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Automotive Aftermarket In China

China is the second largest economy in the world, with a GDP of $ 10.4 trillion and expected to grow at a rate of 6.76% in 2015.

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Definition / Scope

  • China is the second largest economy in the world, with a GDP of $ 10.4 trillion and expected to grow at a rate of 6.76% in 2015. [1]
  • In the past couple of years it has experienced an unparalleled growth in the automobile market. Today, China is the world’s largest automobile market with a total of 154.5 mn automobiles.[2]
  • In 2014 the auto sales were sluggish yet analysts suggest that it remains a robust market for automakers. This flourishing automobile market is propelling the growth of automobile aftermarket industry albeit with a lag. (See Exhibit 1)

Market Overview

“The aftermarket encompasses all parts and services purchased for light- and heavy-duty vehicles after the original sale, including replacement parts, accessories, lubricants, appearance products and service repairs. This definition also includes any additional innovative services that help to optimize the use of the vehicle.”[3] 

Brief overview of the Automotive Aftermarket (AA) industry in China:

  • Broadly, players in the industry can be categorized into Original Equipment Manufacturers (OEM), Independent Aftermarket (IAM) and others.
  • It is fragmented with many small independent players involved in fierce price competition. 
  • Consumers in China are price sensitive and lack quality awareness fueling the growth of counterfeit parts. (See Exhibit 3) 
  • The country’s domestic manufacturers lack the technical skills and so, high technology and specialty components are still being imported.
  • Intense competition among players is paving way for innovation and technological sophistication

The scope of this report is limited to the domestic demand of AA and overview of the present and future scenarios of the industry in China

  • The aftermarket era in China has just begun, and is displaying evidence of a stellar outlook; its revenue for 2015 is expected to be $ 567 bn up 9.7% from 2014.[2] (See Exhibit 2)  
  • With the opening up of the Chinese auto market, a large number of foreign players have entered the country through JVs’ with the local players.  
  • This has led to intense price wars making the market beneficial for the consumer. In such a price sensitive market, service has become the differentiating factor in this industry.  
  • Disruptive internet technologies have forced players to fuse their traditional business models with the latest online ones like O2O (Online to Offline), C2B2B.  
  • This integration has aided suppliers to provide highly innovative service solutions to the consumer.  
  • Although there is immense potential for growth, uncertainties are inevitable even in this market.  
  • One such challenge aftermarket industry needs to tackle, is that of governments move towards greener environment viz. promoting low maintenance, high technology hybrid cars, capping of new sales in Tier 1 cities, scrapping of old cars etc. 

Key Metrics

Metrics Value Explanation
Base Year 2016 Researched through internet


Market Risks

  • OEM’s advances in technology and superior products are significantly improving average shelf life of the automobiles, resulting in erosion of aftermarket sales margin.
  • Government initiatives in decommissioning of “yellow label” cars in view of road safety.[4]
  • Many cities across China are imposing caps on new car sales to 100,000 a year in order to combat pollution and traffic jams.[5]
  • Probable economic slowdown is likely to have a negative bearing on the consumer spending patterns.
  • Rise in operating cost including labor cost and raw material cost is major setback impacting  profit margins 
  • Socio political instability could have unforeseeable implications on most industries including auto aftermarket
  • Probable depreciation in Yuan will make imports expensive leading to price increase in automobiles and imported auto components.[6]

Top Market Opportunities

  • “A rising tide lifts all boats” is an apt adage to describe China’s industrial growth. The boom in the economy has led to a surge in consumer spending making it a lucrative industry for foreign and domestic players.
  • Low production and labor cost is attracting many foreign player to set up manufacturing units in China.
  • Growing internet infrastructure will give rise to a wide array of channels for sales and service, squeezing out multi-tier margins and increasing supplier profit.
  • Overall infrastructure development is generating demand for hi-tech heavy duty commercial equipment, fostering its aftermarket sales.
  • AA in China is in its “Seed harvest” mode[7], reaping the seeds sown by the automobile manufacturers in the last decade.
  • China's agreement with WTO opened up Chinese market to a number of foreign players. In addition to this, the government’s efforts on improving its IP protection laws is gaining confidence of foreign players 
  • Stringent Anti-Monopoly Laws (AML)[8] will ensure a level playing field for domestic and foreign players. 

