A New Model For Selling Used Cars In China


Published on

The China used car market, which came into formal existence in the 1980s, went on a fast track in development during the 1990s. After nearly 20 years of strong growth, the used car market has become an important part of the automotive market, with an annual turnover of nearly 2 million vehicles. However, the huge growth in the market has not cultivated successful players—used car dealers are still lacking in core competencies, and associated differentiated advantages. Exploring a new model for China’s used car dealership is significant to the players seeking success in the market.

Published in: Automotive
  • i have a huge need of 01-06 chrysler sebrings in any condition in china. if anyone has any info or connections on who has them in china or how in the hell we can get them into china, please, please let me know. thanks so much. :) brandon

    email me at blongchina@hotmail.com
    Are you sure you want to  Yes  No
    Your message goes here
  • Dear Deborah,

    We are established in Miami for 15 years, with large experience exporting new cars to Brazil, Now we are expanding our business, looking for clients in other Countries, for new and pre owned cars, specially high end.
    Please, let me know if I can be of any assistance,

    Thanks & regards,

    Paulo Pereira
    Are you sure you want to  Yes  No
    Your message goes here
  • i have a warm need of 10 000 used cars from China and elsewhere in good conditions but under 1000 USD fob any export port within 3 years Hoping being knocking at the right door
    Are you sure you want to  Yes  No
    Your message goes here
  • i have a warm need of 10 000 used cars from China and elsewhere in good conditions but under 1000 USD fob any export port within 3 years
    Hoping being knocking at the right door
    Are you sure you want to  Yes  No
    Your message goes here
  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

