Deloitte's China Auto Consulting Practice managing partner Marco Hecker said the Chinese market still has huge potential because of having the highest growth in the world, and the largest volume.

"It is far from saturation. The Chinese auto market penetration rate is only 14 percent," he said.

"The premium auto market still has a faster growth rate than the overall market, and the international carmakers still have higher profitability than the local ones," he added. However, the consulting company's report found about only 30 percent of dealers were profitable last year, drastically lower than the 56 percent in 2012.

Bargaining power

When dealers formed groups and selected representatives to talk with the carmakers earlier last year, the international giants' attitudes softened to "negotiable". After the dealers ran the risk of refusing to take stocks, the carmakers showed their respect by offering more favorable support, including cash.

In the entire industrial value chain, dealers are in a weaker downstream position, compared with carmakers. The dealers previously obeyed the carmakers' instructions, including price dictation, because the carmakers could halt vehicle supply, reduce incentives, or even cancel authorization of a dealer as an extreme action.

Partner of Deloitte Auto Industry Liu Wei said the situation is an ordinary fluctuation between carmakers and dealers and happens every few years, not only in China, but also in the United States and Europe.

"This round of fluctuation was extended from 2013 and 2014 when the dealers' profitability declined from 7 percent to the current 1 to 2 percent.

"It's cyclical, as profitability fluctuates cyclically. When the profitability is high, carmakers and dealers will be in honeymoon mode again. The relation will be tense when profitability drops."

The market environment changed after a series of government actions last year. Premium carmakers, including JLR, BMW and Mercedes-Benz, were investigated from July for monopolistic practices, and fined for price fixing or dictation.

Parallel imports were legitimized from August 2014, after which international traders in free trade zones became another legal and public supply channel for auto dealers.

The government watchdog allowed dealers to modify their registration from "auto sales company of a certain brand" to just "auto sales company" from October 2014. A dealer could then turn to another auto brand more easily, or sell products from several brands at the same time, as the brand wouldn't be bonded in its registration at the local industry and commerce administration.

Soon, media reported dealers had cleared their stocks of one carmaker and switched to another more popular brand. Following that, the carmakers lowered their suggested retail prices.

Liu said: "Chinese dealers are chasing profitability but in a shortsighted way, as they are short of capital. So it will be very painful for them if their auto stocks last for 60 days. They switch brands, when they see a brand is unprofitable.

"The distribution sector requires large financing volume. Some dealers suffered broken capital chains then went bankrupt."

The recent moves show the dealers have now enhanced their bargaining power when facing the carmakers. Liu predicted their relations would ease back into honeymoon status soon.

He said the dealers tend to be more mature these years, and the carmakers are planning their production more reasonably in pace with demand.