Market Drivers

Modular Architecture

OEM’s are adapting to mega platforms/ modular architecture where design and parts are standardized across the globe.[9] Aftermarket industry stands to benefit as costs associated with manufacturing of unique parts will reduce substantially. 

Online marketing & e-tailing is gaining a foothold in the industry

In 2014, online shopping increased by 48.7% in comparison to 2013[10] Research firm Forrester predicts that ecommerce industry in China will be a trillion dollar industry by 2019.[11] Companies like BOSCH have already ventured into this space by setting up e- stores in Alibaba, Tmall etc.[12]  Online selling not only helps in reducing cost drastically but also reduces dead stock and combats counterfeiting.

3D printing is the new wave

With 3D printing, parts can be made available almost instantly phasing out supply chain bottle necks, reduce manufacturing, labor and logistics costs thereby increasing profit margins. 3D printing allows one to manufacture just a single product on demand, this makes it easy for cost effective customization. It can also be used in developing parts for old cars which are difficult to find in the market.[13][14]

Increase in service levels

The Rise in O2O model in ecommerce has opened avenues for many brick and mortar store to have an online presence. O2O is advertising, marketing, selling services online to bring in the consumer to their offline store.[15]

Aftermarket O2O models is still in its nascent stage with a promising outlook. C2B2B is another emerging business model in the era of connected cars; here, the data on the performance of the vehicle gets communicated from the consumer to the carmaker and from the carmaker to the supplier.[16]

This real time update will help in providing timely service, forecast requirement and reduce working capital.

Market Size and Forecast

  1. Year on Year increasing percentage of ageing vehicle, leading to growth in aftermarket sales. On an average, Cars over 6 years of age need repair and maintenance.[17]
    Average Ageing vehicle.png
  2. Industry Data
    Industry data.png
  3. Consumer decision making parameters in China as compared to the rest of the world[3]
    Decision Making Parameters.png

Market Outlook

  • Growing awareness and demand for high quality products could lead to technological advancements in the industry
  • Superior technology products will minimize counterfeit market and “auto parts city” will eventually phase out due to financial restraints
  • Hybrid cars and electric vehicles are likely to form a large size of passenger car market. Its high technological requirements indicate that, OEM’s may be the sole player catering to its aftermarket demands.
  • Ecommerce may perhaps redefine the selling strategy of auto components.[11]
  • 2014 new regulation draft proposal by NRDC will allow foreign investors to set up wholly foreign owned enterprise(WFOE)[8], nullifying the 50-50 joint venture rule passed in 2001.[5]

Competitive Factors

Critical success factors map out those key elements that are required to achieve the business objective. The causal mapping illustrated below should be the basis of formulating a sustainable strategy after a clear understanding of the contributing intrinsic factors. An effective and robust strategy can be formed to integrate these underlying factors by maximizing the internal competencies and reinforcing the restraining factors. It is also interesting to note that even a leading firm will not have all the core factors favoring them but a blend of a few strong factors have helped them design sustainable strategic position in the market.

Crit sf.png

A synergy of these key underlying factors: Availability, Value proposition, Service and Brand Equity are essential for success in Automotive Aftermarket industry.

Availability

 Leaner supply chain and efficient inventory management are ways to ensure that products are available at the right time and at the right place.

  1. Leaner supply chain: can be achieved by identifying-reducing-eliminating supply chain bottlenecks and adopting efficient Transport Management System (TMS). To this effect, some manufacturers are now revisiting their business models by favoring online selling channels to traditional selling.
  2. Inventory management: caters to uncertain market demands, streamlines inventory flow and ensures that Stock Keeping Unit (SKU) strikes a balance between stock deficit and stock surplus.

