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COVER STORY: Rising Opportunities in China's Automotive Independent Aftermarket

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China’s automotive industry has entered a new phase where new car sales growth decelerates, while the car population expands and the average car age increases. This brings enormous opportunities for expansion of the independent aftermarket.
In this article, we examine the complexity of China’s independent aftermarket including the distribution channel and service shops. We also examine the key success factors, market dynamics and emerging marketing channels in the independent aftermarket. We will highlight the implications of these developments for key players along the value chain.

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COVER STORY: Rising Opportunities in China's Automotive Independent Aftermarket

  1. 1. ChinaAutomotiveReviewAugust 2017 www.chinaautoreview.com Vol. 12 No. 8 Serving the World’s Largest Emerging Automobile Market中国汽车要闻 China automobile sales up 3.81 percent in H1 2017 Baidu launches “Project Apollo,” sees China taking global lead in autonomous driving in 3-5 years Rising Opportunities in China’s Automotive Independent Aftermarket 本期精选中文目录 1 1 1 1 8 8 8 9 16 18 19 22 22 23 7月汽车月度沙龙回溯: 受购置税减半政策刺激 中国车市去年从今年“偷了” 250-300万辆汽车销量 2017年上半年汽车销量同比增长3.81% 百度启动“阿波罗计划,” 助力中国自动驾驶产业3-5年后站在世界前沿 中国汽车独立售后市场的增长机会 外国车企巨头对中国新能源汽车市场虎视眈眈 受政策影响上半年车市表现既忧又喜 兄弟情: 吉利沃尔沃左手牵右手 成立两个合资企业的两大目的 从跑车到飞行汽车 吉利用非寻常之道建立新汽车帝国 中国Panamera车主平均年龄仅36岁女性占三成: 访保时捷全球Panamera车系销售与市场总监 StefanUtsch博士 智能汽车和自动驾驶技术是《中国新一代 人工智能发展规划》的重要组成部分 中国加速自动驾驶事业的发展 6月重卡销9.5万辆创历史新高,全年要超90万辆 90万辆重卡?永远不要低估中国汽车市场的潜力 沃尔沃卡车中国区总裁陆博天: 高效物流改变了中国的卡车市场 Commentarylaws & regulations interview page 9page 18 smart ev page 21 Daimler and Chery reach agreement on use of EQ/eQ brands Heavy-duty page 23 Eric Labat: Efficient logistics has transformed China’s truck market From sports cars to flying cars, Geely takes unorthodox approach to new empire Intelligent vehicle and self-driving tech key component of China's new AI development plan Dr. Stefan Utsch: Chinese Panamera owners average only 36 years old, 30 percent are females continued on page 19 continued on page 5 continued on page 28 EQ eQ page 16 MAS@Shanghai 0713 recap: Incentive policy “stole” 2.5-3 million vehicles from 2017 – by Jay Li SHANGHAI – The incentive policy “stole” 2.5-3 million units in passenger vehicle sales from 2017, worth about one month of sales, into 2016, according to John Zeng, general manager of LMC Automotive Consulting (Shanghai) Co., Ltd., citing passenger vehicle registration data. Zeng shared the interesting observation at CBU/CAR’s Monthly Automotive Salon (MAS) held on July 13 in Shanghai discussing China’s Auto Market in H1 2017 and Future Look. Joining him was Jay Li, statistician and statistical database manager of CBU Analytics, Inc. Some two dozen industry executives participated in the discussions. continued on page 10 – by Jay Li BEIJING – China’s automobile sales in H1 2017 increased 3.81 percent from the same period of the previous year to over 13.35 million units, and sales in June increased 4.54 percent to more than 2.17 million units, according to data released by China Association of Automobile Manufacturers (CAAM) on July 11. In the first six months of the year, passenger vehicle sales reached 11.25 million units, down 1.61 percent, while commercial vehicle sales reached 2.10 million units, up 17.39 percent. In June, passenger vehicle sales reached 1.83 million units, up 2.32 percent, while commercial vehicle sales reached 340,100 units, up 18.36 percent. – by Bill Russo, Jason Zhang, Jackie Tang and Peter Hu Introduction China’s automotive industry has entered a new phase where new car sales growth decelerates, while the car population expands and the average car age increases. This brings enormous opportunities for expansion of the independent aftermarket. – by Lei Xing BEIJING – The Apollo has landed in the Chinese and global autonomous driving orbit. After nearly three months of buildup, Chinese internet search giant Baidu released details of its “Project Apollo” – an open, complete and secure platform to help
  2. 2. 28 China Automotive Review August 2017 continued from page 1 AFTERMARKET Rising Opportunities in China’s Automotive Independent Aftermarket In this article, we examine the complexity of China’s independent aftermarket including the distribution channel and service shops. We also examine the key success factors, market dynamics and emerging marketing channels in the independent aftermarket. We will highlight the implications of these developments for key players along the value chain. China’s Independent Aftermarket Is Rapidly Expanding China’s automotive market is entering a “new normal” phase as the new car sales volume growth decelerates. New car sales volume is estimated to increase at a CAGR of 3.8% from 2017 to 2022, significantly lower than the growth of recent years (see Exhibit 1). Meanwhile, the overall car population is aging and the average car age is expected to reach 5.2 years by 2022, compared with 4.4 years in 2016. As a result, we