A New Model For Selling Used Cars In China

  1. 1. Perspective Arnold Sun Edward Tse Bill Russo Ken ZhongA New Model for SellingUsed Cars in China
  2. 2. Contact InformationBeijingBill RussoSenior Advisor+86-10-6563-8300bill.russo@booz.comKen ZhongSenior Associate+86-10-6563-8300ken.zhong@booz.comHong Kong/ShanghaiEdward TseSenior Partner+852-3650-6100+86-21-2327-9800edward.tse@booz.comShanghaiArnold SunPrincipal+86-21-2327-9800arnold.sun@booz.com Booz & Company
  3. 3. EXECUTIVE The China used car market, which came into formal existence in the 1980s, went on a fast track in development duringSUMMARY the 1990s. After nearly 20 years of strong growth, the used car market has become an important part of the automotive market, with an annual turnover of nearly 2 million vehicles. However, the huge growth in the market has not cultivated successful players—used car dealers are still lacking in core competencies, and associated differentiated advantages. Exploring a new model for China’s used car dealership is significant to the players seeking success in the market.Booz & Company 1
  4. 4. PRoMISINg A variety of factors have fueled growth of the used car market enhance the situation. Domestic used passenger car sales reached 1.84MARkET in recent years. In 2009, for the million units and 100 billion RMB first time, the Chinese government in total revenue in 2009. However, addressed the goal of “vigorously the used passenger car sales volume developing the used car market” in was just under 20% of new car sales a work report. This was followed volume, which reached 10.33 million by a series of favorable policies that (See Exhibit 1). This undoubtedly further optimize the environment for indicates a great potential for growth, the used car market. For example, given the ratio of used car sales to consumption tax reductions on low- new car sales is 5:1 in the U.S. and emission cars, as well as subsidy for 1:1 in Japan. (See Exhibit 2, page 3). scrapped vehicles, each pose indirect positive effects on the used car With new car sales continually on the market. In addition, vehicle subsidies rise, an analysis by Booz & Company for rural areas drive inter-regional estimates that, by 2016, there will be circulation of used cars and stimulate around six million used cars traded in consumption. the market, with a CAGR of 20+%, even higher than that of new car Promising macroeconomic forces sales, and sales are expected to reach and a fast-growing new car market 600 billion RMB by that time. Exhibit 1 Sales and Trend of New and Used Passenger Vehicles SALES AND TREND OF NEW AND USED PASSENGER VEHICLES (TOTAL TRANSACTION, IN THOUSANDS) 2004-2016E 18,000 17,330 New Car Sales 15,900 Estimate 16,000 14,580 13,380 14,000 12,270 12,000 11,260 10,330 10,000 8,000 6,330 5,800 Used Car Sales 6,000 Estimate 3,790 3,540 4,000 2,910 1,840 2,230 2,000 0 2004 2006 2008 2010 2012 2014 2016 Source: China Auto Industry Association2 Booz & Company
  5. 5. Exhibit 2Sales of Used Passenger Vehicle to New Passenger Vehicle of China, U.S. and Japan SALES OF USED PASSENGER VEHICLE TO NEW PASSENGER VEHICLE OF CHINA, U.S. AND JAPAN IN THOUSANDS 3,730 4,500 6,080 7,600 8,190 12,170 24,060 60,430 8,560 12% 12% 15% 17% 17% 15% 26% 46% Used Car 83% FEW SUCCESSFUL CASES FoR 88% 88% 85% 83% 83% 85% 74% INDEPENDENT 54% New Car USED CAR DEALERS 17% 2004 2005 2006 2007 2008 2009 2015E 2009 2009 China U.S. Japan While the outlook of the China used car market is promising, there are relatively few examples of aSource: China Auto Industry Association; Booz & Company successful used car business model. Currently, used car businesses include individuals (commonly known as “scalpers”), OEM captive dealers, independent used car dealers (including branded dealers), 4S stores and automobile websites. The 15,000 “scalpers” account for 70% of the total sales. The illegal nature of scalpers has largely resulted in the overall lack of credibility in the market. For OEMs, captive dealers and 4S stores, the used car business is normally limited to a single brand and is an affiliate to the new car sales business. Most automobile websites are still in their nascent stage and are small in size. In the U.S. and Japan, the independently branded used car model is very successful in that used car dealers focus on brand- building and provide a one-stop shop services for used car customers.Booz & Company 3
  6. 6. NUMERoUS external financing to keep developing while sacrificing potential profits”. DISADVANTAgES HINDER Besides their limited scale, poor brand recognition and reputation are making PoSSIBILITY oF it more difficult for dealers to secure the SUCCESS necessary financing. Car supply Limited supply is another key issue that the independent used car dealers face. Success in the used car distribution The rapid expansion of China business requires a good financing auto market is a relatively recent capability, abundant car supply, development. The large population and attractive prices. Clear brand of relatively new cars, along with positioning and reliable value-added the generally longer average newSuch companies build reputation and services are the key differentiation car ownership period (5-10 years ongenerate higher returns. This type of factors. Failing to deliver on these average) in China, limits the supply ofbusiness model may yet find its way key success factors has hindered the used cars in the near term.to prosper in China. healthy development of the market. Meanwhile, most individual car In the meantime, other objective owners usually sell their cars to 4SHowever, despite interests from the factors, including price depreciation, stores, due to market familiarity,financial market, the annual trading diversified consumption habits, and price transparency, perceived integrityvolume of a top branded used car shortage of appraisal professionals, and brand recognition. As a result,dealer in China is around 5,000 units. have also negatively affected the independent used car dealers have noMany independently branded dealers development of independent used car particular advantages in sourcing andare unprofitable. The combined share dealers. rely predominantly on 4S stores forof the top seven domestic branded their supply. It is estimated that carsused car dealers is only around 1%. 