At Konggang Motion Center in the north China city of Tianjin, you can see a movie, get a massage, have dinner - and look at the latest Chevrolets and Buicks.
You can't buy a car at Konggang, which is near the center of town. Sales take place at a dealership on the outskirts. But 22-year old Chevrolet salesman Liu Jia insists the midtown showroom is valuable.
"Of course it is a good thing," he says. "People can go there to see the cars and have some fun."
Attracting consumers is crucial because private vehicle ownership is relatively new in China. Four out of five customers are shopping for their first car, and competition is fierce. Until about five years ago, the Chinese government made most vehicle purchases. The franchise dealership system was not well-developed.
Volkswagen AG began assembling cars in China in 1986. PSA/Peugeot-Citroen SA started turning out cars in China in 1992. Initially, neither company had good control of its dealership system. Both had a mishmash of selling points, from factory-authorized dealerships to tiny storefronts in small towns. Volkswagen and PSA have worked in recent years to standardize their networks.
General Motors, Ford Motor Co. and other automakers came to China later. From the start, their distribution networks have more closely resembled those in developed markets such as the United States.
Authorized dealerships in China adhere to automakers' global design in many ways. Chevrolet dealerships, for example, feature the familiar blue and gold color scheme and bow-tie logo.
But there are special touches. The Beijing Dashixing Chevrolet dealership has a bulletin board where customers can post photos of themselves and their cars and write comments. Sample: "Dashixing is great! If I buy another car, I'll come back here."
Dealerships in China operate under a franchise system similar to that in the United States. But there's one key difference: Franchises can be either private or government-owned.
Running dealerships as independent local units is essential, says Lubo Li, director of business and market development for J.D. Power Asia Pacific.
"The dealership business is an entrepreneurial business," Li told Automotive News. "It can't be run as a big corporation. You have to have people who are local."
It also helps to have good government relations because the Chinese government owns all land.
A 2005 law requires dealerships in China to affiliate with an automaker. All the large dealerships that offer sales and service are now so affiliated, but some smaller stores continue to sell multiple brands.
The trend is toward all new-vehicle sales taking place through franchised dealerships, says Michael Gu, general manager of Comengine, an auto consulting firm in Shanghai.
Foreign investors can own dealerships in China, although few have taken the plunge. Navigating China's labyrinthine bureaucracy can be tough even for a native.
Up and down
Dealerships in China vary widely in size. But they generally are smaller than a typical U.S. dealership, with its acres of parking and hundreds or thousands of vehicles in stock. Some inner-city Chinese dealerships are mere storefronts.
"In the U.S., you have three to four acres," says Dale Sullivan, who managed the Chevrolet brand for General Motors in China from 2003 until June 2006. "Here it is more like one acre. In China, we build up. A dealership might have three or four floors."
Multistory auto malls, in which several brands occupy a defined space, are popular in China. Such malls encourage comparison shopping. Some even have test tracks.
"They are like a mini auto show," says Sun Jian, vice president of consultant A.T. Kearney's Greater China operation. "They give the buyer more choices. You can order there and process paperwork elsewhere."
Last year, Ford Motor (China) Ltd. set up Changan Ford Sales Co. to improve its support of dealers. The company also revised dealer incentives.
'4S' or less
Ford seeks full-fledged "4S" - sales, service, spare parts and survey (customer information gathering) - dealerships. Setting up a 4S Ford dealership requires an investment of $2 million to $5 million, depending on location. Ford also allows dealers to set up smaller branch dealerships.
Coastal cities such as Beijing, Shanghai and Guangdong are the most expensive. Smaller inland cities don't always warrant that kind of investment.
"One size doesn't fit all," says David Thomas, vice president of China distribution operations for Ford Motor (China). "Investment is scaled to business opportunities."
A Citroen dealership costs as much as $1.5 million in big cities. Among Citroen's 350 dealerships in China, 155 are "Golden Dragon" 4S dealerships. Citroen also has 50 "2S" dealers in small cities that offer spare parts and service.
Citroen links its Golden Dragon dealerships on the Internet to a central technical center in China. A dealership service technician can plug a computer into a car's systems, run a diagnostic test and consult a technician at the center about repairs.
"The dealer return on investment is much better in China than in Europe," says Gilles Debonnet, director general for the Citroen brand in China. "In Europe, it takes 10 to 12 years to get back an investment. In China, if (it's) more than five years for a 4S dealership, we are not happy."
Fewer happy returns
Still, getting a quick return on investment in a Chinese dealership has gotten tougher in the past few years. Price wars have escalated, and market growth has slowed.
There once was a long line of people seeking to open dealerships. The outlook is not so rosy now, says A.T. Kearney's Sun.
"In the last year, the profits are squeezed," Sun says. "The (dealership) profit margin average is now 4 percent. It is no longer a golden time."
Discounting, a standard practice in China, also pares margins. Most dealerships in China don't offer the finance and insurance products that are a profit center for U.S. stores.
Salespeople in China often have considerable leeway to offer discounts. Some, for example, cover a government-mandated $625 insurance fee. Others may help a buyer with title and registration expenses.
Automakers want dealers to cut down on such discounting. Ford has made its dealer training more focused on a vehicle's features so that dealers are "selling on product benefits, not just price," says Ford's Thomas.
In addition, Ford now offers the same type of repair service in China as it does in more developed markets. The customer and service technician go over the car step by step and determine what repairs are needed.
"There's transparency," says Thomas. "The customers are more loyal to the dealer then."
Ford also is conducting regional marketing campaigns in China. All these measures are aimed at improving dealer profitability and cutting discounting. Their success is reflected in Ford's latest launch, the mid-sized Focus sedan.
"The Focus is selling at retail," Thomas says.
Vehicle leasing is rare in China, since the government has not issued leasing regulations. Only 1 to 2 percent of Chinese customers lease, compared with a lease penetration rate of about 20 percent in the United States, says J.D. Power's Li.
Consumer financing also is rare in China, where paying cash is a cultural trait. About 20 percent of Chevrolet customers in China finance their purchases, compared with 80 percent in the United States, Sullivan says. Roughly 10 percent of Ford's Chinese customers use financing, Thomas says.
China also lacks a well developed system of vehicle financing companies. Banks offer auto loans, but the government has discouraged such lending because of a rise in defaults. Because China does not have personal credit databases, determining individual creditworthiness is difficult.
Automakers' captive finance companies, such as Ford Motor Credit Co. and General Motors Acceptance Corp., set up operations in China only recently. They mainly handle wholesale financing for dealers.
Another potentially huge profit center - used-vehicle sales - has not taken off in China, either. The Chinese government issued used-car regulations last October. They did not take full effect until this spring.
"We expect, sometime in 2007, the individual used-car market volume will become substantial," says Comengine's Gu.
Despite the obstacles that dealerships in China must overcome, the franchise system is likely to flourish. Even in nascent markets such as China, dealers and automakers agree that franchising provides the best business model for new-vehicle sales.
"The franchise system has stood the test of time in most major markets throughout the world," says Ford's Thomas. "It seems to be the right combination of large organizations that need to invest in r&d and small local retail organizations focusing on delivering product to the customers. It is pretty well suited for China as well."
You may e-mail Alysha Webb at [email protected]