fit for growth - dealer management and risk …...pwc china autofacts seminar 2016 fit for growth -...

PwC China Autofacts Seminar 2016

Fit For Growth- Dealer Management and Risk Control

December 2016

www.pwc.com

PwC

Preface

Auto dealers are finding it harder to survive these days, showcased by many dealer termination and bankruptcy news. But dealer investors are also reluctant to leave this market which once enjoyed incomparable growth. Hence a “Fit-for-growth” adventure starts.”

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December 2016PwC China Autofacts Seminar 2016

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Golden Era? Gone with wind…Decreasing growth rate, intense competitions, policy change, monetary tightening and over-expanding dealer network all indicate that the Golden Era of 20+% growth is gone


Decreasing growth of demand with increasing network supply

• Overall auto market is under downward pressure and luxury market also suffering from heavily decreasing growth rate

• For top three luxury brands, their dealer networks have expanded so greatly that it significantly intensified the competition among them

Policy change results in profit erosion

Financing dilemma for auto dealers

2015.1Transportation Department, Guiding Opinions on Promoting Transformation and Upgrade of Automobile Maintenance Industry and Improving Service Quality

2015.10State Administration for Industry and Commerce, Measures for the Administration of Information Disclosure of Automobile Maintenance Technology

2016.1Commercial Department, Measures for the Administration of Automobile Sales

2016.3Development and Reform Commission, A Guide to Antitrust in the Automotive Industry

1. Loan policy from banks become more strict in a weak economy;

2. Commercial banks have raised the bar for auto dealers to avoid industry risk；

3. Some dealers have to turn to underground lending for survival

16%

10%7%

29%

24%

11%

0%

10%

20%

30%

2013 2014 2015

2013-2015 Market Growth of Passenger Vehicle

GR of Passenger Vehicle GR of Luxury Vehicle

Data Source: PwC, Sum of dealers is identified at the end of that year

1,107 1,296

1,454

2013 2014 2015

Dealer expansion of ABB

Sum of ABB Dealers

普华永道


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December 2015

2015.3 Beijing: LENTUO Group which used to list on NYSE closeddown

2016.4 Shanghai: several famous 4S shops are facing severe bankrupt risks

2016.2 Henan: the Boss of Yongxin Group lost connection hence former clients are making strong protests

2016.8 Fujian: Many popular 4S shops’(e.g. Chang’an and BYD) investors discontinued operations due to the out-of-controlled private-lending risk

2016.2 Hubei: several legal disputes incurred between 4S shops and clients since the investors have abandoned the shops

2015.8 Guangdong: several auto shops’ Capital Chains have broken

2015.6 Sichuan: several commercial vehicle’s 4S shops’ investors abandoned the operations

2016.4 Chongqing: large number of minor auto brands are jointly facing severe cash-flow problems and termination risk

2016.4 Hunan: the province-wide 4S shops belongs to Chang’an Ford made strong protest against the OEM

2016.11 Shannxi: one of the Top 100 Auto Retail Groups - Huaxia Auto Group is forced to discontinue the operation by the court

Sichuan Shanghai

Beijing

Chongqing

Hunan

Guangdong

Fujian

ShanxiHenan

Hubei

Termination and bankruptcy wave shock the traditional dealershipMore and more auto dealers are striving for survival

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Operation termination

High employee turnover rate;

Insufficient management

competence

Low AS loyalty

High expenses

Bad location choice

Poor environment

Cost control by group;

Investor intend to opt out

Insufficient MgtCapability

NCS Loss Poor EBTCash

ShortageSTD Bad

Performancecapital chain

rupture

Bank financing ceased

Cash flow Freez

Cash flow occupied by inventory

Debt dispute and lawsuit

The decline of traditional Auto dealersDealers are exposed to a variety of risks in daily operations, especially those lacking operation competence or rely heavily on external financing. The accumulation of risks may cause the breaking of capital chain and finally paralyze the dealer.

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Worst time? Or Best time?The future is not bright for traditional dealers, but for others, the best time is yet to come. Capital fluxes into connected car, car sharing, hailing service and other digital initiatives. Transformation of the whole industry is on the way

Car- SharingConnected E-commerceNew Energy

+ + +

• Shift from hardware to

software

• Auto-pilot driving

• Connected vehicles

• …

• Environment issues

• Technology

development

• Infrastructure progress

• ..

• Next battlefield for

online merchandise

• Precise advertisement

shaped by consumer

behavior

• …

• Tremendous shift from

ownership to usage

• Lower fee through

economic scale by big

data

• …

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“Do Nothing” Strategy

• No change to avoid risk of

disruption

• Not a sustainable solution

since the profitability is

shrinking steadily

• Expand through acquisition to

gain more market share

• Actively looking for high

potential business, e.g. Used

Car and related FS products

Expanding Strategy

Focus on After-Sales

• Upgrade service mindset and

leverage CRM system

• Expanding after-sales service

customer touch points by

satellite mini network

Total Transformation

• Reposition as total mobility

product and service provider

• Strive to change into system,

data and content provider

Where shall auto dealers go now? What you do at the toughest time in life defines who you are. Dealers need to make strategic decisions to transform their business model and find new source of growth.

