06 January 2015

BMW Payout To Chinese Car Dealers - Why?

BMW car dealers are pulling their hair out in frustration

China car sales have been growing quickly for some time now. The Chinese government virtually forces car makers to open plants in that country by heavy tax imposed on imported vehicles. Car makers then have to keep opening new plants to keep up with escalating demand. dealers are paid bonuses for reaching sales targets as market share is aggressively chased. Then suddenly growth slows.....

Dealers cannot meet targets and having tried to do so are losing money. Dissatisfied dealers need financial help. BMW has stepped in and agreed to pay to its dealers US$820 million to keep them on board and smooth over the anger they feel.

What has gone wrong? The Chinese government cannot help itself meddling in the car industry to get what it wants. Whenever governments get too involved in business, it creates problems. Surely they could reduce import duties on imported cars. If car makers could balance local production with imported cars, they could better manage supply and demand issues. The way things are now, overcapacity will be the new problem for many car makers in China.

Car producers are commercial ventures driven by profit. China has been a profitable market to be in and they have chased sales to make more money. Now that the 'gold rush' situation is coming to an end, over capacity will hurt the bottom line. The greed of the whole situation has the potential of coming back to bite over ambitious car makers.

This payout will satisfy the dealers and more realistic bonus targets in the future should ensure this doesn't happen again. The longer term issue is how car makers work in a car market with excessive import duties and having to plan the right amount of factory capacity.

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