January 5, 2015 / 8:54 AM / in 3 years

BMW's China dealers say company agrees to pay $820 million subsidy

SHANGHAI/FRANKFURT (Reuters) - BMW (BMWG.DE) will pay 5.1 billion yuan ($820 million) to auto dealers in China who pressured the world’s top luxury carmaker to share the cost of overstocked showrooms, BMW’s main Chinese dealership group said on Monday.

An employee removes a plastic cover from a new BMW car at a BMW dealership from the Baoxin Auto Group in Shanghai September 2, 2014. REUTERS/Carlos Barria

Car sales growth in China, the world’s largest auto market, was expected to halve to 7 percent in 2014, bringing demands for compensation from dealer groups which had bought vehicles on expectations of rapid growth.

BMW has been hit by a slowing Chinese economy where cut-throat competition leave its aging product range increasingly exposed. Its 7-series limousine for instance, on the market in China since 2009, competes with a new version of the Mercedes (DAIGn.DE) S-Class, launched in late 2013.

BMW declined to give details of the deal but Chinese dealers and analysts were upbeat an agreement had been struck.

“This is the biggest such subsidy we’ve had in China ... because last year, dealers had the highest level of stockpile,” said Song Tao, deputy secretary general of the China Automobile Dealers Association (CADA), which had represented dealers in the negotiations.

“I‘m glad the negotiations ended with champagne,” Song said in a phone interview.

Other foreign automakers such as Toyota Motor Corp (7203.T) are also negotiating with their dealers in China, who have complained to the government that they are obliged to buy too much stock, leading to large losses in a slowing market.

PREMIUM SALES

IHS Automotive expects premium car sales growth in China to slow to 5 percent by 2018 from an average rate of 30 percent over the past decade, while the market gets more competitive.

Ford (F.N) launched its Lincoln brand in China last year while luxury brands such as General Motors’ (GM.N) Cadillac and Nissan Motor’s (7201.T) Infiniti joined the rush to localize production.

BMW started subsidizing its dealers in 2012 due to falling retail prices, with the payout in 2013 reaching around 3 billion yuan, according to a senior executive at one dealership who declined to be identified.

BMW shares closed down 3.3 percent at 85.08 euros.

Analysts at Evercore ISI said a substantial amount of the payment had already been incurred in nine-month results released in November.

“We believe it is positive that BMW has reached an agreement and this should put an end to the ongoing public statements by BMW’s Chinese dealers,” Evercore said in a note.

”The number mentioned by the Chinese dealer association covers all of BMW’s bonus and support payments to its Chinese dealers for 2014 and some payments for 2015.

“This is not a new or additional number and it will not trigger any special reporting at BMW,” the note said.

For BMW, China remains the key battleground for retaining its crown of largest luxury auto maker by sales.

BMW reiterated it is sticking to its full-year target of selling more than 2 million cars worldwide, saying it still sees China as a growth market which is “normalizing” after a spurt in the past few years.

“Many automotive dealers in China had experienced pressures and challenges from the market in the second half of 2014,” it said in a statement emailed to Reuters.

Recent figures showed the company keeping its lead over rivals Audi and Mercedes, as sales in China and the United States helped it report record November deliveries.

($1 = 6.2190 Chinese yuan renminbi)

Additional reporting by Adam Jourdan in Shanghai; Editing by Keith Weir and David Holmes

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