1. key required qualities purchased from 4S stores account Independent dealers must have basic for 70%-80% of the total supply ofAt the same time, it is difficult capabilities such as strong financing independent used car dealers.for independent used car dealers capacity, a stable car supply andto achieve economies of scale. competitive prices. However, these In developed markets, used car dealersCompared to new car sales, used key qualities are not regulated or have diversified sources of cars,car sales require more tailored and coordinated in the domestic used car including individuals and the leasingcomprehensive processes before, market. market. But in China, the heavyduring and after the sale of the car. reliance of used car dealers on 4S storesIn terms of total activities involved Financing cannot be altered in the foreseeableand time spent, a new car transaction A strong financing capacity is required future.procedure is normally only 40% for a used car dealer, as they mustof that for a used car and a more manage a certain amount of inventory, Pricecomplicated process involves more and used car transactions are usually Price is a key selection criterion forstaff, higher cost, and more risks. done in cash. Due to the limited scale, consumers. Since most of their carsThe investment and return do not most independent used car dealers come from 4S stores, independentcorrelate positively. perform poorly in coordinating used car dealers do not have any between cash and inventory, and even particular cost advantages againstFinally, independent used car dealers worse in financing. According to a 4S stores. Independent dealers alsomake net profit margins as low as 2% manager in a large used car market in have a limited ability to sell theirto 3% in the China market. Further, Beijing, independent used car dealers cars at prices higher than those of thethe downward pressure on new car rely on “mutual lending or short term 4S stores, since they lack the brandprices will potentially further erodeused car dealers’ margin.4 Booz & Company
  7. 7. equity and image needed to drive the market, such as Apple and TUC. the China used car market. Thishigher purchase consideration from In general, the independent used car is extremely important to Chineseconsumers. The two factors above dealers have not yet successfully built consumers who are in a relativelyenhance the profitability pressure recognition and credibility in their weak buying position with limitedthat independent dealers face (See brands. information available on used carsExhibit 3). prices, and great concern over safety In the China auto market, records. According to a survey onAs is shown in Exhibit 3, compared consumption has entered an era intended buyers of used cars, overto 4S stores, independent dealers in which success is expressed via 90% expressed concern on the qualitycan only buy cars high and sell them products, and customers are seeking of used cars. In the western marketslow. In addition to this, many OEMs more differentiation than ever before. many well-developed used car dealersprovide subsidies for trade-in of used In the used car consumer market, are backed by their chain brand andcars to 4S stores and this further there are practically four types of reputation, which are associated withweakens the price competitiveness consumers: first-time auto buyers, positive perceptions over quality, andof independent dealers. Normally, rational and practical buyers, stylish an overall buying experience.independent dealers have higher and forward-looking buyers, andauto turnover rates than that of 4S business buyers. The interests among Value-added servicestores, and this only in part makes those groups can be quite different. With the development of the used carup for their disadvantageous pricing First-time buyers and rational market, the consumers start to expectposition. buyers focus more on prices and cost more dedicated services from dealers. effectiveness. However, stylish and Therefore, providing tailored servicesMoreover, new car pricing dynamics business buyers lay more emphasis to satisfy diversified consumersand an increasing supply of used on the one-stop service experience needs becomes a key for futurecars due to cyclical upgrades and are more valuable consumers of used car dealers in fostering uniqueand replacements will also affect the future used car market. However, competitive advantages.negatively the price of used cars. existing used car dealers are largely unable to identify these customer However, the current after sales2. key Differentiation Factors segments and develop positioning services is in many ways deficient. ForKey differentiation factors, including strategies accordingly. As a result, few example, unlike in mature markets,brand and value-added services, are positioning strategies are witnessed in consumers hardly have any warrantycrucial for independent dealers’ success. the market where price wars become coverage when purchasing used the key theme. cars. Hence, if a problem occurs,Brand consumers may have to spend aAs the domestic used car market is In addition, branding correlates great deal of time and money thatstill at its early stage of development, positively with perceived integrity may not resolve their problem. Thisonly a few well-known brands exist in and quality, which is lacking in lack of coverage is a key concernExhibit 3Survey and Analysis on Beijing Used Car MarketCOMMON TYPE PURCHASE PRICE INDEX SALES PRICE INDEX4S Store 100 108Used Car Dealer 103 108LUXURY TYPE PURCHASE PRICE INDEX SALES PRICE INDEX4S Store 100 110Used Car Dealer 103 109Source: Booz & CompanyBooz & Company 5
