China gold rush loses its luster
McLarty sells dealerships amid slowdown
At April's Beijing auto show, the exuberance was palpable.
Global automakers said China was on fire. American dealers, epitomized by retail mogul and former White House Chief of Staff Mack McLarty, were pouring into the world's largest auto market, eyeing the big growth.
"This is the Gold Rush of 2012," gushed former Toyota and Chrysler executive Jim Press, who with McLarty's son Mark ran McLarty's China network and had planned to double its dealerships to 23 this year.
China's golden luster has faded. Factories are running well below capacity, and vehicle prices, even for premium brands, are dropping.
And last week, McLarty Automotive Partners agreed to sell all of its 12 luxury dealerships to domestic retailing giant Baoxin Auto Group Ltd., in exchange for shares in Baoxin. Other investors in McLarty's China operations took either stock or cash.
"Near term, it's not the robust market that China has seen the past 10 years," Mack McLarty said Friday, while extolling the long-term prospects there.
Significantly, government policy has shifted dramatically in favor of public transportation to ease China's reliance on foreign oil. In many major cities there now are limits on new-vehicle registrations.
And the auto slowdown comes in the larger context of a sputtering overall economy.
"We are seeing a very dramatic shift," says Kenneth DeWoskin, a longtime China hand and chairman of Deloitte China's research center in Beijing. "A lot of multinational companies were so focused on getting regulatory approval from China that they didn't focus too much on the demand curve."
Some automakers, such as Ford Motor Co., still are investing in expectation of continued dramatic growth over the long term. And passenger vehicle sales through July were up 9 percent to 7.96 million units.
But that is a sharp deceleration from the glory days of 2010, when industry sales soared 33 percent for the full year. More troubling: Analysts say those sales figures, always a little slippery in China, are wholesale numbers -- sales to dealers, not deliveries to customers.
Last year, sales of passenger vehicles and commercial trucks totaled 18.0 million units -- a huge number and a China record, but up only 4.6 percent from 2010.
McLarty's sale involves the Yanjun Auto Group, 12 dealerships in northern China that sell premium brands once thought immune to a downturn, thanks to China's soaring wealth and lust for luxury: BMW, Mini, Jaguar, Land Rover, Volvo and Porsche. The stores are owned by NCGA Holdings Ltd. and operated by U.S.-based McLarty Automotive Partners.
Separately, McLarty Automotive is a shareholder in retailer RLJ-McLarty-Landers Automotive Holdings of Little Rock, Ark. Robert Johnson, the founder of Black Entertainment Television, owns a majority share in RLJ-McLarty-Landers. The other partners are longtime Arkansas dealer Steve Landers and McLarty.
"This is a big strategic move for us," said McLarty, who said the deal was subject to automakers' approval. "It wasn't just the Chinese economy [that led to the sale], but that is a factor. We are looking at a natural combining and strengthening that we think made sense."
Mark McLarty is based in Beijing and is founder and chairman of NCGA. Mark was not immediately available for comment, and the company's plans for future Chinese dealerships, if any, are not clear.
In a filing to the Hong Kong stock exchange, Baoxin, which also specializes in top-shelf brands, agreed to pay $305.4 million for NCGA.
While McLarty took stock in Baoxin and thus remains an investor in Chinese dealerships, NCGA investor Citigroup Inc. cashed out, Mack McLarty said.
McLarty had positioned China as a key pillar of overseas expansion. McLarty Automotive, which is led by Mack McLarty, operates two other overseas companies besides Yanjun: Caltabiano McLarty in Brazil and GDV Imports Mexico. Press was hired last year as president of those international dealership operations."I think Jim will stay with McLarty Automotive Partners once the transition is done," Mack McLarty said. "He'll stay in China for a few months, but I expect him to return to the U.S. and continue to make his contribution to McLarty Automotive Partners."
At the Automotive News China Conference in Beijing in April, Press said McLarty's China group planned to grow to 23 stores this year from 10 in 2011.
He called opportunities for foreign dealers in China "tremendous" and predicted that other U.S. dealership groups would be piling in to tap the gold.
But by midyear, things looked less rosy. McLarty's BMW dealership in Xian, a city deep in China's interior, found itself flooded with unsold inventory.
Innovative thinking helped move that metal, thanks to an invitation-only evening sales extravaganza that wined and dined the city's well-heeled elite.
