Starbucks, McDonald’s and KFC outlets are all too common sights in towns and cities across much of the world.

But in China, it seems, you are just as likely to run into a car dealership selling the wares of one of the country’s best-selling auto manufacturers.

According to calculations by Robin Zhu, a senior analyst at Bernstein, GM, VW Group and Nissan have 8,400 dealerships in China between them, within a whisker of the 8,600 McDonald’s, KFCs and Starbucks outlets the Middle Kingdom boasts, as the first chart shows.

And that is not taking into account the 5,100 dealerships in the distribution networks of five other foreign auto manufacturers: Honda, Toyota, PSA Peugeot Citroën, Ford and Hyundai.

Perhaps unsurprisingly, Mr Zhu wonders if this might be too many, suggesting this “McDealering” could be a “catalyst for chaos” in 2016.

“Do Chinese cities really need as many car dealers as fast food restaurants? We think these numbers highlight just how large and dense the dealer networks have become, and the extent to which over-penetration has become a problem,” he says.

“[This] over-dealering represents one of the most significant challenges for pricing and profitability in the Chinese auto industry, and one of the most under-appreciated structural issues among investors.”

One of Bernstein’s concerns is that the proximity of many dealerships is encouraging buyers to play them off against each other, eroding retail pricing power. This danger is exacerbated by the presence of intra-brand competition, where two or more chains of dealers compete head-to-head.

In Beijing for instance, two of the three largest dealer networks sell Volkswagens: FAW VW and Shanghai VW, both joint ventures with Chinese state-owned manufacturers, as the second chart shows.

This problem is not limited to megacities such as Beijing, where Bernstein counts 391 dealerships among the top 21 brands, and Shanghai, with 344 dealers.

Even in cities it dubs Tier 2 and 3, it found each of these 21 brands had an average of 4 outlets per city, with Shanghai VW typically having seven or eight a city and FAW VW five or six (in addition to another six or seven for VW Group’s Skoda and Audi marques).

“Cannibalisation amongst dealers was one of the main contributors to declining retail pricing over the summer of 2015 as dealers of the same brand increasingly tried to undercut one another, and looks set to remain a risk,” says Mr Zhu.

As EM Squared reported this month, car sales in China are currently strong, with a temporary tax cut helping push light vehicle sales to a record high of 24.2m (on a seasonally adjusted annual basis) in November, underlining the country’s position as the world’s largest market.

Bernstein argues that expectations of strong sales growth have drowned out concerns about overcapacity, but that the dealer network “remains unsustainable”, with more than 26,000 dealers at the end of 2014 — 60 per cent more than in the US.

Indeed, while the US has about 13,000 Starbucks outlets and 12,800 McDonald’s restaurants, the number of Ford dealerships is less than 3,500. Toyota, the world’s largest car company by unit sales, has 1,750 outlets in the US and Canada.

Mr Zhu goes as far as to claim that running a Chinese dealer is increasingly akin to a “McJob” — unstimulating, low-paid and with few prospects — and this in turn is ”putting off Chinese entrepreneurs”.

With new car profitability “looking permanently impaired” and after-sale service margins now “under attack” following a market liberalisation that allowed consumers to service their cars at a non-franchise location during the warranty period, he believes a crunch may be looming for manufacturers.

“We expect many to face the unpalatable choice of accepting shrinking distribution scale, impacting sales, or financially supporting hundreds of increasingly challenged dealers, impacting pricing and profitability,” says Mr Zhu.

“Returns in the market may be about to fall irreversibly.”

GM, VW and Nissan all declined to comment.

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