BEIJING (Reuters) - An anti-trust probe into global auto makers is being cheered on by car 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.
Foreign brands including Jaguar Land Rover, Volkswagen AG’s (VOWG_p.DE) Audi, BMW (BMWG.DE) and Mercedes-Benz (DAIGn.DE) are scrambling to lower prices for both new cars and spare parts in an effort to appease Chinese regulators who have accused some of them of anti-competitive behavour.
As well as charging higher prices in China than consumers pay elsewhere, some dealers say foreign luxury marques have also been running quasi-monopolies on even generic spare parts and accessories such as tyres, engine oil and aluminium wheels.
“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,” said 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 maximise profit.”
An array of industries have been coming under the spotlight as China intensifies efforts to bring companies into compliance with its anti-monopoly law enacted in 2008.
The auto sector has been under particular scrutiny, and the National Development and Reform Commission (NDRC), China’s state planner, has been investigating the industry amid accusations by state media that global car makers are overcharging consumers.
Industry experts say automakers have too much leverage over car dealers and auto part suppliers, enabling them to control prices, considered a violation of China’s anti-trust laws.
The NDRC, which regulates pricing activity, said on Aug. 6 it would punish Audi and Fiat SpA’s FIA.MI Chrysler for monopolistic practices, a ruling that could see the car makers fined up to 10 percent of their sales revenue in the world’s biggest auto market.
The NDRC gave no details, but an Audi dealer executive said the regulators’ investigation, focused on the central province of Hubei, was in part about alleged price-fixing.
“The whole affair was instigated by the manufacturer, and everybody had the same price for some parts and car models in the region,” the executive said.
An Audi spokesman in Beijing confirmed that the sales arm of the brand’s China joint venture with state-owned FAW Group had “partially” violated China’s anti-trust laws in Hubei and would accept a penalty when it was formally levied.
The spokesman said Audi “would not be able to comment on details as to the size of the penalty or the precise nature of the violation, until the final conclusion of the investigation is announced”.
Audi is by far the most successful foreign premium car brand in China, favoured by both state officials and entrepreneurs.
German luxury rival Mercedes-Benz is also under investigation for alleged price fixing, according to a senior executive at one of China’s biggest Mercedes-Benz dealer chains.
The executive said a 10-hour raid by NDRC investigators on Aug. 4 at the Mercedes-Benz east China sales office was partly about collecting evidence of possible price-fixing on new cars and spare parts by the German brand and its dealers.
His knowledge of the probe stemmed from the fact that one of his dealerships was raided on the same day, he said.
Beijing-based Mercedes-Benz spokesman Senol Bayrak said it was cooperating with China’s anti-monopoly authorities, but declined to comment further because the investigation was “an on-going matter”.
China’s anti-trust authorities have taken aim at industries as varied as pharmaceuticals and electronics in recent months.
Foreign milk powder producers were fined in 2013 for colluding in setting prices for their products, and regulators named U.S. chipmaker Qualcomm Inc (QCOM.O) as a monopoly last month and are widely expected to levy a heavy fine.
Agency investigators also raided Microsoft Corp’s (MSFT.O) offices in four Chinese cities.
Some foreign firms and others, including the American Chamber of Commerce in Beijing, have argued China’s real intent is to give its homegrown players a competitive edge.
But China insists that the probes are intended to protect Chinese consumers and companies.
In the auto sector, regulators are also zeroing in on the high prices global auto 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 said.
BMW did not respond to Reuters’ requests for comment.
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 percent on a gross basis in recent years due to aggressive discounts and sales incentives to maintain growth.
Still, his stores were prevented by tight manufacturer-dealer agreements that set sales performance objectives for even those generic items.
“If you don’t make those targets, you stand to lose very generous rebates and bonuses BMW pays periodically,” said the dealer. Those rebates and bonuses, he said, are often an essential source of profitability for car dealers operating in China, where a slowdown in the country’s once red-hot auto market, even as more premium auto brands pile in, has made the competition cut-throat.
“We mostly lose money selling new cars and make it all up by achieving sales goals and getting bonuses and rebates from the factory when they feel generous,” the BMW dealer executive said.
Auto manufacturers and their brands exert power over dealers in markets around the world, and it was not immediately clear whether using contractual agreements or sales performance objectives to compel dealers to buy readily available generic components and products from or through the company would be outlawed under competition rules in more developed markets.
But in advanced markets such as the United States, retail store operators have given themselves more clout in dealing with manufacturers by establishing brand-by-brand dealer associations, which are still being formed and developed in China.
In the United States, the agreements between the dealers and the manufacturers are also driven by state franchise laws that give dealers more influence and freedom in procuring spare parts from multiple suppliers, said Daron Gifford, a partner with industry consultant Plante Moran.
“In China, the manufacturers do have a lot more power,” Gifford said.
Reporting By Norihiko Shirouzu in Beijing; Additional reporting by Bernie Woodall in Detroit; Editing by Alex Richardson