By Samuel Shen and Edward Taylor
SHANGHAI/FRANKFURT (Reuters) - After years of outsized growth that turned China into the world's biggest car market, a slowdown is exacerbating tensions between global automakers and local car dealers, with smaller margins leading to tougher negotiations over sharing profits.
The dispute is turning costly for some of the auto firms, who have agreed to shell out hundreds of millions of dollars to keep the peace.
Spearheading the backlash is the China Automobile Dealers Association (CADA), a dealer trade body which earlier this week went public with an announcement that it had persuaded German automaker BMW to pay 5.1 billion yuan ($820 million) (BMWG.DE) in compensation to dealers for lower than expected 2014 profits.
CADA took the unprecedented step of giving interviews to foreign media to announce the deal. BMW has not confirmed the 5.1 billion yuan figure but says it has reached a deal which does not require it to modify its 2014 profit target.
BMW is not alone. Volkswagen-owned Audi (VOWG_p.DE) has pledged 2 billion yuan in subsidies, two sources with direct knowledge of the matter told Reuters. Daimler (DAIGn.DE) has paid China-based Mercedes dealers about 1 billion yuan, two sources familiar with the matter told Reuters. Both companies declined to comment on the figures.
And subsidies are not the only issue. Dealers also complain of high sales quotas, which can hurt their margins. Porsche, also owned by Volkswagen, has imposed a target to increase sales in China this year by 40 percent to 64,000 cars, which its dealers want scaled back, said a CADA official who declined to be identified. Porsche declined to comment.
The disputes are signs that the Chinese auto market is shifting gears from a period in which car makers and dealers scrambled to keep up with demand, to a new era in which China functions more like a mature market.
In 2013, the Chinese bought 492,000 Audis, 362,000 BMWs and 228,000 Mercedes, making the country an important battleground for the big German luxury brands.
But increasingly, Chinese drivers are more careful about prices and less willing than before to pay more than customers in other parts of the world. That means profit margins are lower, and dealers argue that they need bigger subsidies from the manufacturers to stay afloat.
The decision by the BMW dealers to go public about the scale of their payout has raised eyebrows in Europe, where it has been seen as a signal of deteriorating relations.
"The fact that the dealer body puts out these numbers is shocking," Arndt Ellinghorst, an automotive analyst at Evercore ISI said. "It is normally done behind closed doors. It raises a question over whether others need to rethink their dealership strategies."
BMW and its dealers both face a big year: the firm is about to introduce a new 7-series, an important vehicle for the Chinese market.
The carmakers say it is in their own interest to ensure that dealerships are profitable and well run. The dealer's showroom is the customer's first encounter with a luxury brand.
"A financially solid dealer network is part of our strategy, as satisfied dealers create satisfied customers," Audi said.
Daimler said its negotiations were aimed at striking "a healthy balance between sales performance in terms of volume and the operational quality and customer service of our dealers."
Volkswagen, Porsche and Mercedes negotiate with their dealers through "dealership councils" set up by CADA, which increases the dealers' clout.
CADA also has ambitions beyond representing the big importers of luxury foreign brands.
Song Tao, CADA's deputy secretary, said the body is in talks about helping to set up a dealership council at Toyota's <7203.T> joint venture with state-owned Chinese firm FAW <000800.SZ>, where he said the dealers want subsidies of 2.2 billion yuan and are not happy with the carmaker's response. Toyota declined to comment and a spokesman for the joint venture was not available.
“Many conflicts we see today result from lack of communications,” Song said. "Due to the difference in status, individual dealers are not willing to, or don’t dare to, talk frankly with the carmakers... If this new platform is set up, all issues can be solved on the negotiation table.”
($1 = 6.2125 Chinese yuan renminbi)
(Reporting by Samuel Shen in Shanghai and Edward Taylor in Frankfurt, additional reporting by Andreas Cremer in Berlin, Ilona Wissenbach in Stuttgart; Editing by Peter Graff)