
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Based on my visit to Chengdu this past summer:
我的两毛钱
All of us are suffering from the repercussions of European manufacturers catering to the Chinese market. Maybe they should just stop and try to make normal cars again since they won’t ever be able to compete when Winnie The Pooh is stacking the deck anyway?
Admitting they are retreating from China would presumably come with a big hit to their stock price, though.
Staying should come with a big hit. The problem of compelling domestic offerings at prices that undercut the Euro brands isn’t going away. Unless that can somehow make the products cheaper than the Chinese alternatives the trend will get worse and profits will go negative. I guess there aren’t any brands ready for that conversation yet but I suspect within the next 3-5 years you’ll see some big brands start to pull out of China after posting some large losses.
I agree with you, I am just figuring this must by why they aren’t biting the bullet.
That’s the explanation I’ve seen for BMW’s new designs, catering to the Chinese market. How are these new designs perceived in China, I wonder?
I’m curious because from the outward appearance, I like the designs of recent Chinese cars and on quick glance, they share very few design motifs of the recent BMWs and Mercs. I’m referring to their big grills, fake grills, simple shapes (see Merc EQS above).
Chinese has fewer dynastic rich and their nouveau riche want to signal their wealth. with European brand symbols like giant in-your-face BMW grills. But, the Chinese middle class is maturing and they just want a nice quality car at a good price like everyone else.