The gate is shut, the cars are gone. A former Citroën 4S dealership sits empty on Wudong Road, Wuzhong District in Suzhou, near the Suzhou-Jiaxing-Hangzhou Expressway on October 21, news photos from ChinaFotoPress showed.

Li Jing, owner of two Citroën stores in the city and another one in Lianyungang, deserted her multimillion-yuan businesses in mid-October to escape creditors, taking with her down payments and deposits from over 200 customers, according to media reports.

Li was caught by police in Zhuhai and sent back to Suzhou for investigation, it said.

During the week between October 15 and 21, more than 10 creditors came to Li's 4S stores in Suzhou with documents and receipts showing debt amounts ranging from 1 million yuan ($160,000) to 30 million yuan, in addition to customers and employees seeking compensation and salaries, China Business News reported Tuesday, citing para-police at the scene.

According to a performance report found in a general manager's office in one of the dealerships, the operation sold around 60 new cars monthly in the first five months of the year, almost in line with the dealership's target, the newspaper said.

Last straw

"Confronted by the manufacturers' aggressive sales targets and lackluster results from their marketing efforts, the accumulation in inventory at dealerships has exerted further strains on the finance chain that sustains their business," British accounting firm Deloitte Touche Tohmatsu said in an executive summary of its 2012 China Auto Dealership Performance Study in September.

Average inventory turnover in dealerships in China increased to about 70 days in June from about 40 days in December 2011, higher than the industry benchmark of 45 days, Deloitte's research showed.

The comprehensive dealers' inventory index came down to 1.65 points in August from 1.98 points in June, still above the 1.5-point alarm line, the China Automobile Dealers Association said in a statement on its website in late September.

"Due to the dealers' high reliance on external funding sources, [the dealers] likely [face] the risk of a fracture of their financing facilities in the event of a policy change over credit lending," Deloitte said.

One of Li's dealerships sits on a 0.67-hectare plot of land, which she bought in 2005. "A 4S dealership needs a tremendous amount of operating cash flow, and a company would inevitably be tempted to borrow shark loans. However, the dealerships' gross profit margins are far lower than the interest rates of the shark loans," China Business News reported, citing a source named Wang Hua, who has known Li for five years.

"If it weren't for the shark loans, Li's company would not have collapsed," Wang told the newspaper.

High inventory, low margin

"Because the overall economy in the European Union is sluggish, many foreign carmakers want to transfer their inventories from the EU to China to digest," Zeng Zhiling, director of LMC Automotive Asia Pacific Forecasting in Shanghai, told the Global Times.

Automakers are facing a 35 percent overcapacity in the EU, Zeng said. While China's car market growth has slowed down, it is still growing at around 8 percent a year, and 20 to 30 percent a year in the luxury segment, he noted.

"Affected by such factors
as the general conditions in the market, regional competition, and inventory pressure, a tumble in gross profit margins for new vehicle sales has been noticeable," Deloitte said.

According to the accountants, returns on new car sales in China declined sharply to close to zero percent in June from nearly 2.5 percent in December 2011. The industry profit benchmark is 3 percent.

Wuhan Kangshun Auto, a local dealer in Wuhan, Hubei Province, said that it recorded a loss of 50 million yuan in the first half of the year, and it expects to make another 50 million yuan loss in the second half, Xinhua New Agency reported on Tuesday, citing an unnamed executive at the company.

The dealer lost 50 million yuan on selling BMW cars alone this year, with a 1 to 2 percent loss on each unit sale, the executive told Xinhua.

New car sales no longer generate profits for car dealers in China - the same is true in the US - and now they have turned to rely on after-sales services and repairs to make money, Zeng said.

Luxury vehicle sales in China used to enjoy healthy profit margins, but this year, luxury carmakers, including BMW AG and Mercedes-Benz, heavily slashed their prices to digest high inventories, so that many high-end dealers' profitability has also become reliant on after-sales services and repairs, Zeng said.

Realignment

"The current winter freeze among auto dealers is likely to
give rise to a reshuffling in the auto sales industry, and the occurrence of mergers and acquisitions by dealer groups will be certain
to intensify," Deloitte predicted in its report.

Small dealerships are going to find it more and more difficult to survive in the current environment, and more small firms are likely to be taken over by larger ones, which have deeper pockets and a stronger bargaining power with the manufacturers, Zeng said.

"In the medium- to long-term, the market still has potential, and that's why some luxury brands, especially the stronger brands, are still opening dealerships in Beijing and Shanghai," Zeng said.

BMW AG opened the first Mini 4S store in Beijing, the sixth in China, on October 15, followed by another opening in Huzhou, Zhejiang Province, on October 17, the Economic Observer reported on Monday.

As of the end of September, BMW sold 17,256 Mini vehicles in China, up about 46 percent year-on-year, the news report said, citing BMW Mini China Brand Manager Zhu Jiang.

Meanwhile, Ford Motor's China joint venture, Changan Ford Mazda Automobile Co, opened a North China training center with Tianjin Vocational Institute on October 19 in Tianjin to meet the human resources demand brought about by fast expansion of its sales network in China, Ford said in a press release on its Chinese website.

"After graduation, these young people will enter our dealership network across the country, and there provide high-quality products and services to the national consumers," said Marin Burela, president of Changan Ford Mazda.

The foreign automakers may have realized they were overly optimistic about China, and plan to import 11 months' worth of vehicles in 2013 in a bid to reduce sales pressures on dealers, Beijing Business Today reported Tuesday, citing Wang Cun, a marketing manager at China Automobile Trading Co.

Meanwhile, Deloitte said,"When executing M&A by the dealer groups, close attention must be paid to the financial status of the individual dealer to avoid excessively fast-paced expansion, and thus jeopardizing overall liquidity."