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SHANGHAI—Audi AG dealers in China have threatened to take action against an agreement that paves the way for the country's largest auto maker to build and sell Audi vehicles there, fearing it would dilute already thinning profits as sales slow.

If the German auto maker doesn't call off its agreement to explore a tie-up with SAIC Motor Corp., China's largest auto maker by sales, the dealers said they would demand "hundreds of billions of yuan" in compensation for potential lost sales. They have also threatened to not accept new Audi vehicles from December, some of the dealers told The Wall Street Journal on Tuesday.

Representatives from 15 dealer groups, which have a combined 150 Audi dealerships, met with Audi's top executives in China on Monday, dealers participating in the talks said. The talks didn't yield any outcome, they said.

Officials from Audi and SAIC weren't immediately available for comment. The companies signed a memorandum of understanding on potential cooperation earlier this month. SAIC is also a partner of General Motors Co.

Currently, Audi makes and sells cars in China through a three-party joint venture with Volkswagen AG and FAW Group Corp. Dealers say an additional joint venture would add more dealerships to a network already struggling with slower sales and sliding profits.

"We firmly oppose Audi's tie-up with SAIC because it will seriously hurt our interests," said one of the Audi dealers.

Audi now has about 460 dealerships in China, with a third having opened in the past three years, said its dealers. "Our profits have dropped significantly. I couldn't imagine where we will go if the company adds another 200 dealers," said another Audi dealer who participated in the Monday talk.

Chinese regulations require foreign auto companies to team up with domestic manufacturers to build cars. Some foreign companies have two car-making partners in the country to tap demand for owning a car in China. For example, Volkswagen counts both FAW and SAIC as partners, and Ford Motor Co., Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. each have two Chinese partners.

However, analysts say luxury nameplates like Audi are in a weaker position to follow suit due to lower sales volumes.

"Although Audi has expanded very fast, its volumes are still small by mass-market brand standards," said Yale Zhang, managing director of consulting firm Automotive Foresight in Shanghai. Setting up a second joint venture will likely seriously divert sales from the current dealers, he said.

Friction between car manufacturers and dealers has risen sharply in recent years because of slowing sales and rising inventories. BMW AG last year agreed to appease its dealers by lowering sales targets and paying 5.1 billion yuan, or $740 million, in subsidies.

Audi's new agreement with Shanghai-based SAIC comes as its share of China's luxury-car market is falling as competition grows. Audi, which arrived in China in the mid-1980s and quickly gained a reputation as the maker of limousines favored by government officials, has long been the best-selling premium-car brand there.

Audi currently sells about 15% more cars annually in China than rival BMW Group, and nearly 30% more than Daimler AG's Mercedes, according to data from these companies.

However, the gap has been narrowed amid growing competition from BMW, Mercedes and new entrants such as GM's Cadillac and Ford's Lincoln models.

Rose Yu

(END) Dow Jones Newswires

November 22, 2016 03:45 ET (08:45 GMT)

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