COVER STORY: Article on China’s Automotive Aftermarket published in China Automotive Review

China Automotive Review, August 2017

Our recent article on the rise of China’s Automotive Independent Aftermarket was published as a cover story in the August edition of China Automotive Review.

Rising Opportunities in China’s Automotive Independent Aftermarket

Gao Feng Insights, May 2017

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 paper, 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 secret weapon: used car salesmen

The Financial Times, March 1, 2016
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You have probably read, in the Financial Times and elsewhere, that China is the world’s largest car market.

It is not. It is the world’s largest new car market, with sales of 21.1m units last year compared with 17.4m in the US. When used cars are included, the US auto market swells to more than 40m units, against less than 30m total passenger car sales in China.

In value terms, the gap between the two markets is even larger. In 2014, the overall value of US car sales was almost $1.2tn, more than twice as large as China’s $470bn.

This is not surprising, considering that two-thirds of cars on Chinese roads are less than five years old and 80 per cent of all buyers are first-time drivers. The latter fact explains why crossing an intersection in China can be a harrowing experience for pedestrians.

Put another way, an industry that most Americans, Europeans and Japanese have grown up with and now take for granted does not yet even exist in China. Dismiss a shady character as a “used car salesman” and most Chinese people will not understand the reference.

As Chinese leaders gather at their annual parliamentary session later this week, it is worth bearing in mind that they are doing so in a country where one cannot very easily buy a used car.

That fact should reassure Chinese politicians and multinational executives worried about the pace of growth in the world’s second-largest economy, which will be a topic of much discussion at the National People’s Congress.

Government officials insist that the rising “new economy” will balance out the declining “old economy”, allowing the country to grow at an average rate of 6.5 per cent through 2020. The creation of entirely new industries will further support growth.

The inevitable rise of what will soon be the world’s largest used car market is one such example. While its emergence will initially cannibalise some new car sales — primarily those of cheap domestic brands — the potential for growth is huge. In most developed auto markets, there are at least two used car sales for every one new car sale. In China the ratio is inverted, with roughly three new car transactions for every used car sold.

Another new industry whose time should come soon is China’s private jet sector, which is a fraction of the size of its US counterpart.

But the development of business aviation has been constrained in China by the military’s grip on airspace and many of the smaller airports best suited for private jets. Similarly, a giant new used car market will not spring up by itself. Complicated financial reforms will need to be hammered out in order to facilitate its development.

As Janet Lewis at Macquarie Securities in Hong Kong points out, while regulations governing the sale of used cars vary from province to province, in general dealers must act as brokers between sellers and buyers. That is because value added tax would be incurred if they took temporary ownership of vehicles, putting further strain on already tight cash flows.

When such wrinkles are finally ironed out, the inevitable surge in Chinese used car sales will also benefit car manufacturers now contending with a “new normal” of falling margins in what has historically been their most lucrative market.

In developed economies, ancillary activities including maintenance, trade-ins and used car sales have helped dealers sustain profits as new car margins are squeezed. But in China dealers have too often been, as industry consultant Bill Russo puts it, “dogs who just want to be fed”, solely reliant on buoyant new car demand.

When the going got tougher over recent years, dealers demanded ever bigger discounts and one-off subsidies from their manufacturer suppliers. By contrast, in the boom years after the global financial crisis, China was one of the few countries where to own a car dealership was to collect a lazy economic rent. The pickings were so easy that in at least one recent high-profile corruption case, a senior official’s son was gifted a stake in a Toyota dealership.

The emergence of a proper Chinese used car market will help everyone from the ruling Communist party by boosting economic growth, to the world’s largest multinational carmakers by boosting dealer profits. Who knew that used car salesmen could be such an asset to society?

tom.mitchell@ft.com

Click here to read this article at FT.com

Letter in response to this article:

Reimagining Mobility in the China Context

Gao Feng Insights Report, February 2016

We are pleased to share with you our paper titled: Reimagining Mobility in the China Context. This article builds on the themes from our previous article titled Digital Disruption in China’s Automotive Industry, and offers a perspective at how the traditional value chain of the automotive industry is being fundamentally transformed by a new wave of “digital disruptors”.

Unlike traditional automotive OEMs and suppliers, these digital disruptors are leveraging mobile internet technology to present new and innovative “Connected Mobility” services to users, and in the process challenging the business model of the automotive industry. The century old hardware-centric business model of individual car ownership and product-based segmentation is transforming into a new form which leverages internet technology to deliver a broader range of services to address mobility needs.  Such changes are happening faster in China than in the rest of the world, where the size and scale of the urban population and the sheer numbers of mobile internet users are much greater than other markets.

