China’s Automotive Aftermarket: A Strategic Chance – China Business Review
China’s Automotive Aftermarket: A Strategic Chance
China is now the largest auto market in the world, and while automakers have previously focused on fresh auto sales, there has been latest interest in developing China’s automotive aftermarket for vehicle service and repairs. The domestic automotive aftermarket is relatively fresh in China and there are several characteristics unique to the China market.
China’s expanding auto aftermarket
Driven by fat growth in car sales, China’s stock of cars, especially older vehicles, is expanding dramatically. In 2009, China overtook the United States to become the largest fresh auto sales market in the world. China has experienced annual growth of toughly twenty percent over the last ten years. Strong growth is forecast to proceed despite some cities, such as Shanghai, Beijing and Guangzhou, introducing monthly license plate quotas.
The continued growth in fresh car sales is having the secondary effect of dramatically enlargening the cumulative stock of cars in China. The average warranty period for vehicles in China is typically three years. According to LEK Consulting’s estimates, by two thousand seventeen the average age of cars will increase from three years to Four.Five years, the age when spending on aftermarket parts and services typically peaks. The number of out-of-warranty cars will almost triple during the same period, further driving request for aftermarket products and services.
Prior practice indicates that these factors will create substantial request for aftermarket parts and services. The size of the market has already enlargened dramatically from $Ten billion in two thousand eight to $24 billion in 2012. This trend can only be expected to proceed as China’s car fleet both increases and ages.
Assembly and wear-out repairs, including engine, framework, bod and transmission repairs, and minor repairs are the two largest segments of the repair services market (by value), and are expected to remain the largest segments for the foreseeable future.
Mapping the auto aftermarket structure
Developing a winning strategy in China’s automotive aftermarket involves mapping the value chain, identifying key stakeholders, and determining how suppliers can best reach the customer. Product type, manufacturer background, geographic market, and development level of each city will affect each of these elements.
Manufacturing of auto parts is predominantly done by three types of companies: international original equipment (OE) suppliers, domestic OE suppliers, and dedicated aftermarket suppliers. The distribution and service is typically done either by the original equipment supplier (OES) network or the independent aftermarket (IAM) network.
Because the development of a large scale Chinese automotive market is relatively latest, chain service and repair stations have yet to be established on a broad scale. Traditionally, 4S stores managed by the auto OEMs perform the bulk of auto servicing. 4S stores, which is brief for “sales, service, spare parts, and surveys (customer feedback),” were developed in China to address the lack of service for vehicles after they had been purchased. Customers purchase cars from 4S dealerships, which also provide service after auto sales. Non-OEM aftermarket suppliers are mostly petite, regional companies that sell parts through distributors that supply independent repair shops. Distribution in the independent channel is sophisticated, and several layers of distributors may exist. Some distributors also have their own retail outlets and repair shops to further complicate matters.
There is a fresh, but puny, direct channel emerging where component suppliers are opening self-owned and self-branded stores, or directly supplying products online. Bosch and Continental are examples of players moving down this path and other companies are studying if and how they should participate. Such channels are typically less common in other markets, but could be very effective in China as consumers are typically brand and price-sensitive and increasingly require verification that the parts they are purchasing are genuine. Besides opening fresh and profitable revenue rivulets, these direct channels help strengthen the manufacturer brands which in turn can help its core business.
Launching direct channels is not without challenges, and a company considering this route needs to cautiously evaluate product mix, store economics and operational issues before moving down this path.
Industry development
Presently, 4S stores predominate sales and repair services in China, albeit chained repair shops are forecast to increase in relative importance in the coming years. Direct channels including self-owned and self-branded stores and online distribution may also be placed for strong growth albeit from a puny base.
Another significant trend will be enhancing levels of industry consolidation. Government policy directives have been issued in the last decade aimed at decreasing the number of auto-component suppliers as a means of enlargening scale and competitive capabilities. The 11th Five-Year Plan called for a reduction in the number of component suppliers while enhancing the competence of supplier capabilities. A National Development and Reform Commission two thousand six mandate encourages merger and acquisition activity in the sector. Every year, hundreds of domestic transactions in China’s automotive sector suggest the government’s ambitions for a stronger home-grown automotive supplier base are little by little taking form.