expect a golden era for the independent aftermarket (IAM) service growth. As cars age, come out of warranty, and are re-sold, car owners are more likely to have them inspected and served in an independent service shop rather than a 4S dealer. Owners of older cars are more value conscious, and seek flexibility and convenience when choosing a service provider, which will shift the car owner’s preference for car maintenance over to the IAM (see Exhibit 2). This offers new opportunities for players in the IAM ecosystem, including auto parts suppliers, original equipment manufacturers (OEMs), 4S dealers, distributors and service shops. Market Landscape Is Complex And Not Easy To Serve While large and expanding, the IAM market is fragmented and complicated, making it very difficult to profitably serve. In addition, the automotive market has very diverse characteristics across regions and provinces in China. China’s car parc is concentrated in Eastern China, and the mix of car models varies significantly among provinces and different city tiers (see Exhibit 3). Each province or region can be treated as a separate market which requires a different mindset and strategy to conquer. Further complicating the situation, there is no universal standard or integrated matching system for auto parts in China. Thousands of car models of varying specification from multiple manufacturers and brands are on the road, and each has a different matching system for auto parts management. The service parts distribution channel is complex as well (see Exhibit 4). A multi- tier distribution channel is in place to serve the huge pool of car models in different provincial markets. Typically, a few tier 1 national or regional leading distributors are connected with auto parts suppliers, who then sell to hundreds of tier 2 and lower- tier distributors for city coverage. Each distributor may supply different categories of auto parts for different car models. These distributors then serve over 500,000 service shops, of which only a small portion are regional chained service shops. The vast majority are small local outlets with limited resources and capability. Service Shops Must Be Trustworthy And Offer Convenience To Car Owners Most car owners don’t like spending a whole lot of time waiting at a service shop. Therefore, a key success factor for a service shop is to have replacement parts delivered from local distributors as quickly as possible, also known as the “last mile delivery.” A service shop is usually supplied by 20 to 30 distributors to cover all auto parts for different car models, and they ensure that delivery can be achieved within 1 to 2 hours for common auto parts. With strong last mile delivery capability, service shops can build long term trusted relationships with car owners. Trust is the key since Chinese car owners are generally young (in 2016, 30% of licensed drivers have been driving less than 1 year).  There is also no “do-it-yourself” repair culture in China when compared with mature markets like the U.S., and thus Chinese car owners rely on the service technician’s advice for diagnosis and specification of repairs needed. Typical car owners shop for service within their local neighborhood and the relationship may begin with simple and regular services such as a car wash or oil change (see Exhibit 5 and 6). After building trust after several routine service experiences many become loyal customers for routine or even more complicated repairs.  A typical service shop has 3 to 4M RMB annual revenue, and 80% of revenue is contributed by these regular customers. Service shops are increasing investment in technician training to improve customer service quality in order to retain customers. Mergers and Disruptors in the IAM market Since the IAM market is huge and fragmented, single players find it difficult to serve the entire market well. Key players along the value chain are collaborating, both vertically and horizontally, in order to strengthen their market influence and share resources (see Exhibit 7). For example, Gao Feng Advisory Company Exhibit 3: Passenger vehicle car parc by cities 3 Car parc of all vehicles by cites: ~110 Mn in 2015 (Unit: Million) 0-0.3 0.3-0.6 0.6-1.2 1.2-2.5 2.5-5 Tier 5 cities and below  20% car parc of all vehicles concentrated in the Top 10 cities  68% car parc of all vehicles concentrated in the Top 100 cities (tier 1, tier2, tier3 cities) Note: Mainland China data only, excluding HK and Taiwan Source: Gao Feng analysis Gao Feng Advisory Company Exhibit 1: China’s new passenger vehicle (PV) sales volume and average PV age 1 30.229.228.326.9 25.325.124.2 20.2 5.25.15.04.94.8 4.6 4.4 4.1 0 5 10 15 20 25 30 35 40 45 50 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 +3.8% +11.5% 2022E2019E2016 2021E2020E2018E2017E2015 New PV sales volume (million) Average PV age (year) Source: HIS, Gaofeng analysis Japan EU US11.4 9.65 8.3 Gao Feng Advisory Company Exhibit 4: Distribution channel of auto parts in Aftermarket 44 Auto parts suppliers OEMs 4S Dealers Car owners Tier 1 Distributors Tier 2 Distributors E-Commerce / O2O Parts Supplier (~10,000) Distributors (~50,000) Workshops (~500,000) Consumers ODM* Fleet Drivers Independent service shops Note: On-demand Mobility (ODM) platforms direct fleet drivers to partnered workshops for vehicle services Major Channel Emerging Channel Source: Gao Feng analysis Gao Feng Advisory Company 2 35% 20% 65% 80% 4S Dealer 2017 IAM 2022 Exhibit 2: Car owner’s preference for car maintenance Source: Gao Feng analysis
