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BEIJING, China: Recently, the China Automobile Dealers Association (CADA) has received a considerable number of reports from its members that suggest the ongoing "price wars" and other contributing factors have resulted in significant transformations within the automotive industry.
Consequently, automobile dealers are confronted with significant challenges, including substantial cash flow constraints. In response, the association has conducted extensive research and analysis with the objective of providing a comprehensive reflection of the current financial predicaments and shutdown risks faced by automobile dealers.
In a recent development, CADA submitted an urgent report, titled "Report to relevant government departments. This report analyzes the heightened shutdown risks stemming from the tightening cash flow faced by automobile dealers and provides policy recommendations to address the urgent issues these dealers are confronting, offering an effective basis for governmental decision-making.
The report also highlights that automobile dealers are currently experiencing significant losses in new car sales, with widespread cash flow deficits and an increasing risk of liquidity breakdowns, making it difficult for them to escape the survival crisis. Two primary issues are currently at play: first, weak consumer demand combined with pressure from manufacturers' wholesale volumes is keeping dealer inventories high.
In an attempt to alleviate financial pressure and reduce borrowing costs, dealers are forced to sell at low prices to survive. Second, the "price wars" have led to severe "upside-down pricing," whereby the purchase price exceeds the sale price. As the number of transactions condealers conduct increases, their losses intensify, while they simultaneously encounter challenges in fulfilling their financing obligations.
This situation has resulted in a severe cash flow crisis for dealers, with their available working capital reduced to the bare minimum. According to CADA's "Market Pulse" monitoring data, as of August of this year, the prevalence of "upside-down pricing" reached a peak of -22.8%, an increase of 10.7 percentage points compared to the same period last year.
Expert analysis from the association indicates that the overall discount rate in the new car market in August was 17.4%. From January to August this year, the "price wars" have led to a cumulative retail loss of 138 billion yuan in the new car market, significantly impacting the development of the industry.
This year, media reports have frequently highlighted instances of significant financial losses among domestic automobile dealers, affecting both national and regional players. We learned that the primary cause of these incidents often relates to cash flow issues rather than the dealers' operational performance. Liquidity breakdowns ultimately lead to business shutdowns.
CADA posits that the current automotive market has entered a phase defined by an abundance of existing inventory, wherein the efficiency of distribution has become a pivotal factor in enhancing the overall efficiency of the national economy. The automotive distribution industry is characterized by a high level of capital intensity and a significant proportion of private enterprises.
Consequently, financial stability is a crucial determinant of operational fluidity. It is imperative to enhance financial services in order to support distribution, particularly by increasing financial support for private dealers. This is essential for expanding automotive consumption, upgrading the automotive industry, and establishing a new dual-circulation development pattern.
CADA calls on relevant government departments to pay close attention to the financial difficulties and shutdown risks facing the automotive distribution sector and to promptly implement phased financial relief policies to effectively prevent systemic risks in this field. The association urges relevant departments to act quickly and develop temporary financial relief measures for the automotive distribution sector, including:
1) Organizing special research on the financial environment in the automotive distribution sector to assess the financial needs of top automotive dealer groups, regional leading dealer groups, and small and medium-sized dealers, and to formulate financing support policies. This would guide financial institutions to increase their support for the automotive distribution sector while ensuring legal compliance and risk control.
2) Collaborating with financial institutions to stabilize the automotive market by ensuring that existing loans are not withdrawn, not reduced, and not delayed; allowing flexible extensions and continuations of loans, and gradually increasing credit limits for dealers while expanding the scope of loan use. State policy banks are encouraged to establish special credit policies for automotive dealers.
In the future, CADA will collaborate with industry partners and members to address these challenges. It will also engage in active cooperation with government departments in conducting industry research and reflect member concerns, assisting a wide range of automobile dealers to overcome difficulties and build a better future together.
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