Dispute With Dealers Trouble in Audi's Chinese Paradise

Audi is locked in a dispute with its Chinese dealers who are demanding $4 billion in compensation for sluggish sales. The premium automaker needs to watch out: China's dealers are powerful, as rival BMW learned to its cost.
Audi didn't sell as many cars in China as it hoped. Picture

Sanya, on the southern island of Hainan, is a tropical holiday paradise, but the auto dealers meeting there this week weren’t in a mood for partying. In fact, they’re downright angry at German premium automaker Audi and blaming it for lackluster sales.

The dealers claim they lost 28 billion yuan ($4.08 billion) from 2014 to 2016 as Audi's sales failed to live up to expectations. They set up an Audi dealers association in Sanya on Thursday to press their case.

But Audi doesn’t see why it should pay. “The business of China’s Audi dealerships was profitable in each of the past three years,” an Audi spokeswoman in Beijing told Handelsblatt. An internationally independent auditing company had confirmed that and the accusations were currently being addressed with the dealers, she added.

The spokeswoman said it was true that the profit margins of Chinese auto dealers were under pressure by international comparison. "In addition to that, China has an above-average proportion of young dealers who are in the start-up phase of their business. The average yield is lower then."

The dispute could end up being expensive for Audi. China’s car dealers are powerful, as BMW learned two years ago when it paid its dealers 5.1 billion yuan, or almost €700 million, after a similar dispute.

The dealers are also criticizing that Audi has started talks with Chinese automaker SAIC Motor Corp Ltd. They see the partnership as a threat because the added competition could further impact their earnings.

The argument is already having an impact on Audi. Unit sales in January fell 35 percent year-on-year to around 35,000 vehicles, for the first time depriving the group of its lead in China among premium automakers.

Mercedes led the pack with a 39-percent jump in sales while BMW saw sales rise 18 percent in the period.

Audi dealers may have cut back their January orders to put the automaker under pressure. The dealers have argued that Audi is responsible for their low profits because it expanded the dealership network too much.

Audi begs to differ. "We can’t understand that accusation. The number of Audi dealers in China is at the level of our competitors – with significantly higher annual unit sales in 2016,“ said the spokeswoman.

On average the Audi dealers had sold more cars than the dealers of rival automakers, the spokeswoman said. Their sales were even higher than in Audi dealership networks in other top markets.

But the dealers are also criticizing that Audi has started talks with Chinese automaker SAIC Motor Corp Ltd. On the face of it, that may not seem a big deal because Audi’s parent company VW has been working with SAIC for some time. But the dealers see the partnership as a threat because the added competition from SAIC dealers could further impact their earnings.

 

Stefan Scheuer is a correspondent for Handelsblatt in Beijing. To reach the author:[email protected].