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China's car dealers pay the price for rapid expansion and neglect of after-sale service
 Dealers in China have good reason to criticize carmakers for burdening them with excessive vehicle stockpiles -- a market dynamic that has forced them to slash prices and swallow losses.

But a report released this month by the China Automobile Dealers Association shows that retailers are partially to blame for their predicament.

The report analyzes 11 public dealership groups that sell a wide range of vehicles, from inexpensive Chinese brands to global luxury marques.

The companies range in size from Xuhu Yaxia Automobile Co. -- whose sales last year totaled 5.2 billion yuan ($850 million) -- to Pang Da Automobile Trade Co., which generated revenues of 60 billion yuan.

Despite their vast differences in size, the 11 companies had two traits in common: They expanded too aggressively and they relied too heavily on new-vehicle sales.

Last year, seven of those dealership groups had their assets grow more than 15 percent. They did so mainly by constructing new stores. In China, it can cost several million yuan to open a dealership, and now some dealership groups are paying the price.

Yaxia, for one, lost 65 million yuan in 2014 -- the result of costs incurred by operating 51 new dealerships, the company admitted in its financial report.

Overexpansion is bad enough, but these dealership groups have an even bigger problem -- a near-total reliance on new-vehicle sales for revenue. The report notes that new-car sales generated 91 percent of the dealership groups' revenue and 51 percent of gross profits.

This suggests that after-sales services such as spare parts and repairs are severely underdeveloped.

Dealerships aren't going to rid themselves of these headaches anytime soon. To grab a bigger share of China's market, global giants such as General Motors and Volkswagen AG ramped up production capacity despite slowing sales.

As they did, automakers pressured dealers to order more cars. For much of 2014, dealerships across China carried more than 40 days' supply, well above the normal range of 24 to 36 days. 

As competition heated up, prices of new vehicles steadily declined. That explains why impressive sales growth failed to generate profits for China's dealers. 

Last year, the number of vehicles sold by the 11 listed dealership groups rose 15 percent. But their total revenue only rose 6 percent, and their profits actually dropped 11 percent.

Given China's slowing economy, most automakers have lowered their sales targets this year. That means dealership inventory pressures likely will ease.

But if dealers continue to neglect their service and parts operations -- even as they open new stores -- they will have little chance to make money.