  3. 3. August 2017 China Automotive Review 29 Hella has formed supplier partnerships with Dolz and Bilstein, in which Hella would offer its distribution channels in China. Also, SAIC-GM acquired ACDelco’s business in China, and is currently using Delco in the IAM as a secondary auto parts brand targeting price-sensitive customers who are seeking alternatives. In addition, there are two other types of disruptors emerging in the market: aggregators and consolidators. An aggregator brings together market players and forms strategic alliances, for example the China Aftermarket Auto Parts Alliance (CAAPA) is an alliance among distributors and chained service shops, offering global purchase support to its members. Such an alliance increases the bargaining power of distributors against suppliers. On the other hand, a consolidator consolidates players along the value chain. Carzone is currently one of the largest distributors and covers 27 provinces with over 80,000 SKUs. It competes aggressively through a digital distribution platform and teams up with a wide portfolio of international auto parts suppliers including Bosch and 3M. The above transformations would take a long time given the complexity of China’s automotive aftermarket. Yet, the trend of integration is inevitable and relevant companies must take action. Emerging New Channels E-commerce and On-Demand-Mobility (ODM) players are attracting a lot of attention as well. E-commerce players aftermarket Gao Feng Advisory Company Exhibit 5: A typical workshop in Shanghai 5 Source: Gao Feng analysis Gao Feng Advisory Company Exhibit 8: Tuhu’s homepage and distribution channel 8 Auto parts suppliers Distributors Tuhu Service shops Car owners Partnership Tuhu’s own logistics Source: Tuhu official website, Gao Feng analysis Gao Feng Advisory Company Exhibit 6: Auto detailing service by frequency and consumer interaction 6 Frequency Auto Detailing Price Gross Margin Car owners Acknowledge High Car Wash Low Low High Polish Middle High High Engine Oil Middle High Low Air Filter Low High Low Coolant Low Middle Middle … … … … Low Shock absorber Middle High Middle Tire High Low Middle Brake Middle Middle Middle Chassis and steering High Mid Low … … … … Relative Level of Trust Required Source: Gao Feng analysis Gao Feng Advisory Company Exhibit 7: Vertical and horizontal collaboration examples 7 Upstream OEM/auto part suppliers Midstream Distributors/ 4S dealer group Downstream 4S shops/IAM End User ODM/car owners Horizontal  N/A  Supplier alliances / shared sales platform  Rise of service shop alliance  Emergence of cross region multi category distributors & alliances Emergence of cross region multi categoryregion multi category Vertical  4S dealer groups open IAM service shops and launches private label products  O2O platform opens service shops  Didi Chuxing opens car owner club that provides car rental and maintenance services  Taxi groups open service shops  Chained service shops launched O2O platform/ partnership with upstream players/last mile delivery  OEM opens service shops  OEM launches 2nd line product 4S dealer groups open IAM service shops and launches Didi Chuxing opens car owner Source: Gao Feng analysis Gao Feng Advisory Company Exhibit 9: China’s digital landscape 9 Total Internet users in China (2016) 731M (53.2% penetration rate) Alibaba’s sales on Singles' Day 2016 USD 17.8Bn (650M orders shipped) Total mobile Internet users in China (2016) 695M (12.2% YoY growth) Number of Chinese companies in top 10 tech companies worldwide 4 (based on market capitalization) Daily rides booked on Didi Chuxing (Oct 2016) 20M (covering 400 cities in China) Monthly active users of WeChat* 846M (30% YoY growth) Source: CNNIC, Gao Feng analysis that focus on auto parts, led by Tuhu and JD.com, allow car owners to directly purchase auto parts online and have them installed in the designated offline service shops (see Exhibit 8). Currently, some e-commerce portals are mainly used as a benchmarking tool for price comparison, since most car owners have technical barriers in terms of installing auto parts by themselves. E-commerce players also lack the capability of last mile delivery, and do not offer credit sales or financing to service shops as traditional distributors do. On the other hand, ODM fleets, such as Didi Chuxing, are growing rapidly in China. Many people are satisfying their mobility needs by using ODM services, which drives higher penetration cars in the total car parc being used in ODM fleets. Such cars have significantly higher utilization rates with a correspondingly high need for parts replacement. In most cases, ODM companies and fleet car operators would aggregate the demand for IAM services for their drivers and fleet operators in order to reduce fleet maintenance costs. In