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Auto dealers in the doldrums amid price war

With inventories rising amid an intense price war, auto dealers in China are having a tough time making a profit, according to a report by British consulting firm Deloitte.

Dealer margins are hurt by their heavy reliance on new vehicle sales, a challenge compounded by rising operational, labor and financing costs, said the report based on surveys and in-depth interviews with dealers.

The report said one cause for dealer doldrums is the low percentage of revenues from parts and after-sales services.

Deloitte said the average profit margin at Chinese auto dealers was less than 2 percent of revenues in the first half of 2013, well below the industry benchmark of 3 percent.

Statistics also show that the ratio of dealer overheads – which include expenses in sales, management and financing – was more than 7 by the end of 2013, up 1 percent from the previous year.

Since 2011, Deloitte has researched and surveyed auto dealer performance to provide insights about the risks and challenges in the industry. It then formulates strategies to address problems.

Its latest report was based on a questionnaire and nearly 100 interviews with executives at auto dealers and carmakers in China.

“While auto sales will be buoyed by sustained economic growth, the structure of the auto market is not mature, compared with the Western world,” said Winhon Chow, a managing partner at Deloitte China.

“Heavy reliance on new car sales can leave overall profitability exposed to uncertainties in the external environment. There is a long way to go for the profit structure to tilt toward the back-end segments (of parts and services). Chinese auto dealers also need to bear the brunt of increased overheads.”

After years of rapid development, the Chinese auto market began to slow in 2011. In the wake of the global economic recovery, there has been a moderate but steady rebound over the last three years.

Modest growth

Sales growth has continued at a single-digit pace and prospects remain weak as the industry matures. After years of high-gear expansion, the auto dealership sector now faces an era of modest growth, according to Deloitte.

New challenges include high risk of cash liquidity problems and piling-up inventory.

In the first half of 2013, a drastic increase in production amid modest growth in sales led to excessive inventory. Some 74 percent of survey respondents attributed the oversupply to fierce market competition.

The Deloitte report said high inventories will give rise to funding and liquidity problems exacerbated by the lack of external financing and scarcity of internal capital at dealerships.

“After all, it is a capital intensive industry – auto dealers have always been operating with great balance sheet stress. Usually, they are highly leveraged to meet capital needs. Loans from local commercial banks are cited by 64 percent of respondents to be one of their major sources of financing,” said Chow.

One of the emerging trends in the industry is expansion of sales networks into second and third-tier cities, partly due to government purchase restrictions in mature first-tier cities and partly because of pent-up consumer demand in smaller cities.

But the trend will make it harder for auto dealers to manage their sales networks, especially when qualified management and technical professionals are in short supply in lower-tier cities, said the Deloitte report.

With the steady recovery of China’s auto market offset by challenges that emerged in 2013, the report advocated stronger cooperation among automakers, dealer groups and independent dealers, as well as tighter controls on capital, expenses and staff.

The report also highlighted the need for staff retention and transformation of the overall business model.

China Mobile hits profit slump amid competition, new projects

China Mobile Ltd’s booth at the 3-15 International Consumer Goods Exhibition in Dalian on March 13. Provided to China Daily

China Mobile Ltd, the world’s largest telecom carrier by subscribers, experienced its first annual net profit decline in more than a decade after the company invested heavily in mobile network projects and was put under pressure by Internet companies.

At a news conference in Hong Kong on Thursday, China Mobile said its revenue reached 630 billion yuan ($101 billion) in 2013, up 8.3 percent year on year.

But the company’s net income was dragged down by a disappointing second half; it fell by 5.9 percent from the previous year to 121.7 billion yuan.

China Mobile’s shares on the Hong Kong stock exchange dropped by 3.6 percent to HK$67 ($8.63) per share at the market’s close on Thursday. During the day, the company’s stock was traded at HK$66.55 per share, its lowest point in five years.

China Mobile’s profit growth rate has fluctuated greatly in the past decade. The Chinese telecom operator enjoyed double-digit growth in terms of net income between 2004 and 2008, thanks to major expansions to the country’s vast rural areas.

