How sour dealer relations wreaked havoc on Audi's China sales

Yang Jian is managing editor of Automotive News China.Yang Jian is managing editor of Automotive News China.
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Audi cut itself a sorry figure in China's luxury car market last month.

As Audi deliveries fell 35 percent in January, China's leading luxury brand was finally overtaken by rivals Mercedes-Benz and BMW.

It was an especially poor performance in a month when second-tier luxury brands such as Cadillac and Volvo enjoyed robust sales.

Audi attributed the plunge to its dealers, but it has only itself to blame.

The collapse was the result of hasty steps Audi took last year to set up a distribution channel with SAIC Motor Corp. The decision produced a huge backlash among dealers affiliated with Audi's partnership with China FAW Group Corp.

It's a humiliating turn of events for a brand that virtually created China's luxury car market.

In 1995, Volkswagen's joint venture with FAW began producing Audi cars to avoid China's 25 percent tariff on imports. Audi got another boost when government officials developed a taste for the stretched A6 sedan.

Over the next two decades, Audi was by far China's most popular luxury brand. But Audi's fortunes began to sour in 2013 when President Xi Jinping launched an anti-corruption campaign.

Audi's fleet sales went soft as bureaucrats canceled their limousine purchases. To make things worse, Audi was slow to upgrade its product lineup.

Mercedes took advantage. In 2013, the company fixed its inefficient distribution system and began introducing a new generation of crossovers. Sales soared.

Under pressure, Audi committed two big blunders last year. First, it dumped excessive vehicle inventories on its dealerships, and most of them lost money.

Second, Audi signed a tentative agreement with SAIC in November to establish a second dealership network. Shocked by the news, Audi dealers published an open letter warning that a new distribution channel would "inevitably" harm them.

Audi executives held talks with dealers at the Guangzhou auto show, but the meeting failed to appease angry retailers. According to Chinese media, the dealers subsequently warned that they would stop ordering vehicles from Audi.

Apparently, a large number of the dealers, if not all of them, have carried out that threat. In a statement released Wednesday, Audi blamed its sales slump in China on local dealers who "had planned a restrained business volume at the start of the year."

This month, Audi held a new round of talks with its dealers in a bid to repair relations. But Audi refused to give dealers what they want most: a promise to shelve plans for a second distribution network.

This impasse bodes ill for Audi's future. Unless it can quickly mend ties with its Chinese dealers, the German brand will continue to bleed market share.

You can reach Yang Jian at yangjian@autonewschina.com.

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