Value proposition

Value proposition in this context relates to good quality at best price such that the customer perceives value for the product.

  1. Quality: Over engineering is a common problem seen in foreign players in this market; complying with Asian standards and lowering their technical specs will still meet the quality requirements of the region.
  2. Price: competitiveness can be achieved by decentralizing warehouses, maintaining minimum trade layers, by keeping the packaging design minimalistic etc. 

Service

 Service excellence has become the kingpin in achieving greater customer satisfaction. By improving customer relationships, firms are coming up with innovative service solutions to secure customer retention. 

  1. Customer Relationship Management (CRM): Engaging current and potential customers through varied means to understand their needs, and device service products accordingly. By providing meaningful touch points like informed and efficient service representatives, group forums where common FAQ’s are addressed, customer experience can be enhanced.    
  2. Innovative solutions: like Do-It-Yourself (DIY), tailoring services to individual customer needs, improving service levels at Do-It-For-Me (DIFM) outlets, transferring routine maintenance hassles like service reminders, door to door service etc.[18] over to the firm rather than the customer.    

Brand equity

Brand awareness coupled with strong network presence improves brand equity of a firm.

  1. Brand awareness: can be brought about by engaging consumers through online advertising which includes various channels such as social media, and email marketing. It is equally important to build awareness among trade partners from grass root level– tier 1, to repair shop/body shop as they are key advisers to the consumers; trade shows and trade magazines are a few effective ways of educating the dealer.
  2. Network penetration: is important to ensure that at each trade level the channel partner finds value in carrying and promoting a firm’s product. This can be accomplished by incentivizing dealers for achieving sales targets.

Key Market Players

Aftermarket industry in China is highly fragmented with a number of small players constituting a large size of the market as exhibited in the table below. 

Major market players.png

Other prominent manufactures with lower market share include: United Automotive Electronic Systems Co., Ltd., China FAW Group Corporation, Yanfeng Visteon Automotive Trim Systems Co. Ltd. Dongfeng Motor Co. Ltd.[2]

Key players by component type

Players by component type.png

References

  1. IMF World Economic Outlook (WEO), April 2015
  2. 2.0 2.1 2.2 “Auto Parts Manufacturing in China”- IBISWorld Industry Report 
  3. 3.0 3.1 The Aftermarket in the Automotive Industry –“How to Optimize Aftermarket Performance in Established and Emerging Markets” –Capgemini
  4. China to scrap millions of cars in anti-pollution push-Reuters,2014
  5. 5.0 5.1 China's Shenzhen latest city to restrict car sales- Reuters,2014
  6. What if China’s economy tanks?- IHS Quarterly,2014
  7. It’s a Race to the Bottom in China’s Auto Market- Strategy-Business.com, John Jullens,2014
  8. 8.0 8.1 China’s auto industry explained- Hogan Lovells, 2015
  9. GM, Renault, VW, others bet on megaplatforms,Automotive News,2014
  10. China E-commerce Market Rises 21.3% in 2014- iResearch Consulting Group
  11. 11.0 11.1 China Will Become The First $1 Trillion Online Retail Market By 2019- Forrester Blog
  12. Auto Parts E-commerce Is A Future Trend,Duco,2014
  13. 3D Printing In The Automotive Aftermarket,3DLT News,2013
  14. 3D printing presents opportunities, threats in the aftermarket supply chain,SearchAutoParts.com,2013
  15. O2O Primer: Online to offline commerce in China, CKGSB Knowledge,2014
  16. C2B2B – Here’s to consumer-citizen power!- Isaac George,2014
  17. Driving Aftermarket Value: Upgrade Spare Parts Supply Chain, Deloitte China Auto Industry Spare Parts Management Benchmark Survey White Paper
  18. Trillion yuan auto aftermarket lying untapped - China Economic Net,2015



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