The little-known Henan city of Luohe may not ring a bell with many mainland Chinese but it’s beaten out major second-tier centers like Chengdu and Qingdao and even thumping metropolises such as Shanghai and Beijing to become the home of BMW’s latest mainland dealership.
Operated by China Harmony Auto Holding Ltd. (03836.HK), the new 4S, or full-function dealership, is the result of both strong local government support and growing market demand.
For the world-class premium maker to pick Luohe says something about the source of the group’s future China business growth.
While it’s no longer rare for the middle class and elite in affluent regions to own a luxury marque, the market is apparently much underserved in less-developed areas, presenting a segment with much potential for growth.
Luohe does not make the top 50 mainland cities by GDP ranking, but even if just a small percentage of populous Henan can afford an expensive model, it may add up to a rewarding customer base for the new outlet. With few other top brands to compete with, the Luohe 4S shop stands a better chance of winning buyers.
China Harmony has been a firm believer in the draw of luxury rides in the country’s economic hinterland. It has shaped its network strategy around this concept, locating most of its up-market car dealerships in central-western China. In top-tier cities, the company focuses on the ultra-luxury car segment.
Such tactics have worked well. In the first six months, China Harmony’s revenue was up 24 percent year on year while net profit expanded 52 percent. The company sold 6,327 BMWs in the period, about 90 percent of its total new car sales.
China Harmony also opened a Henan MINI store in the first half, and two more cities in the province — Shangqiu and Nanyang — will be the sites of new Volvo outlets from the dealer. Elsewhere, it has been authorized to open one Ferrari and Maserati outlet in Shijiazhuang.
Car sales are not the only potential source of profit. As premium car owners are generally less price sensitive and care more about keeping their status symbols in good condition, luxury car dealers can look forward to a river of after-sales service revenue from motorists unlikely to turn to cheaper quick-fix repair shops.
China Harmony, for example, saw a 20 percent gain in gross profit in the first half from car sales, an impressive figure but one left in the shade by the 90 percent-plus surge in its after-sales services. Gross margin for car sales was under 10 percent; profitability for fixing and maintaining vehicles was almost 50 percent.
China Harmony describes China’s market potential as huge, a view shared by many peers. Chairman Feng Changge points to urbanization and rising living standards as reasons to be bullish.
These macro trends are hardly news and, from time to time, doubters draw attention to the shadows cast by restrictive car purchase policies, a rumored new sales tax, occasional car inventory pileups, and the broad economic slowdown.
The key difference between commentators and entrepreneurs is that observers change their views as often as their clothes, but businesspeople commit once they are convinced of the long-term big picture. And for entrepreneurs, that means putting down serious money, growing a network step by step and plugging away regardless of headwinds.
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