In 2007, China Mobile recorded its highest annual net profit growth rate of 32 percent.

But the figure dropped to single digits in 2009 and in the ensuing years, it hovered at or below 5 percent.

China Mobile attributed the weak performance to the effects of over-the-top (OTT) products, such as WeChat, on traditional voice and text messaging businesses, along with a more saturated telecom market with fiercer competition.

Other factors, including hefty investments in building a speedier fourth-generation (4G) mobile network and handset subsidies for flagship smartphone models such as Apple Inc’s iPhone devices, all played a role in squeezing China Mobile’s net profit.

Xi Guohua, chairman of China Mobile, said, “China Mobile will vigorously push forward the development of 4G service and will lower the 4G user threshold.”

Since China Mobile was granted a 4G (TD-LTE) license last December, the company has taken the lead in launching 4G commercial services. It said the 4G business has been “positively received by its customers” and revealed that about 1.34 million people had subscribed to its 4G service by February.

The company said it plans to build the world’s largest 4G network, with 500,000 base stations, that will cover every city, key village and urban area in counties by the end of 2014.

But the foreseeable future for China Mobile is not rosy, many analysts said, since the company has no choice but to spend a lot on both network construction projects and handset subsidies.

Meanwhile, outside pressure coming from Internet companies will only get worse, said Sandy Shen, telecom analyst with Gartner Inc.

“Trends show more people are likely to stick to instant-messaging mobile applications such as WeChat and that few of them will go back to rely on traditional voice and text messaging services,” Shen said.

But Xiang Ligang, a Beijing-based telecom expert, said it may be a good thing for China Mobile to see a reduced net profit.

“If China Mobile gives up the mind-set of always pursuing an extraordinary performance, it will stop pushing its employees too much, and stop imposing so much pressure on the industry, which causes abnormal competition in the market.”

Foreigners allowed bigger stakes in Chinese companies

Relaxed regulation unlikely to create big short-term waves amid low stock market confidence: Analysts

Foreign investors can own more of a listed Chinese company after rules were relaxed to draw long-term overseas capital.

Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) can hold up to 30 percent of a company, under a guideline issued by the Shanghai Stock Exchange on Wednesday.

That had earlier been capped at 20 percent of total outstanding shares in a company. Foreign investors will soon also be able to invest in more financial products, including asset-backed securities and preferred shares, according to the authority.

Analysts said the move is meant to attract more long-term capital and boost China’s equity market. It is in line with the Chinese leadership’s plan to further open up the capital market.

QFII and RQFII are programs for licensed foreign investors to buy and sell yuan-denominated “A” shares on the Shanghai and Shenzhen stock exchanges.

State Administration of Foreign Exchange data show that in February, China issued total quotas of $52.3 billion under the QFII program and 180.4 billion yuan ($29.32 billion) under the RQFII program, which allows investments using offshore yuan.

QFIIs increased holdings in more than 20 Shanghai-listed companies, according to their annual reports. The Bank of Ningbo Co Ltd and Ping An Insurance (Group) Co of China Ltd were among companies that got the most QFII investment, Securities Times said on Thursday.

Analysts said foreign investors, favoring long-term value investment, are cautious about China’s stock market, which has suffered bearish sentiment since 2008 and has been hurt by insider trading and price manipulation scandals.

“The overall amount of QFII and RQFII investment is still limited on the A-share market, so the impact of the new rules may be limited in lifting the market,” said Zito Ji, an analyst with a mutual fund in Shanghai.

Investors cite corporate governance as a problem. Analysts say a lack of clarity about how Beijing will tax profits from QFII investments has also restrained some investors, Reuters said.

A weakening yuan and a pressured property industry is dragging investor confidence in China’s stock market.

The benchmark Shanghai Composite Index slumped by 1.4 percent to 1,993.48 on Thursday. And Shenzhen Component Index dived to a five-year low to 6,698.2.

