Slower Growth Squeezes Auto Dealer Profits in China

China's cooling car market is sapping dealer profits and raising the likelihood that carmakers will be forced to launch new efforts to financially support their sales networks in the country, Bloomberg News reports.

The news service estimates combined net income for the eight Chinese dealers traded on the Hong Kong stock exchange plunged 29% in the first half of 2015. Analysts have predicted a 21% increase in full-year profits.

Over the past few months Audi, BMW, Toyota and Volkswagen have agreed to provide their dealers in China a combined 8.5 billion yuan ($1.3 billion) in aid. Analysts note that carmakers can't risk further sales erosion by allowing their retail networks to shrink.

The fortunes of Chinese car dealers are strongly linked to new-car sales, which produce about half their profits, according to Bloomberg. That contrasts with North America, where dealers derive more than 80% of their profits selling used cars, performing maintenance and providing financial services.

Sanford C. Bernstein and Co. estimates the average profit margin on a new car in China shrank to 3.3% in January-June compared with 4.8% the same period last year.

UBS AG predicts the growth in new-car sales over the past several years, coupled with the emergence of online auction sites and appraisal services, will push China's annual sales of used cars above 10 million units by 2017 from 6 million in 2014.