Who is the most troublesome in the sluggish car market?

Author：He Lun, IIA’s Co-Chief Content Officer, Deputy Head of IIA Academy of Auto

Automobile hot topic Q&A (Ep.207)

TEXT:

In the first half of 2019, China's auto sales fell 12.4% year-on-year. Except for Toyota, Honda, Great Wall and most luxury brands, other manufacturers have fallen more or less. The question is who is the most painful.

Q: Changan Ford's sales in the first half of the year fell 67% year-on-year, the largest drop among all manufacturers. Can we say that it is the most painful one?

A: It is really painful to suffer such a large decline. However, Changan Ford's dealer inventory has dropped from 80 days at the end of last year to the current 28 days, which is quite good. And in May, Ford's wholesale volume actually fell by 75% year-on-year, while retail sales increased by 30%. It can be seen that in order to adjust the sales rhythm and rationalize the relationship between manufacturers, Ford has indeed made a lot of effort.

Last July, Henry Li (Li Hongpeng) became the president of the newly established Ford sales service division. His task was to reduce inventory, but it still failed to bring Ford’s dealer inventory back to a reasonable level after five months. Obviously, it is because the company was not willing to make painful adjustments and only wanted to increase sales. Therefore, Henry Li had to resign at the end of last year.

The reason why Ford can make up its mind to eliminate the biggest obstacle of dealer inventory now is obviously, after Henry Li resigned, due to sales still plunged. In addition to reducing inventory at all costs, Ford has no choice. Now, the inventory reduction has already begun to bear fruit, and it can be said that the sales rebound is still very promising.

Q: Jaguar Land Rover sales fell 36% year-on-year, the biggest drop among luxury brands. What’s your comment?

A: I once said that, in the automotive industry, you can't just consider sales without considering inventory. The biggest problem with Jaguar Land Rover is also the high dealer inventory. Since the beginning of this year, its focus has also been on inventory reduction. After about half a year's adjustment, its dealer inventory factor has been reduced from more than two months at the beginning of this year to the “reasonable level” claimed by the manufacturers. The accepted inventory ratio is reasonably priced between 0.8 and 1.2. Retail sales in May and June also showed month-to-month increase. It can be said that Jaguar Land Rover has shown signs of stabilization and recovery, and the new generation of Evoque is about to hit the market, and the overall situation is expected to be further improved.

The difference between Jaguar Land Rover and Ford is that JLR’s sales have not fallen to the worst. It is still a question whether the Chinese and foreign shareholders can bear the necessary price, endure the inventory control, and adjust the dealer's business policy to make deep structural adjustments.

At the same time, unlike the Ford sales service division, Chery Jaguar Land Rover Integrated Marketing Sales and Services (IMSS) is actually a coordinating division composed of two sales departments: Chery Jaguar Land Rover (China Car) and Jaguar Land Rover China (Imported Car). At present, it is not known how much it has a voice in the common disputes between Chinese and foreign parties such as brand positioning, marketing methods, branding and sales. And if a luxury brand and its product are operated by two different teams in different systems and processes in two different systems, the result will not be too good. How to solve these problems from the organizational structure is a huge challenge for Jaguar Land Rover to face the future.

Q: Audi's sales volume increased by 2.1% in the first half, and ranked third among luxury brands. It is also possible to drop from the first of sales last year to the third place. What’s your comment?

A: Audi has been in the leading position in the Chinese luxury car market for more than 20 years. Last year, Audi still managed to keep the first position but cost a lot. This year, Audi seems to give up the goal of keeping the first. In the first half of the year, 48% of the annual sales target was completed, and the current dealer inventory ratio is 1.0, which is also within a reasonable range. It can be seen that Audi has already got rid of the fear of being surpassed by competitors to a certain extent and began to advance at his own pace. I think this is quite right. The point is to properly handle the relationship between the joint venture partners and stakeholders, rather than keeping the first place at all costs.

9 years ago, Dieter Zetsche, the then president of Daimler, answered my question in Detroit: "In the Chinese market, our recent goal is to exceed BMW in sales, and the medium- and long-term goal is to keep approaching Audi." Haste makes waste. Since then, the gap between Mercedes-Benz and the opponent has become bigger and bigger. It was not until 5 years ago that Daimler got rid of the pressure of surpassing its opponent and focused on its own path. Daimler's deep structural adjustment achieved a go-ahead. These lessons are worth learning.

In the second half of 2019, the production and sales of new models such as the Audi A6L and Q3 will also enter a peak period. The launch of high-end new products such as Audi e-tron and Q8 will also add momentum to the Audi brand. Maybe the third position will be given to the German opponent.

Q: According to the data released by China Passenger Car Association (CPCA), Geely's sales in the first half of 2019 fell by 19% year-on-year. Especially in June, sales fell 33% year-on-year. Geely claims that one of the main reasons for the sharp decline in sales is due to the active reduction in dealer inventory, resulting in a reduction in wholesale volume. But in fact, Geely's wholesale volume in June released by itself was 6,000 units more than the retail volume released by CPCA. What is your comment?

A: Although Geely is still the leader among Chinese car brands, it is also the most burdensome of all mainstream manufacturers. It is mainly because Geely's expansion is too fast in these years. According to data provided by the global automotive information platform MarkLines, Geely's current passenger car production capacity is 2.53 million units, while the capacity utilization rate in 2018 was less than 60%. There is tremendous pressure on the release of capacity. Since the beginning of this year, sales have fallen year-on-year, and production capacity has been even worse. What’s worse, more than 1 million units are being built. Moreover, Geely has 10 brands that need to invest in. With its own volume and profitability, the financial burden would be quite heavy. Now, Geely's sales have fallen, and the profit that has been suspected is expected to decrease by 40%. In the context of the downturn macroeconomy and the difficulty of financing, Geely's share price plummeted from HK$17 per share to the HK$11 per share after the collective sell-off of Geely executives in mid-April. No one would be surprised if Geely were to face with shortage of funds in the future. Geely may face a deep structural adjustment.