fact, ODM service operators will likely become major key accounts for companies competing in the independent aftermarket. Digital Marketing Is Efficient With the world’s largest population of internet users, with an extraordinarily high penetration of the mobile internet, China’s digital landscape is unique (see Exhibit 9). Compared with Western markets, Chinese car owners and technicians are in general younger and more open to embrace new ideas, especially digital solutions. A typical Chinese car owner would use Autohome or Bitauto to specify and comparison shop for their new car before going to a physical dealership. Likewise, a technician would use Baidu to research a vehicle and its service parts bill of materials online before determining and place a repair order. This brings unique opportunities for digital marketing and online customer engagement platforms. OEMs and auto parts suppliers can leverage digital tools to engage car owners and service shops and create more touch points along the customer journey. For example, OEMs are now beginning to organize WeChat groups for car owners in order to strengthen the bond between customers and brands. Through online communities and O2O activities, car owners can be converted into brand advocates. Auto parts suppliers can offer technical guidance and online training to technicians through an official WeChat account. Such new and emerging tools provide a mechanism to deepen the relationship with customers and build trust and raise brand awareness. Implications For Key Players OEMs and 4S Dealers As car owners increasingly choose independent service shops when their warranty expires, OEMs should aim at
  4. 4. 30 China Automotive Review August 2017 AFTERMARKET Eight characteristics of China’s used vehicle market in 2017 Bill Russo is Managing Director and the Automotive Practice leader at Gao Feng Advisory Company based in Shanghai. With 15 years as an automotive executive, including over 13 years of experience in China and Asia, Mr. Russo has worked with numerous multi-national and local Chinese firms in the formulation and implementation of their global market and product strategies. He was previously Vice President of Chrysler North East Asia, where he managed the business operations for the Greater China and South Korea markets. Prior to this, Mr. Russo was Head of Product & Business Strategy for Chrysler. He also has nearly 12 years of experience in the electronics and IT industry, having worked at IBM Corporation as a manufacturing and systems engineer, and formerly served as Vice President of Corporate Development at Harman International. Jason Zhang is a Senior Associate at Gao Feng Advisory Company based in Beijing. He provided strategy and operational consulting service to clients in Greater China and globally, ranging from market entry strategy, growth strategy, portfolio prioritization, go-to-market model design and M&A opportunities assessment. He previously worked at other consulting firms as project manager, with 14 years of experiences in Industrial Goods, Life Science and Consumers goods. Jackie Tang is a Consultant at Gao Feng Advisory Company based in Shanghai. She provided strategy and operational consulting service to multinational and local clients and she is experienced in automotive, digital/e-commerce, asset management industries, specializing in strategy formulation and business model development. Peter Hu is a Consultant at Gao Feng Advisory Company based in Shanghai. He has worked with clients from various industries including Automotive, Technology, Consumer Goods and Hospitality, and focused on go-to-market strategy and market opportunity assessment. He has worked and studied in China, Japan, Singapore and the United States. [ ABOUT THE AUTHORS ] retaining car owners in the out-of-warranty period. Possible solutions may include extended warranty, introducing a secondary brand for auto parts to deliver good value at lower price, and investing in chained service shops. OEMs could also improve their service delivery capabilities and improve retention through CRM programs.  4S dealers share a similar mission as for OEMs, and they should also consider setting up their own IAM service shops in order to capture the inevitable “leakage” of customers seeking lower price and more convenient service options. Auto Parts Suppliers  Auto parts suppliers must first protect their core B2B customers: the OEMs and their 4S dealers who are the primary buyers of their products. However, they must aggressively pursue the explosive growth potential in the IAM. Achieving this may require a wider product portfolio to capture a more value-conscious service customer or through partnerships with other downstream parts makers and service providers in order to expand their penetration of the IAM. A multi-brand approach is an option to target customers in different price segments. A new “key account” strategy may be needed to capture a share of the IAM business served through E-commerce and ODM platforms. Key success factors include, but are not limited to, flexible production of differentiated products, recognizable brand names, consolidated marketing