Big brands targeted by China’s anti-trust laws

An anti-trust probe into global car makers is being welcomed by dealers in China, who say that companies such as Audi and Mercedes-Benz have been exploiting their dominance to boost profits in ways that would not be tolerated in Western markets.

A National Development and Reform Commission (NRDC) official says the investigations, some of which began in 2011, are not aimed at any specific type of industry or a specific country.

“Investigations in many industries started with domestic companies and then spread to foreign companies,” the official at China’s top economic planning body, the NDRC, told the China Daily.

The latest automotive company involved is US manufacturer General Motors, which says its passenger vehicle joint venture in China was contacted by the NRDC after at least seven foreign carmakers cut prices amid the antitrust investigations.

BMW, Volkswagen’s Audi, Daimler’s Mercedes-Benz, Tata Motors’ Jaguar Land Rover, Fiat’s Chrysler, and Toyota and Honda have all announced price cuts for vehicles or spare parts in July and early August.

The overcharging accusations were proven so far in one instance – Audi’s local sales network – while the other foreign brands committed to voluntarily cut prices.

“High-margin new car business pretty much dried up in China. That means if you procure other things you sell at the dealership the way the automaker dictates, you cannot possibly make money,” says Yale Zhang, head of Shanghai-based consulting firm Automotive Foresight.

“Automakers slap high margins and kick up wholesale prices dealers pay – so high that there’s really no room for you as a dealer to play with and maximize profit,” says Zhang.

Volkswagen’s Audi division is facing a fine of 1.8 billion yuan (A$314.5 million) for operating a monopoly, The Economic Observer reported, quoting an unnamed Audi dealer.

The NRDC official notes, “our goal (with antitrust probes) is to ensure that Chinese consumers can enjoy high-quality automotive and component services with prices as fair as in other markets.”

Anti trust drive

In the automotive sector, regulators are zeroing in on the high prices global car brands charge for replacement parts – and the way they get dealers to accept those terms.

According to the head of a large BMW chain, manufacturers exert tight control over independent vendors to enable them to charge high margins and inflate wholesale prices.

“BMW controls every aspect of our dealer operations… compelling us to procure everything from them or through them – including engine lubricant oil, tyres and window-tinting films,” the executive told Reuters.

The BMW dealership executive said that, while dealers agreed with automakers that it was in consumers’ interests to provide maker-certified components for maintenance and repairs, they might prefer to buy generic items from other suppliers.

“Any way to boost our profit margins,” which he said had slipped to 1.5 to 2% on a gross basis in recent years due to aggressive discounts and sales incentives to maintain growth.

“If you don’t make those targets, you stand to lose very generous rebates and bonuses BMW pays periodically,” says the dealer. Those rebates and bonuses are often an essential source of profitability for car dealers operating in China, where a slowdown in the country’s once red-hot automotive market, even as more premium car brands pile in, has made the competition cut-throat,” he says.