Customer segments and behaviors
Understanding customer request and behavior is always critical to determine the right strategy to succeed. Here we examine consumer behavior, including where drivers go for aftermarket services, how service center usage differs, and what drives consumers’ selection of auto parts.
Presently, most care owners use 4S stores for their aftermarket needs. Consumers that purchase their vehicles privately-as opposed to company cars or government cars-are more likely to use non-4S service centers. These consumers are often more price sensitive and may have greater automotive skill. However, the OES network (i.e. 4S stores) predominates even the private car repair market, and has been estimated at seventy percent.
There are differences in consumer behavior depending on what service or product is required. Consumers who require more crucial mechanical repairs or issues concerning safety may be more inclined to use a 4S center. However, other factors including price, convenience, product availability or technical expertise influence or determine the service center selection.
Typically consumers choose branded parts supplied by OEMs, with toughly seventy percent of consumers likely to choose 4S centers as their very first choice. In general, customers purchase branded parts because they worry that non-OEM generic parts could be counterfeit. However, there are regional differences in the propensity for consumers to consider non-OEM parts. For example, consumers in coastal provinces are more willing purchase non-OEM branded parts that are perceived as less critical, such as windshield wipers, trusting that the quality will meet their requirements at a decent discount. Reported 4S auto part sales are also lower than the estimated request for 4S parts. This is likely due to a preparedness to use others brand and the prevalence of counterfeit parts in the marketplace.
Developing a winning strategy
The dynamic nature of the Chinese market means there are several key factors that will determine success in the market. Consumers can be very price sensitive and brand awareness is low. It is not uncommon for a BMW holder to shop around and save a few renminbi on an oil switch for example –haggling for bargains is a key trait of the Chinese consumer and car-owners are no different in that respect. In such an environment it becomes critical to position the company correctly and align products, price and channel strategies accordingly. The Chinese component supply chain is long and complicated, and there are typically many levels of distributors. Design and management of the go-to-market and supply chain assets will also determine success or failure in the industry.
China’s Automotive Aftermarket: A Strategic Chance – China Business Review
China’s Automotive Aftermarket: A Strategic Chance
China is now the largest auto market in the world, and while automakers have previously focused on fresh auto sales, there has been latest interest in developing China’s automotive aftermarket for vehicle service and repairs. The domestic automotive aftermarket is relatively fresh in China and there are several characteristics unique to the China market.
China’s expanding auto aftermarket
Driven by yam-sized growth in car sales, China’s stock of cars, especially older vehicles, is expanding dramatically. In 2009, China overtook the United States to become the largest fresh auto sales market in the world. China has experienced annual growth of toughly twenty percent over the last ten years. Strong growth is forecast to proceed despite some cities, such as Shanghai, Beijing and Guangzhou, introducing monthly license plate quotas.
The continued growth in fresh car sales is having the secondary effect of dramatically enlargening the cumulative stock of cars in China. The average warranty period for vehicles in China is typically three years. According to LEK Consulting’s estimates, by two thousand seventeen the average age of cars will increase from three years to Four.Five years, the age when spending on aftermarket parts and services typically peaks. The number of out-of-warranty cars will almost triple during the same period, further driving request for aftermarket products and services.
Prior practice indicates that these factors will create substantial request for aftermarket parts and services. The size of the market has already enlargened dramatically from $Ten billion in two thousand eight to $24 billion in 2012. This trend can only be expected to proceed as China’s car fleet both increases and ages.
Assembly and wear-out repairs, including engine, framework, assets and transmission repairs, and minor repairs are the two largest segments of the repair services market (by value), and are expected to remain the largest segments for the foreseeable future.
Mapping the auto aftermarket structure
Developing a winning strategy in China’s automotive aftermarket involves mapping the value chain, identifying key stakeholders, and determining how suppliers can best reach the customer. Product type, manufacturer background, geographic market, and development level of each city will affect each of these elements.
Manufacturing of auto parts is predominantly done by three types of companies: international original equipment (OE) suppliers, domestic OE suppliers, and dedicated aftermarket suppliers. The distribution and service is typically done either by the original equipment supplier (OES) network or the independent aftermarket (IAM) network.