Smog and slowing growth make it hard for US firms to recruit in China

China’s smog was making it harder for foreign firms to convince top executives to work in the country, the American Chamber of Commerce in Beijing said on Tuesday, offering some of the strongest evidence yet on how pollution is hurting recruitment.

About 48 percent of the 365 foreign companies that replied to the chamber’s annual survey, which covers businesses in China’s northern cities, said concerns over air quality were turning senior executives away.

Pollution was “a difficulty in recruiting and retaining senior executive talent”, the report said. This year’s figure is a jump from the 19 percent of foreign companies that said smog was a problem for recruitment in 2010.

China’s slowing economy, however, remained the top risk for companies, the report said.

Foreign executives increasingly complain about pollution in China and the perceived impact it is having on their health and that of their families. Several high-profile executives have left China in recent years, citing pollution as the main reason for their decision to go.

Almost all Chinese cities monitored for pollution last year failed to meet state standards, but northern China suffers the most. It is home to much of China’s coal, steel and cement production. It is also much colder, relying on industrial coal boilers to provide heating during the long winter.

The capital Beijing, for example, is surrounded by the big and heavily polluted industrial province of Hebei. It is also choked by traffic.

By contrast, China’s commercial capital Shanghai, in the south, suffers less air pollution. Indeed, a similar survey conducted by the American Chamber of Commerce’s Shanghai branch did not even ask if pollution was affecting recruitment.

Premier Li Keqiang “declared war” on pollution at the opening of parliament this month.

Shanghai Disneyland to feature first Pirates-themed land

Shanghai Disneyland, the first Disney park on the Chinese mainland, will feature scenes and characters from the blockbuster “Pirates of the Caribbean” movies, Shanghai Disney Resort announced on Wednesday.

The first-ever Pirates-themed land in any Disney park will be named “Treasure Cove,” according to a press release.

A major attraction at the Treasure Cove will be “Pirates of the Caribbean: Battle of the Sunken Treasure.” This is a boat ride that incorporates new effects and technologies, and guests will be enlisted to travel with Captain Jack Sparrow on an epic journey to find Captain Davy Jones’ treasure.

Wednesday also marks the completion of the key structural work on the Pirates attraction.

“We are excited to celebrate this new milestone in Shanghai Disney Resort’s development,” said Bill Ernest, president and managing director for Asia with Walt Disney Parks and Resorts.

He said the resort’s theme park will be home to “a first new themed land and attraction, inspired by the phenomenal Pirates of the Caribbean movies that were originally inspired by a Disney attraction.”

“It is truly unique to Shanghai Disney Resort,” added Ernest.

“We are excited to see the Disney Imagineering team continue to bring the most advanced technologies and construction techniques to China, working collaboratively with local talents, in building this modern and innovative park,” said Fan Xiping, chairman of Shanghai Shendi Group, Disney’s Chinese joint venture partner in Shanghai Disney Resort.

Construction of Shanghai Disney Resort began in 2011 in the Pudong New District and is scheduled to open at the end of next year.

The complex will include Shanghai Disneyland, a Magic Kingdom-style park, two themed hotels, a large retail, dining and entertainment venue, recreational facilities, a lake and parking and transportation hubs.

China Unicom launches 4G services

China Unicom, the country’s second-largest wireless operators in terms of subscribers, launched its 4G service Tuesday, making it the last of the country’s three major wireless carriers to do so.

China Unicom’s 4G monthly package starts at 76 yuan ($12.26), with 200 minutes call time and 400 megabytes wireless traffic, while a similar package could cost 88 yuan at its major rival China Mobile.

At a partner conference Tuesday, China Unicom launched a total of 61 terminals together with companies including Samsung and Lenovo, and 25 of the new terminals launched are China-developed TD-LTE (time division-long term evolution) terminals.

At the event, China Unicom also signed this year’s sales contracts with 16 companies. Terminal sales would top 188 million units in 2014, media reports said.

