BEIJING (Bloomberg) -- BMW agreed to pay 5.1 billion yuan ($820 million) to its distributors in China to help cover their losses after the retailers stopped ordering cars from the manufacturer, a dealers' group said.
The subsidies are the largest by an automaker to its retailers in China and will be paid by the end of February, said Song Tao, a deputy secretary general of the China Automobile Dealers Association, which represented the BMW distributors in the negotiations. The dealers are still in talks with the Munich-based carmaker over this year’s sales targets, he said.
Auto dealers have complained of meeting unrealistic sales projections in order to qualify for year-end bonuses as foreign automakers expand their manufacturing capacity and number of distributors to chase market share.
The BMW payout may increase pressure on other automakers to extend similar support to their retailers, including Toyota Motor Corp., whose dealers are threatening to quit the sales network of one of its Chinese ventures because of mounting losses.
“This is an unusual move by automaker to give funding of such big scale,” said Han Weiqi, an analyst with CSC International Holdings Ltd. “But in the long term, a smooth relationship with dealers is in carmaker’s best interests and they have to meet dealers half way.”
Slowing sales growth means a “new normal” is emerging in the country’s auto market, BMW said in an e-mailed statement. The carmaker and dealer group “reached consensus on the structure of optimized business measures and financial allocation for the dealers,” according to the e-mail.
The German automaker delivered 415,200 vehicles in China in the first 11 months of 2014, operating through a network of more than 440 BMW sales outlets and 100 Mini stores. BMW plans to help its dealers expand activities beyond selling new cars, including financial services and used car sales.
The additional activities offer “large potential” for BMW and its dealers, said the automaker, which will double the number of locally produced cars to six models in the next few years.
Automakers are increasing the number of factories even as more cities in China impose purchase restrictions on vehicles to control congestion and air pollution. Shenzhen, the large metropolis bordering Hong Kong in southern China, on Dec. 29 followed other Chinese cities including Shanghai, Beijing and Guangzhou in setting quotas on new vehicles.
Unsold stock on dealer lots rose to the highest level in November since August 2013, according to the association’s data.
Baoxin Auto Group, the dealership group that accounted for almost 10 percent of BMW’s sales in China in 2013, gained 2.7 percent to HK$4.60 for the biggest gain since Nov. 24.
BMW’s payout increases pressure on other automakers facing similar demands by their dealerships for financial support. As many as 10 percent of dealers for one of Toyota’s China ventures are poised to drop out of the network because they can’t make money on the cars they’re told to sell, the dealers association said last month.
The negotiations for financial support are part of a broader push by China’s auto retailers to gain more autonomy from manufacturers, which currently dictate the number and type of cars they sell. Sales targets are crucial because dealers must meet them to qualify for year-end bonuses, which account for more than half of their annual profit from selling cars, the China Auto Dealers Chamber of Commerce, a separate distributor group, said last month.
The chamber last month proposed to the government that automakers be prohibited from dictating the number of cars they sell and extend the duration of distribution contracts to stem losses in the industry.