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The Critical Role OEM plays in handling the challenges of changeDealers are still an unique party in the ecosystem, supporting OEM mass production and sales, their transformation would not be possible without OEM’s change in their network management

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Channel Strategy for the Future

Data-driven Operation

Monitoring

Overall Network Risk Management

NCS

AS

Survey

Parts

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December 2016

Channel Strategy（1/2）Establish modularized, flexible and customized management of dealer format

FlexibleModularized Customized

Optional Functional Areas

Reading room

Dining area

Kids garden

Massage area

Billiard parlor

Showroom

Flagship

Two-layer

Ａ

Ｂ

Ｃ

Ｓ

Workshop

Flagship

Two-layer

Ａ

Ｂ

Ｃ

Ｓ

CBD showroom, pre-owned car+ fast service store, and multi-brand store are introduced as new outlet formats on top of existing outlet formats

XX Brand2 Showroom

Workshop

XX Brand 1 Showroom

Showroom / Office

Workshop2

Workshop1

Showroom / Office

Workshop1

Workshop2

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December 2016

Channel Strategy（2/2）For different markets, a variety of 4S +S4 combinations can be formed to suite local needs

4S+S4S44S

Sales Service

SurveySpare Parts

Integration of 4S

City showroom

Test drive center

Used car mall

Accessory / Fin. product

mall

NEV showroo

m

Pure AS center

Bodywork center

Multi-brand

Community quick

service FS

OEM official website

Branded APP

3rd party partner

…

Parts supermarket

3rd party channel

Platform…

Sales

AS

Survey

Parts

Module separation , simplified if possible S4 development led by 4S

Modulation & Simplification Fleet-like Layout

4S S4

4S S4

S

Tier1&2

Tier2&3

Tier4 and Below S

Mini 4S multi-brand

city type

4S

+

S4

Dual-Layer

A-class B-class C-class Small showroomBodywork

centerUsed car

mallquick

service Multi-brand

Satellite ……

Tier1 √ √ √ √ √ √Tier2 √ √ √ √ √ √Tier3 √ √ √Tier4 √ √ √

Tier5&county √ √

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. •

Big Data Platform Development

Data Standardization

Data Collection

Data Application

Data Platform

• Align requirements of different departments, and define the

unique data source

• Data standardization at the level of all BUs

• Realize highly automatic data

monitoring and cleansing

• Provide analysis

and BI tools to

support OEM’s

decision-making

and dealers’

daily operation

• Timely and efficiently collect detail

business/financial data

Data-driven dealership performance monitoringTo help dealer achieve “Fit-for-Growth”, OEMs should start from data standardization, then BI platform and application development to closely monitor dealer and investor performance

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Capability Improvement/Decision Making SupportStandard Database

Data Quality Monitoring & Improvement

DMS System

Dealer Financial Management Handbook

Monthly Analysis Report BI system

Investor DatabaseExperience data and Model Construction

Dealer Report Template

Data-driven dealership performance monitoringWith improved data quality, OEM could grasp the market trend faster and understand dealers operation better, therefore improve its ability to predict risk and respond to market change

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Use Risk Warning Model to recognize and monitor potential risks

Recognize Risk 3-6 months in advance

Communicate with OEM regional management

Risk Management System helps OEM recognize the risk timely, adopt mitigation measures effectively, and improve the stability of the network.

Analyze operation/finance situation

Understand investor’s financing capability and intention

Dealers’ cash flow pressure test

Develop a toolbox of mitigation measures

Discuss solutions with OEM/dealers

Draft a plan and schedule

Risk Management SystemA. Risk Warning Recognize risks in advance

B. Risk Assessment Access overall risks

C. Risk Mitigation Deal with risks appropriately

Dealer Risk Management by OEM will become a key topicTaking quality dealer data as initial input, establish three-dimension Risk Management System and promote sustainability and stability in the network to help dealers transform

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Auto dealer Risk Management — Early WarningConduct multi-dimensional analysis based on intelligence of dealer’s operational and financial situation to recognize and predict dealer risks

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Lack of Management Competence?

Burdened by investor

cash drain?

Cash flow shortage?

Investor intend to

exit?

Investor disputes?

Large investment

upfront?