  8. 8. that consumers have with used cars. average ownership lifecycle of a Total number of used car consumersMoreover, the availability of other new car is 5-10 years vs. 1-3 years is growing rapidly, especially for thegood quality value-added services are in the US. New cars in the U.S. will stylish and business buyer groups,also very limited. depreciate 20-30% as soon as they who typically seek one-stop service. hit the road while in China, cars3. other objective factors will typically depreciate 50% after 5 Appraisal ProfessionalsKey objective factors include the years. The slow depreciation speed With an increasingly diverse set ofdepreciation speed, consumption and longer ownership cycle indicates emerging used car dealers beinghabits and appraisal professionals. that used car supply will not be established, the issues of professional sufficient, at least in the near term. talent are also emerging. Overall, thereDepreciation speed is a lack of professional training forThe health of the used car market Consumption habits used car appraisers resulting in varieddepends to a large extent on Used car buyers differ in style and levels of professionalism, which createscar replacement demand in the motivation. Some of the first-time discrepancies in the valuation results.market. The rapid growth of the buyers are transitional buyers, whocar population and the necessary are not yet willing to buy a new A quality used car appraiser shouldreplacement of cars will undoubtedly car. Lacking a great deal of data possess 20 years of professionalresult in a huge used car market. on used cars, first-timers buyers of experience and sufficient knowledgeMoreover, the rapid development used cars tend to focus on pricing. in car types, collision and accidentof the used car market will enable Most rational buyers treat cars as an types. During a typical appraisal,replacement consumers to sell their alternative transportation tool and the appraiser needs to have a full setcars easily while ensuring high are very practical in their choices. of technical skills to identify the carresidual value. In addition, a stable Many of those buyers are middle structure, technology involved, andsupply of used cars will satisfy the class wage earners who focus on level of damage. Besides, the appraisergrowing demand of used car buyers. cost, while more stylish buyers tend should be able to perform market-Such a virtuous cycle will support the to emphasize appearance. Business based evaluation of used cars. However,continuous development of China’s buyers are mostly small and medium high quality appraisers are rare in thematuring auto industry. enterprise owners who prefer China used car market. For example, in premium brand used cars, yet want Beijing, only one third of the certifiedHowever, this virtuous cycle has to allocate sufficient funds for other appraisers are experienced.not yet been established. Under business purposes at the same time.the current situation in China, the6 Booz & Company
  9. 9. A NEW MoDEL: Today, in 4S stores, used car businesses are often seen as affiliates For 4S store business: establishedBUILDINg to new car sales. On average, used used car business attracts more trade-BRANDED cars only account for about 2% of total sales and about 10% of net ins, which may further enhance 4S stores performance by more new carUSED CAR profit to 4S stores in China, while in sales, as well as attaining incrementalDEALERSHIPS oN the U.S. the ratio is 30% and 45% respectively. However, 4S stores have trade-in rewards from OEMs.THE 4S SToRE a series of advantages in capital, For used car business: 4S repairNETWoRk supply, pricing, marketing, and services compared with independent facilities can fix used cars up to required standards by OEMs, provide used car dealers and are in a much value-added services to used car better position to develop a profitable customers, etc. and sustainable used car business. The balanced development modelThe absence of many of the key Specifically, four sources of synergies needs to be built on a set ofsuccess factors described in this paper can be realized from the development capabilities that can realize synergy,results in very few success stories of the new used car model: maximize profit, and manage thein the independent used car dealer entire life cycle of passenger vehicles.market. However, a new model: a 1. Customer resources4S store-based branded used car • Customer data sharing, consistent Improve synergydealership could effectively integrate customer relationship management • Coordinate between functionsthe key elements that independent • Sharing of new car customers and • Improve organization structure anddealers lack. The model also used car customers communication mechanismwould serve the unmet needs from • Consistent design of after sales • Diversified marketing and brandconsumers through an integrated, service such as insurance extension building capabilitiesone-stop shop offering. • Sharing of media resources • New business innovation and service product design capabilitiesFirstly, established 4S stores have 2. Human resources • Profit allocation mechanism basedmuch higher brand awareness and • Build an independent used car team on agreed-upon synergycredibility, which in turn, would to coordinate business and shareenable dealers to have easier access the management burden from 4S Maximize business profitto financing. Moreover, 4S stores stores • Efficient and flexible managementhave a continuous supply of used cars structure and new businessthrough trade-ins and direct sales. 3. Cars and validation developmentIn addition, leveraging established • Share car resources and connect by • Clear definition and principles ofbrands may help to rapidly expand internal database development directionthe number of used car dealerships, • Build a unified validation system • Project execution capabilities (e.g.and hence further secure used car (OEM to confirm validation brand acquisition, land acquisition)supply in the longer run. standards, Build an internal price • Cost control capabilities validation system if standards do • Innovation capabilitiesSecondly, leading 4S stores normally not exist)have strong branding and marketing Customer usage cyclecapabilities, as well as operating 4. Equipment and logistics • Understanding of the entirecapabilities, including inventory • Leverage auto technology of 4S customer usage cyclemanagement, sales and services, stores to build unified equipment • Comprehensive application ofand customer management. This group, to restore and repair cars customer resourcescapability can be easily transferred and ensure the consistency of car • Adjustment and follow-up ofto the newly expanded used car quality customer needs in different stagesdealership. Many existing value- • Share inventory and have • Development capabilities ofadded services can also be shared specialized staff to coordinate relevant product servicewith the used car dealership. Under this model, new car sales and used car sales are parallel business lines, and economies of scale can be realized through coordination between the two:Booz & Company 7