The company will first provide 4G services in 25 cities including Beijing, Shanghai, and Guangzhou in South China’s Guangdong Province, and by the end of this year, its 4G services will expand to 300 cities, Web portal tech.qq.com reported Tuesday.

China Unicom will initially use the China-developed TD-LTE network, but it is also planning to adopt the FDD-LTE (frequency-division duplexing) network after the government issues licenses for the standard. The FDD-LTE standard has already been used in countries such as the US and the UK, earlier media reports said.

The Ministry of Industry and Information Technology issued 4G TD-LTE licenses to China’s three major telecommunication companies in December. China Mobile launched 4G services in the same month.

China Unicom’s smaller rival China Telecom launched 4G services in February, but it only released the price policy for mobile data, with the price policy for calls and voice yet to be published.

Analysts noted that with China Unicom finally joining the competition, the price of 4G services may get lower in the future.

There have been complaints about the expensive 4G service charges by China Mobile’s since the launch of its 4G services.

China Unicom had gained a head start in the 3G arena, as it was the first company to introduce the contract Apple handsets to China. By January, China Unicom had total 3G users of 126 million.

China Mobile had 206 million 3G subscribers by January, and China Telecom had 103 million 3G subscribers, according to their filings on the Hong Kong bourse.

Real estate developers’ sales drop

Real estate investment in China slowed in the first two months of this year as property sales declined in the same period, official data showed on Thursday, the latest sign of a slowdown in the country’s housing market.

Property investment grew 19.3 percent year-on-year in the first two months of the year, which is 0.5 percentage points slower than the annual growth in 2013, data released by the National Bureau of Statistics (NBS) showed Thursday.

Sales of properties including residential homes, offices and commercial premises fell 0.1 percent year-on-year in terms of floor space in the period and declined 3.7 percent in terms of value, the data showed.

Meanwhile, Beijing-based Securities Daily reported Thursday that 30 real estate developers saw a sharp decline of sales in February from January.

The 30 companies, including major developers such as Poly Real Estate Group and Gemdale Group, reported total sales revenue of 66.5 billion yuan ($10.83 billion) in February, down 39 percent month-on-month, the report said.

Many of the companies have also shown year-on-year drops during the period. Leading developer Poly Real Estate sold 685,900 square meter of apartments in February, down 24 percent month-on-month and 24.77 percent year-on-year. Its sales contracted 8.38 percent year-on-year to 7.73 billion yuan, the company said Monday.

Developer Gemdale sold 112,000 square meters of apartments in the month, a drop of 25.33 percent month-on-month and 17.04 percent year-on-year, and the value of the sales dropped 16.67 percent year-on-year to 1.35 billion yuan, according to a company statement on Saturday.

Analysts noted that seasonal factors contributed to the month-on-month decline, such as the Spring Festival holidays in early February for which the country had seven days off. However, the more alarming fact is that many of them have reported deteriorating year-on-year performance.

Tight liquidity and sluggish markets in third- and fourth-tier cities are also reasons behind the year-on-year drop in major developers’ performance, analysts said.

In December, 13 cities including Shanghai, Guangzhou and Hangzhou raised required down payment amounts for the purchase of second homes. Beijing may also raise the down payment for property purchase, according to media reports.

Besides, oversupply in some third- and fourth-tier cities has also prompted speculation that prices would drop and some consumers have adopted a wait-and-see attitude.

Hong Kong-listed Central China Real Estate, which mainly focuses on lower-tier cities, has seen its sales revenue dropping 11.1 percent in February, to 400 million yuan.

However, analysts said that developers’ performance may rebound slightly in March, as the month has been a traditional boom season in the past.

Alibaba expands its footprint into media

Alibaba Group Holding Ltd, China’s Internet conglomerate, will spend about $800 million buying the control of a Hong Kong-listed media group, a move that will enable the e-commerce giant to tap into digital content production.

Alibaba will pay HK$6.24 billion ($804 million) for a 60 percent stake in ChinaVision Media Group Ltd, which has a rich business portfolio from print media, television and films to mobile games.