Data collection Risk Recognition Communication

Prompt Communication

Mechanism

Communicate promptly with OEM

regional management on dealer risks

PrelimineryMitigation plan

Come up with mitigation actions

ASAP based on risk prediction

NCS Volume GP before rebate

Throughputs Inventory Depth

Investor News Dealer News

Asset/Debt ratio Loan Amount

Financing Cost/Source

Operational Data

News Center

Financial Data

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Warning！Dealer A

2016.3

Warning！Dealer B

Warning！Dealer E

Warning！Dealer D

Warning！Dealer C

Warning！Dealer F & G

2016.4

Stopped STD

2016.2

Dealer A

Bank ceased financing

2016.5

Risk Exploration

2016.62015.10 2015.12 2016.1

Dealer C, Dealer D Dealer B Dealer E Dealer F & G

Dealer D: SOTDealer C: Investor running away

Capital Chain Rupture, looking for buyer

Suffered from big loss, looking for buyer

Auto dealer Risk Management – Real Case Analysis Dealer risks were predicted 3-6 months in advance with PwC track record in past two years

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Plan

Making customized risk mitigation plan after considering dealer capability, risk level and impacts to region/network

Communicate with regional manager/risk dealers/investors

Improve and adjust continuously and agree on the final plan

• Evaluate investors’ capability, intention, portfolio, legal and tax issues

Target market

Financial situation

Operating Condition

Investor Condition

Risk factors and impacts

Mitigation Plan • Make mitigation plans

Regional

Impact

Going

Concern

Root CauseAssess-ment

• Understand local market economy, demand, location and competitors

• Verify the dealers’ assets and liabilities and lending relationships

• Evaluate the operation efficiency, profitability and team competence

• Understand risk factors and impacts to the region

Auto dealers Risk Management – Risk AssessmentUnderstand the root causes of risk and assess impact on both dealer and OEM from multiple aspects

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Dealer Risk Management- Real Case Study

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Three 4S stores under one dealer group

1、Shareholding Structure

Root Cause of Risk:- Investor’s failure in Real-Estate industry, causing financial constraint throughout the group- Banks ceased financing without prior notice- Disputes between investors

2、Industrial Development Analysis- Investor 3、Dealer Operational Risk Analysis

4、Investor’s Risk Analysis 4、Financing Risk Analysis 4、Overall Risk Assessment

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Dealer Risk Management – Risk MitigationSelect tools according to dealers’ unique situation. For those with no strategic importance, termination and exit will be considered to achieve optimal allocation of OEM resources.

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Design Mitigation Tools Cooperation

Encourage cooperation between all stakeholders. Prompt implementation of rescue plan for risk dealers before it is too late!

Dealer Investor

Region OEM

Design risk mitigation tools. Tailor certain tools to support specific dealer.

Ris

k D

ea

ler

s No strategic importance

Strategic importance

Termination

Willing to turn around

No interest in dealership operation

Willing to sell

Willing for Interim Mgt.

M&A Support

IM Support

Capital chain risk

Poor management

Fast Cash Rebate

Profitability Improvement

Disputes among investors

Investor Interview

Mitigation Tool Box

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Dealer Risk Management– Termination Policy

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Former dealer shall just be terminated if there is no need to establish a new dealer according to network planning

Qualified dealer shall be selected and authorized to maintain market share in local market

Investors give up

Investors have no intention to operate continuously and wish to quit

Termination

based on

contracts

Terminateaccordingly

Unable to Rescue

Fail to Rescue

Unable to pay large amount of loans

Unable to resolve the lawsuit

…

Rescue plan cannot achieve the expectations

New Dealer Establishment

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Dealer Risk Management - Interim Management Example

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• Contact with both IM party and

investor, clarify requirements from

both parties

• Reach out to all related departments

to analyze the feasibility of IM plan

• Assess financial status on site

• IM party has signed an 8-

year-IM contract with the

investor

Interim Mgt. Plan

• Former investor shows no

interest in dealer business,

and poor management causes

huge loss and high turnover

• Unable to reach sales goal,

local market share decreases

Risk Progress Result

Example

IM Party StudyInitial Plan for IM

Key Decision Analysis

Feasibility Report Example

Applied to:

• Strategic position in

network

• Investor looks for M&A

solutions

• Potential “Interim

Manager” exists

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Dealer Risk Management - M&A Example

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M&A Plan

• Ruptured capital chain along

with private lending exposure

• Suspension of triparty

agreement and withdrawal of

bank loans

• Poor operation capability

• Bad location choice

Requirement：Sell

• Finance Due Diligence (FDD)

• Commercial Due Diligence (CDD)

• Assess operation team competence

and profitability for dealers

• Identify key financial risks,

operation problems and legal issues

during deal process

• M&A has moved on to

commercial negotiation after

initial contact, evaluation

and assessment

Risk Progress Result

Example – Package sale by a dealer group

M&A DD Example

FDDODD LDD

Applied to:

• Strategic position in

network

• Investor looks for

M&A solutions

• Potential buyer exists

Building trust in society and solving important problems

Thank you!

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2016 PwC. All rights reserved. PwC refers to the China or Hong Kong member firm, and may sometimes refer to the PwC network. Each

member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

fit for growth - dealer management and risk …...pwc china autofacts seminar 2016 fit for growth -...

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