  10. 10. CoNCLUSIoN We believe the China used car market will change dramatically in next 5 to success in China, they must answer two additional questions: 10 years, mainly driven by increased buyers from lower-tier cities, and First, whether they invest in their carmakers and dealers need to create own brand only or use a multiple a virtuous cycle that supports the brand used car business. For example, continuous development of China’s during the recent Toyota recall, GM, maturing auto industry. Certainly Ford and Nissan dealers all increased there is a long way for China to go trade-in allowances of Toyota brand (more than 10 years) to reach the cars by $1,000 to encourage Toyota levels of the mature markets, but the car owners to replace with the new forecast in growth of the used car brand & cars. In this way, the used- market certainly supports the need to car trade-in process can be used as move quickly. a competitive weapon to encourage owners to switch brands. A 4S network used car distribution model has enormous advantages Second, how to gain access to lower- over most independent dealers. tier cities, the most significant source However, it should be noted that this of used car growth potential. To cover observation is not unique to China. small and scattered cities out of 4S Similar needs existed in mature dealers’ reach, carmakers will likely markets like the US and Japan, where take advantage of independent used there is heavy involvement from the car dealers, even qualified “scalpers”. manufacturers, who view the residual In this case, a 4S dealer distribution value of secondary sales to be critical model may become the “aggregators” to the value placed on the brand as of these independent channels for used well as the initial purchase. With car sales. international brands flooding into China, it is a natural choice for them The new model—4S store-based to expand their used car business to branded used car dealership— China, while using the tools to manage addresses the needs of evolving the downstream business to their consumers well, and tends to free up advantage. the potentials in the existing 4S stores. The new model will help establish However, if international brands and dealers capabilities and build a their 4S dealers hope to replicate this successful used car business in China.8 Booz & Company
  11. 11. About the Authors Bill Russo is a senior advisor with Booz & Company as wellEdward Tse is as the Founder and PresidentBooz & Company’s senior of Synergistics Limited. Hepartner and chairman for lives in Beijing and has moreGreater China, specializing in than 20 years of experiencedefinition and implementation in the automotive industry,of business strategies, most recently serving asorganizational effectiveness, Vice President of Chrysler’sand corporate transformation. business in North East Asia.He has assisted severalhundred companies—head- Ken Zhong is Booz &quartered both within and Company’s senior associateoutside China—on all aspects with over eight years’of business related to China experience in consulting,and its integration with the rest project management andof the world. investment analysis. He mainly serves clients fromArnold Sun is a principal with auto, industrial and consumerBooz & Company and is a goods industry with focus onkey member of the consumer, strategy management processautomotive, and organization, redesign, sourcing strategychange and leadership (OCL) evaluation and optimization,practices in Greater China. and key operationsHe has more than eight years’ assessment and restructuring.management consultingexperience, specializingin strategy development,organizational design, andchange management.Booz & Company 9
  12. 12. The most recent list of Worldwide Officesour office addresses andtelephone numbers can Asia Bangkok Helsinki Middle East Florham Parkbe found on our website, Beijing Brisbane Istanbul Abu Dhabi Houstonwww.booz.com Delhi Canberra London Beirut Los Angeles Hong Kong Jakarta Madrid Cairo Mexico City Mumbai Kuala Lumpur Milan Doha New York City Seoul Melbourne Moscow Dubai Parsippany Shanghai Sydney Munich Riyadh San Francisco Taipei Oslo Tokyo Europe Paris North America South America Amsterdam Rome Atlanta Buenos Aires Australia, Berlin Stockholm Chicago Rio de Janeiro New Zealand & Copenhagen Stuttgart Cleveland Santiago Southeast Asia Dublin Vienna Dallas São Paulo Adelaide Düsseldorf Warsaw DC Auckland Frankfurt Zurich DetroitBooz & Company is a leading global managementconsulting firm, helping the world’s top businesses,governments, and organizations. Our founder, EdwinBooz, defined the profession when he established thefirst management consulting firm in 1914.Today, with more than 3,300 people in 61 officesaround the world, we bring foresight and knowledge,deep functional expertise, and a practical approachto building capabilities and delivering real impact.We work closely with our clients to create and deliveressential advantage. The independent White Spacereport ranked Booz & Company #1 among consultingfirms for “the best thought leadership” in 2010.For our management magazine strategy+business,visit www.strategy-business.com.Visit www.booz.com to learn more aboutBooz & Company.Printed in Greater China©2011 Booz & Company Inc.