Modest growth

Sales growth has continued at a single-digit pace and prospects remain weak as the industry matures. After years of high-gear expansion, the auto dealership sector now faces an era of modest growth, according to Deloitte.

New challenges include high risk of cash liquidity problems and piling-up inventory.

In the first half of 2013, a drastic increase in production amid modest growth in sales led to excessive inventory. Some 74 percent of survey respondents attributed the oversupply to fierce market competition.

The Deloitte report said high inventories will give rise to funding and liquidity problems exacerbated by the lack of external financing and scarcity of internal capital at dealerships.

"After all, it is a capital intensive industry - auto dealers have always been operating with great balance sheet stress. Usually, they are highly leveraged to meet capital needs. Loans from local commercial banks are cited by 64 percent of respondents to be one of their major sources of financing," said Chow.

One of the emerging trends in the industry is expansion of sales networks into second and third-tier cities, partly due to government purchase restrictions in mature first-tier cities and partly because of pent-up consumer demand in smaller cities.

But the trend will make it harder for auto dealers to manage their sales networks, especially when qualified management and technical professionals are in short supply in lower-tier cities, said the Deloitte report.

With the steady recovery of China's auto market offset by challenges that emerged in 2013, the report advocated stronger cooperation among automakers, dealer groups and independent dealers, as well as tighter controls on capital, expenses and staff.

The report also highlighted the need for staff retention and transformation of the overall business model.