The purchase of ChinaVision Media’s new stock, at a 22 percent discount to the last closing price, will take the stake held by Alibaba and parties acting with it to 70.8 percent, according to a ChinaVision filing to the Hong Kong stock exchange on Tuesday.

The investment from Alibaba pushed the share price of ChinaVision up about 186 percent to HK$1.83 on Wednesday from the previous closing price of HK$0.64.

The deal is Alibaba’s second major move in the merger and acquisitions field this year after the Internet titan bought mapping service AutoNavi Software Co Ltd in February for a price of $1.1 billion.

The deal was designed to help Alibaba to access ChinaVision’s television programs, films and other digital content, which are experiencing surging demand from China’s rapidly growing number of mobile Internet users.

“The demand to acquire data and content over mobile and mobile-related devices is absolutely enormous,” said Colin Light, China digital consulting leader for PricewaterhouseCoopers in Hong Kong. The deal enables Alibaba to leverage its huge mobile and Internet-based users into an adjacent market, namely content media, he added.

In a telephone interview with China Daily, Light said observers have seen a dramatic trend around the world that media consumption is shifting from big screens, such as televisions, to small screens on mobile devices.

The shift is particularly strong in China, where more than 80 percent of Chinese Internet users access the Internet via mobile devices. The shift of media is expected to lead a shift in advertising money, according to a recent report from PricewaterhouseCoopers.

Almost 75 percent of digital advertising comes from search and display in China.

Alibaba offers to buy digital mapping company AutoNavi

There are currently few contenders big enough to take on Baidu Inc’s 80 percent share of the search market. Yet key social media sites such as Sina Weibo and Tencent’s popular mobile messaging app Wechat, which has more than 600 million accounts, are beginning to grab a share of the digital advertisement market, said the report.

“Through building online retail platforms, Alibaba serves as a commodity trader. In the same way, it can become a digital content trader. The investment fits naturally with Alibaba’s business model,” said Light.

According to ChinaVision Media’s official website, the company participated in the production and distribution of some very well known movies and television dramas in China.

In addition, the company co-manages the Beijing Times, the biggest morning newspaper in the Chinese capital, and has been jointly developing a mobile television business with People.cn, an information interaction online platform created by People’s Daily, a major State-own media company in China.

“When a company grows to a certain size, it is only a matter of time before they look to own media channels to gain a certain sway in public opinion,” said Tian Hou, chief analyst with T.H. Capital LLC, an independent research and investment advisory firm.

She added that getting involved in media content production is also in line with Alibaba’s mobile strategy. The company announced earlier this year it would enter the mobile gaming industry. ChinaVision media also produces mobile games.

Privately funded banks to be launched

Ten private companies will launch five banks that are entirely funded by private capital in Tianjin, Shanghai, Guangdong Province and Zhejiang Province as part of a pilot program, Shang Fulin, head of the China Banking Regulatory Commission, said Tuesday.

The establishment of the private banks, which was approved by the central government in January, is considered a vital step in the country’s financial reform and its opening-up of the banking sector to private capital.

Internet giants Tencent Holdings and Alibaba Group will be among the 10 companies approved to participate in the pilot program, Shang said, adding that the five private banks should have differentiated market positioning.

Shang did not provide details about the names of the five banks, or the amount invested in them.

The website of People’s Daily quoted Shang as saying on Monday that the 10 companies will also include Fosun International, a real estate conglomerate, and Chint Electrics Co, an electrical equipment maker.

Each bank must have two private investors, Shang said, and they will be allowed to open for business when they have made sufficient preparations.

The private bank that Tencent plans to initiate will specialize in providing products for the burgeoning online finance sector, a staff member of Tencent told the Global Times Tuesday on condition of anonymity.

“Tencent will utilize its advantages in the Internet service industry, and [launch] online financial products based on the services provided by the traditional banking sector,” the source said.

The staff member said the bank will be located in Qianhai, a district of Shenzhen in South China’s Guangdong Province. Qianhai was approved by the State Council in 2010 as a test ground for the free cross-border flow of the yuan and financial innovations.

