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Audi Dealers Running up the White Flag?

Date:03-24 15:17 Source:TsingAuto Authour:Liu Weiyan

The escalating internal conflict between Audi and its dealerships is a hot topic among the media. However, just as Audi and FAW were about to up their ante, market pressure is destroying the “morale” of FAW-VW Audi dealers. “Stop ordering Audi cars”, which was intended to be the killer punch, is turning into an empty slogan.  

“Currently, Audi’s major models are available with bigger discounts.” So said “Wang Meng”, a manager of an Audi 4s store, when talking to me recently.

Just three months ago, the news came out that SAIC and Audi were going to start a new partnership. Fearing that this would hurt their profits, SAIC-VW Audi dealers got together on February 16th in Sanya and formed an Audi Dealers branch of CADA (the China Automobile Dealers Association). They also issued the "Sanya Declaration" and carried out a number of protest actions, including a threat to stop ordering Audi models. They required that any dealership should report to the dealers association if it wanted to order a model from Audi.

Audi’s reaction showed in full the stubbornness of the Germans. Recently, Dietmar Voggenreiter, Global Sales and Marketing Chief of Audi, made it clear that he would not prevent Audi dealers from dropping out, which served to escalate the situation. The Audi dealers association quickly issued a condemnatory statement and asked Audi to give a response to the "Sanya Declaration" by March 31st.

Audi Dealers Running up the White Flag?

However, in the real world, it seems that Audi dealers have already run up the “white flag” - they started to order cars again just after the Spring Festival. “This must have something to do with the special characteristics of Audi dealers and their own operating pressure,” said one Audi dealer in Beijing. It seems that the “reporting system” for car ordering now exists in name only.

The negotiations between FAW and Audi are far from over. On the contrary, they are entering a new phase, and dealers will be taking a more passive role.

Last November in Wolfsburg, Germany, SAIC and Volkswagen signed a Memorandum of Understanding on “Framework Agreement on Manufacturing and Selling Audi Products in China, Selling Audi Imported Vehicles and Providing Related Mobile Services”.

This came no doubt as a sudden blow to the FAW-VW Audi dealers, and immediately provoked an angry “backlash”. At the end of November, it was reported that a lot of Audi dealers had stopped ordering cars from Audi and were even raising the prices of Audi models.

“It is true that some dealers have stopped ordering Audi vehicles,” said “Wang Meng”. “But these are mostly imported models. A lot of dealers import only a few every month, and some have also reduced the discount to about 2%.”

“At the same time, the Audi Dealers Association was demanding that dealers report the number of orders to them. This was seen as a way to control the dealers’ vehicle ordering patterns.”

But this series of protests did not have a lasting impact.  

Audi Dealers Running up the White Flag?

An FAW-VW Audi dealer in Beijing told me, “The Audi A4L was upgraded only last year, so its current market performance doesn’t mean much. But with that exception, other major models, including the Audi A6L, the Audi Q5, the Audi Q3, are all on offer with higher discounts, almost as much as last October.”

“Wang Meng” also confirmed, “Not only are we offering higher discounts, but we have also been ordering (domestically produced) cars according to our own sales plan.”

Statistics show that Audi achieved sales of 32,000 vehicles in China this February, a year-on-year decline of 6.3%, which was much better than the 35.3% decline in January.

“But dealers are still purchasing few imported models,” added “Wang Meng”. “A lot of 4s stores only import a vehicle when they have a confirmed order.”

This is understandable, as imported cars contribute far less to Audi’s sales in China than domestically produced ones. In 2016, Audi sold a total of 592,000 vehicles in China, of which 536,000 were from domestic production, accounting for more than 90% of the total.

Dealers can no longer afford this game

The attempted protest by FAW-VW Audi dealers through threats to stop ordering cars is not something new.

Back at the end of 2014, another German luxury car brand was also dragged into a war with its dealers. As profits continued to decline and no assurance was given concerning future profits, Chinese BMW dealers joined together, threatening to withhold their orders and refusing to accept sales targets. Ultimately, this war ended with BMW paying  compensation of RMB 5.1 billion Yuan to its dealers.

“Unlike BMW dealers, most of whom joined the sales network as groups,” “Wang Meng” said, “Audi dealers are mostly individual stores.” That is why Audi dealers do not have the same persistence – they do not have the same level of collaboration. Each is concerned primarily about their own individual interests.  

The FAW-VW Audi dealer in Beijing explained further: “Audi has still not released its annual sales targets, more than 2 months later than it has done so in prior years. But we are independent business entities with our own internal targets and performance indicators. We have to sell cars to meet these targets.”

A dealer in Shanghai expressed the same concern. “Competitors are working hard, and so must we.”

According to a Tsingauto survey, in one of the most competitive markets – the C-class luxury car market - some models of the BMW 5 series are available with a discount of 15%-20%, and the Mercedes Benz E-Class, which was upgraded last year, are also priced a little lower.

The impact of competition has started to make itself felt. Statistics reveal that after the BMW 5 series surpassed the Audi A6L in sales last year, the Mercedes Benz E-Class also beat the Audi A6L this February.

 Audi’s delaying tactic

Now that Audi cars are being offered with higher discounts, and some dealers are starting to take more stock, it is clear that Audi’s “delaying tactic” is working, and that it will gradually take back the initiative in this carmaker-dealer war.

Another element of the Sanya Declaration stated that until the goal of selling 1 million cars by 2020 was realized, the dealers would object to any Audi proposals to build new partnerships and new sales networks in China.

“Audi was supposed to give a response to this declaration by March 20th,” said “Wang Meng”. Apparently, Audi failed to keep that promise.

According to a media report, Dr. Voggenreiter said in an interview “Audi and its dealers are partners. Should mutual trust be lost, affecting the cooperation between the two sides, we cannot force the dealers to maintain this relationship against their will.”

Shortly after Dr. Voggenreiter had said this, the Audi Dealers Association responded “The ‘Sanya Declaration’ is a genuine, serious and reasonable demand on the part of China’s Audi dealers. We hope that Audi will give a clear response by March 31st.”

One insider said: “To the outside, dealers ceasing to order cars has always been an important means of hitting back at Audi, but if the dealers themselves have lost their commitment, Audi will probably delay its response to the Sanya Declaration even longer. This will also intensify the tug of war between FAW and Audi.”

In the past 4 months, the conflict between FAW and Audi has continued to escalate. It all started when SAW and Audi signed the MOU, and the dealers started to protest. Then Dr. Jochem Heizmann, President and CEO of Volkswagen (China), claimed that Volkswagen had no plans to make Audi cars with SAIC in China before 2018, and the “Sanya Declaration” was issued. More recently, a senior executive of Audi has taken a tough stance, and the Audi Dealers Association has made another announcement, and asked Audi to give a response. The smell of gunpowder is getting strong.

Some people think it is time that this war ended. But now that the dealers’ fortress has started to crumble, with one less point of leverage available to them will the tough guys of FAW give up just like that? Perhaps it will only lead to a further escalation. 

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