But it was a troubling sign that China's recent history of easy sales was just that: history.
According to Baoxin's filing, NCGA had after-tax net income of $32.18 million in the year ended Dec. 31, 2010. But earnings tumbled 79 percent to $6.6 million in 2011. Baoxin said the purchase would broaden its geographic footprint and diversify its brand portfolio. While Baoxin's operations are concentrated in eastern China, NCGA is primarily in northeastern and northwestern parts of the country.
The Chinese dealership group, which went public on the Hong Kong exchange last December, said before its initial public offering that it aims to expand its number of outlets in China by 30 percent every year over the next five years.
But selling cars in China is getting tougher.
Dealer inventories dipped slightly at the end of July to a 54-day supply of vehicles. But supply still soars way above the normal range of 24 to 36 days.
"It's fully evident that dealers have had a huge amount of inventory stuffed down their throats," says DeWoskin. Foreign-owned dealers "have a lot less tolerance for the level of commercial performance they are experiencing there."
With limited access to IPOs or other financing tools, China's cash-intensive car dealerships have become targets for overseas investors, including private-equity firms.
Warburg Pincus recently invested $200 million for a minority stake in privately owned China Auto Rental Holdings Inc.
Meanwhile, Inchcape Retail and Jardine Motors Group, both British-heritage dealership groups, run an expanding number of luxury dealerships in China as well as Britain. They entered China after decades in Hong Kong.
Most revenue comes from new-car sales, with limited business in used cars, service and finance and insurance. When new-car sales slow, the pinch hurts. Dealerships often can't compete in service or aftermarket with local repair shops. And the used-car business is all but nonexistent.
Dealers that dispatch foreign managers to China face the requirement of extremely high expatriate pay to compensate for sky-high housing costs, and a head office typically unversed in the peculiarities of selling cars in China.
Urban Science, a retail consulting firm in Detroit that advises vehicle manufacturers, predicts that China's dealer landscape will quickly consolidate around the top 100 dealership groups. The consultant said China's top 25 dealership groups accounted for 14 percent of industry sales. By comparison, the top 25 dealership groups in the United States generated only 10 percent.
Hamilton Gayden, managing director of Urban Science China, said dealer margins are dropping fast. "I think we will see an orderly shakeout," he said.
Another barrier to foreign retailers: red tape. Foreign investors are subject to a more complex licensing procedure than potential domestic car dealers.
"Typically, they're forced to go through a joint venture and can own no more than half of the venture," Gayden says. "The Chinese invented bureaucracy about 5,000 years ago and they've been perfecting it ever since."
The government is stepping on the automotive brakes. Major cities now restrict the number of new-car registrations.
Beijing allows only 20,000 a month. Central authorities are promoting public transportation to wean the country from foreign oil.
Meanwhile, tightened public purse strings have sated the once insatiable appetite for luxury fleet vehicles, long exemplified by local governments snapping up black Audis.
What's more, the government has tacitly discouraged new automakers from setting up shop in China because overcapacity is a growing threat. DeWoskin says today's capacity utilization rate is down to 65 percent.
Amid the glut of cars, average car prices have slowly declined. Bloomberg reported they fell 1.1 percent from April to May, the steepest drop in two years.
Price wars are further undermining margins.
The sticker slashing started with Audi, Mercedes-Benz and BMW but quickly spread to mass-market foreign brands and even domestic Chinese ones.
In 2011, luxury brands could command a 10 percent premium to the sticker price, says Deloitte's DeWoskin. This year they are deep discounting by as much as 30 percent off the sticker price.
But that has hardly dulled the enthusiasm of the world's automakers. With more than 1.3 billion people, China has too many customers to ignore. All eyes are on the long term.
Case in point: Despite the softening of the local luxury market, Ford announced Aug. 28 that it will thrust its Lincoln brand into the crowded segment in 2014.
That move came days after Ford broke ground on two assembly plants there. Ford aims to double local production capacity to 1.2 million units a year by 2015.
"Our expectation is that between 2012 and 2020, the market is going to grow up to 30 to 40 million units," John Fleming, Ford's executive vice president in charge of global manufacturing, said while announcing the second of the two new plants, in Hangzhou.
"This expansion in China is really the most rapid expansion that Ford Motor Co. has embarked on in the last 50 years," he said. "It's a tremendous opportunity."
Reuters contributed to this report
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