A staff member of Alibaba, which is a partner in Yu’ebao, one of the country’s most popular online money market funds, told the Global Times Tuesday that Alibaba is working with China Wanxiang Holdings Co to apply for a private bank license.

“Now our application materials are still being reviewed,” said the staff member, who wished to remain anonymous.

Wanxiang Holdings is part of China’s biggest auto parts company Wanxiang Group, which is based in Hangzhou, East China’s Zhejiang Province.

The Alibaba source declined to comment on the location or market positioning of the bank.

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times Tuesday that the private banks will offer loans of up to 1 million yuan ($162,879) that will mature in less than two years.

The banks’ major customers will be those that have difficulty in getting loans from large commercial banks, Dong said, such as small and micro-sized businesses. That is why the new program will not have a disruptive impact on the banking sector or influence the interest rate, he said.

According to Shang, the private banks will be regulated in the same way as large commercial banks, but their performance will be more market-based.

Milestones in opening up to private investment

May 23, 2012 The State Council required sectors including railways, telecoms and banking to draw up detailed rules for encouraging private investment.

May 26, 2012 The China Banking Regulatory Commission (CBRC) said it would encourage greater private investment in the banking sector, without imposing restrictive or other additional conditions.

Jun 19, 2013 The State Council said China should set up private banks and financial lease companies that bear the burden of risk on their own.

Mar 11, 2014 CBRC chief Shang Fulin said China will set up five private banks on a trial basis.

Salary hikes will kick-start consumption

When China’s economic growth is targeted at 7.5 percent and domestic demand becomes the main engine driving growth, it is crucial to implement measures to increase salaries and create an economy more conducive to consumption, officials and executives agree.

In working to hike domestic demand, China will focus on boosting consumption, Premier Li Keqiang said in his recent work report to the National People’s Congress.

But since consumption is dependent on disposable income, salary increases become more significant and should be in line with the growth of the Consumer Price Index, CPPCC members said during a panel discussion.

“The government should have a specific target in improving the payroll level and release a guiding index,” said Yang Yuanqing, chairman and chief executive officer of Lenovo Group Ltd.

Public institutions currently are finding it difficult to catch up with CPI growth, let alone private companies.

“Government offices are supposed to be the leader of salary increases,” said Yang.

China’s domestic consumption accounts for less than half of its GDP. Economic growth still relies on exports and investments, according to Yang.

“Once consumption is expanded, the economy will be less reliant on the changeable overseas markets. It will ease China’s conflicts with trading partners,” he said.

Still, the problem of creating consumption hot spots and getting people to spend more at home remains a tough one.

Chinese tourists tend to prefer shopping overseas. Creating a better consuming environment will be a critical part of pulling them back.

More than two-thirds of luxury spending by Chinese mainlanders was carried out overseas in 2013, up from 2012, according to the China Luxury Market Study from consultancy Bain & Co.

Of course, with the rise of e-commerce, the price of goods is more transparent, and the cost of logistics is lower.

“Still, the government can prompt a new round of consumption tax reform and lower high tariffs on imported luxury goods,” said Yang.

Zhu Zhixin, vice-chairman of the National Development and Reform Commission, agreed, saying there is hope for salary reforms.

“We are now suggesting that residents’ income should be in accordance with the increase of GDP,” said Zhu.

In fact, salaries in China continue to rise. The trend has made the nation’s workforce more expensive than in neighboring countries, according to Zhu.

“But for years, wages in government offices and public institutions were kept almost constant,” said Zhu.

The government’s work report also mentions that the government will support nongovernmental investors in various types of services, with a focus on elderly care, health, tourism and culture, as well as implementing a new system of paid vacations.

The number of domestic tourists amounted to 3.25 billion and total income in the sector reached 2.9 trillion yuan in 2013.

“Although we have rules on paid vacations, we are not strictly implementing these rules,” said Zhang Xuewu, president of China National Travel Services Group.