Because the development of a large scale Chinese automotive market is relatively latest, chain service and repair stations have yet to be established on a broad scale. Traditionally, 4S stores managed by the auto OEMs perform the bulk of auto servicing. 4S stores, which is brief for “sales, service, spare parts, and surveys (customer feedback),” were developed in China to address the lack of service for vehicles after they had been purchased. Customers purchase cars from 4S dealerships, which also provide service after auto sales. Non-OEM aftermarket suppliers are mostly puny, regional companies that sell parts through distributors that supply independent repair shops. Distribution in the independent channel is elaborate, and several layers of distributors may exist. Some distributors also have their own retail outlets and repair shops to further complicate matters.
There is a fresh, but puny, direct channel emerging where component suppliers are opening self-owned and self-branded stores, or directly supplying products online. Bosch and Continental are examples of players moving down this path and other companies are studying if and how they should participate. Such channels are typically less common in other markets, but could be very effective in China as consumers are typically brand and price-sensitive and increasingly require verification that the parts they are purchasing are genuine. Besides opening fresh and profitable revenue flows, these direct channels help strengthen the manufacturer brands which in turn can help its core business.
Launching direct channels is not without challenges, and a company considering this route needs to cautiously evaluate product mix, store economics and operational issues before moving down this path.
Industry development
Presently, 4S stores predominate sales and repair services in China, albeit chained repair shops are forecast to increase in relative importance in the coming years. Direct channels including self-owned and self-branded stores and online distribution may also be placed for strong growth albeit from a petite base.
Another significant trend will be enlargening levels of industry consolidation. Government policy directives have been issued in the last decade aimed at decreasing the number of auto-component suppliers as a means of enhancing scale and competitive capabilities. The 11th Five-Year Plan called for a reduction in the number of component suppliers while enlargening the competence of supplier capabilities. A National Development and Reform Commission two thousand six mandate encourages merger and acquisition activity in the sector. Every year, hundreds of domestic transactions in China’s automotive sector suggest the government’s ambitions for a stronger home-grown automotive supplier base are little by little taking form.
Customer segments and behaviors
Understanding customer request and behavior is always critical to determine the right strategy to succeed. Here we examine consumer behavior, including where drivers go for aftermarket services, how service center usage differs, and what drives consumers’ selection of auto parts.
Presently, most care owners use 4S stores for their aftermarket needs. Consumers that purchase their vehicles privately-as opposed to company cars or government cars-are more likely to use non-4S service centers. These consumers are often more price sensitive and may have greater automotive skill. However, the OES network (i.e. 4S stores) predominates even the private car repair market, and has been estimated at seventy percent.
There are differences in consumer behavior depending on what service or product is required. Consumers who require more crucial mechanical repairs or issues concerning safety may be more inclined to use a 4S center. However, other factors including price, convenience, product availability or technical expertise influence or determine the service center selection.
Typically consumers choose branded parts supplied by OEMs, with harshly seventy percent of consumers likely to choose 4S centers as their very first choice. In general, customers purchase branded parts because they worry that non-OEM generic parts could be counterfeit. However, there are regional differences in the propensity for consumers to consider non-OEM parts. For example, consumers in coastal provinces are more willing purchase non-OEM branded parts that are perceived as less critical, such as windshield wipers, trusting that the quality will meet their requirements at a decent discount. Reported 4S auto part sales are also lower than the estimated request for 4S parts. This is likely due to a readiness to use others brand and the prevalence of counterfeit parts in the marketplace.
Developing a winning strategy
The dynamic nature of the Chinese market means there are several key factors that will determine success in the market. Consumers can be very price sensitive and brand awareness is low. It is not uncommon for a BMW possessor to shop around and save a few renminbi on an oil switch for example –haggling for bargains is a key trait of the Chinese consumer and car-owners are no different in that respect. In such an environment it becomes critical to position the company correctly and align products, price and channel strategies accordingly. The Chinese component supply chain is long and complicated, and there are typically many levels of distributors. Design and management of the go-to-market and supply chain assets will also determine success or failure in the industry.