and an effective multi-tier distribution channel. Distributors Distributors should consolidate and aggregate their businesses to optimize their ability to balance supply and demand while achieving scale. Carzone and Autozi are examples of Chinese consolidators and aggregators. Distributors must also expand their product portfolio and explore e-commerce partnerships to broaden coverage of 4S dealers and service shops. Service Shops Service shops should build their trustworthiness and reputation by providing better and consistent services, as well as by joining alliances which improve their bargaining power relative to their upstream partners. E-commerce should also be leveraged to attract online car owners to offline shops. Unlike 4S dealers, service shops must serve a wide range of brands and models which drives a significantly larger pool of auto parts, creating opportunities for segmenting and serving the market in a more flexible way. Service shops must also leverage CRM programs to retain the loyalty of service customers, which may include brand affiliations, targeted marketing, and local community and auto enthusiast events. Conclusion China’s auto aftermarket is an explosive growth opportunity for organizations that are prepared to adapt their approach to the China context. As the China market enters a more mature stage with slower new car sales growth, key players must act now to find opportunities to profitably grow their participation in this business. Unlocking this potential will require an expanded set of capabilities, often developed in collaboration with new partners offering a combination of products and services to a maturing market. – by Dana Wang WUHAN, Hubei – China’s used vehicle market in 2017 has eight key characteristics, according to Xiao Zhengsan, secretary-general of China Automobile Dealers Association (CADA). Xiao made the comments while presenting the 2017 Analysis Report on the Top 100 of China’s Used Vehicle Market at the 2017 China Used Car Assembly (CUCA) held in Wuhan on July 5. The report includes operations data in 2016 from 1,068 used vehicle trade marts in 507 cities in 31 provinces submitted by provincial and municipal used vehicle associations. The eight characteristics are as follows: 1. Favorable policies drive up demand Driven by favorable policies such as purchase tax savings for 1.6L and below passenger vehicles and regulations lifting restrictions on inter-region circulation of used vehicles, vehicle transactions have been on the rise. In terms of average compound annual growth rate for the past six years, the used vehicle market has been growing faster than the new vehicle market. The used vehicle market potential will be released in the next few years, and its transaction scale also will maintain a high growth momentum. 2. Used vehicle market continues to expand The used vehicle market as a whole tends to scale up largely. The total area of used vehicle trade marts in China in 2106 stood at 22.61 million square meters, up 4.37 percent from 2015. The number of business services companies in the used vehicle space was 44,274, up 10.19 percent. 3. Top 100 transaction scale and market share rose The transaction volume of the Top 100 used vehicle trade marts in 2016 reached 4.95 million units, up 16.2 percent, accounting for 47.6 percent of the national used vehicle transaction volume. Transaction value reached ¥318.1 billion, up 9.8 percent with a slight increase of 0.4 percent in share of total industry transaction value. 4. Passenger vehicle share increasing and getting “younger” The proportion of passenger vehicles among used vehicle transaction volume of the Top 100 reached 80.9 percent, up 5.6 percentage points. Locally-made vehicles accounted for 83.1 percent, down 1.6 percentage points. About 64.7 percent of the vehicles transacted were between the ages of 1-6 years. 5. North and East China account for more than half of all transaction volume Due to regional economic structures and parc base, East and North China regions combined accounted for more than half (57.7 percent) of the transaction volume of the Top 100. Guangdong, Jiangsu, Shandong and Zhejiang for example far lead other provinces in terms of transaction volume. 6. More profitable The overall business revenues of the Top 100 reached ¥3.1 billion in 2016, up 1.44 percent. Operating profit reached ¥640 million, up 16.3 percent, representing a profit margin of 27 percent that is higher than the industry average of 17 percent. 7. Majority are still brokerage enterprises, demand boosts improved service Brokerage companies accounted for 94.6 percent of the corporate structural type in the Top 100. Dealer-type companies accounted for 3.7 percent, while appraisal companies accounted for 1.2 percent. The Top 100 had operating area of 7.115 million square meters, up 7.48 percent, with showroom areas of 469,000 square meters, up 24.4 percent. 8. More consolidated 90 companies had annual transaction volumes above 20,000 units and 94 had annual transaction values above ¥100 million, reflecting further concentration of the market. CBU/CARCBU/CAR

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