In such an environment, China’s Internet giants (Baidu, Alibaba, Tencent) along with mobility disruptors such as LeEco and NextEV are vying to deliver an increasingly connected, electrified, smart and personalized mobility experience.  Coupled with the Chinese government’s regulatory push on new-energy vehicle adoption and sustainable transportation infrastructure, China has demonstrated strong potential to become the breeding ground for the Connected Mobility revolution.   As a result, Automotive OEM and supplier CEOs must learn to reimagine mobility in the China context in order to secure a strong position in this new competitive landscape.

We welcome your comments and feedback on our briefing paper or in general about our firm. We would be glad to meet you in person to share our data and perspectives in a fuller manner. Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights.

Thought leadership is core to what Gao Feng does. We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Best Regards,

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Edward Tse
Chairman and CEO, Gao Feng Advisory Company
edward.tse@gaofengadv.com

Tel: +86 10 5650 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Digital Disruption in China’s Automotive Industry

Gao Feng Insights Report, January 2016

We are pleased to share with you our paper titled: Digital Disruption in China’s Automotive Industry. Recent advances in mobile connectivity, big data and social networks have infiltrated the traditional automotive industry and are beginning to redraw the competitive landscape among traditional hardware companies and digital “disruptors”.

The traditional automotive industry, where technology innovation has primarily been focused on powertrain and safety systems, must now contend with new forms of mobility services that are transforming the business model of the auto industry. The conventional hardware-centric, sales-driven, asset-heavy, and ownership-based business model with sporadic customer interactions is being superseded by more connected, on-demand, cost-effective, personalized mobility services. This new form of “connected mobility” is driving new technologies in the areas of navigation, analytics, driver safety, driver assistance and information virtualization.

China’s automotive industry is at the forefront of digital disruption as this transformation is happening much faster in China than the rest of the world, and China will leapfrog to a new era of personalized and electrified mobility.  The unique context of China’s urban transportation challenge, the high rate of adoption of mobile device connectivity, combined with the rapid and aggressive introduction of alternative mobility and ownership concepts will compress the time needed to commercialize smart, connected car technology and related services.  These conditions may permit China to “leapfrog” to towards a new era of personalized and electrified mobility.

We welcome your comments and feedback on our briefing paper or in general about our firm. We would be glad to meet you in person to share our data and perspectives in a fuller manner. Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights.

Thought leadership is core to what Gao Feng does. We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Best Regards,

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Edward Tse
Chairman and CEO, Gao Feng Advisory Company
edward.tse@gaofengadv.com

Tel: +86 10 5650 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Tech Disruptions Impacting the Auto Industry

Beijing, China, October 28, 2015

Audio Interview:  Bill Russo of Gao Feng Advisory Company talks about how convenience-centric mobile users are buying fewer cars

Click here to access the AmCham site with a link to the full audio interview

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Cars are the ultimate mobile device. And changes in mobile purchasing and big data have changed the way consumers interact with cars, with taxi hailing apps as the most vivid example.

Bill Russo, Managing Director and Automotive Practice leader at Gao Feng Advisory Company, spoke at AmCham China Oct. 28 to address these tech disruptions impacting the auto industry. Russo has nearly 30 years of experience in the auto industry, paired with 12 years in the IT industry. Listen in to the full podcast below to hear what he makes of tech’s latest target.

Q: The China market is adopting new innovations in cars faster than other places in the world. What are these innovations happening here first?

A: The car is a mobile device and today it’s not as connected as other things that people carry with them. So the expectation is high that the car will be an extension of their mobility world.

I think we’re actually saying that Chinese adopt new mobile technology faster than the rest of the world, not necessarily new mobile technology in cars.

When you compare China to anywhere else in the world, it’s much more densely populated and everybody’s connected through some form of mobile device. The Internet population is now well in excess of 600 million, and almost all of them are connected some sort of mobile device.

To the auto industry, one of the disruptions that is plainly evident if you live in China is that people have the choice of whether to own a car. It’s become less and less convenient to drive a car or hail a taxi at certain times of day. Internet companies came in and said that’s another convenience that we could provide. You can book a car through your mobile device. That’s having a disruptive impact on the way people use mobility.

 

VW Emissions Scandal Spreads to Asia as Korea Begins Probe

Bloomberg News, September 22, 2015

Click here to read this article at bloomberg.com

The fallout from Volkswagen AG’s admission that it had cheated on emission tests in the U.S. is spreading to Asia, as South Korea said it will check whether the German automaker complied with its pollution standards.

South Korea will test emissions on diesel versions of VW’s Jetta, Golf, and Audi AG’s A3 sedan in October, Park Pan Kyu, deputy director of the country’s environment ministry, said by phone. The investigation will involve about 4,000 to 5,000 vehicles that were imported to Korea since 2014, Park said.

“We found it necessary to review the emissions of the models under probe in the U.S., although the U.S. has a more rigid emissions standard than Korea does,” Park said. “We have no plans at the moment to expand the investigation to other makers or models but will continue to closely monitor the situation.”

South Korea is reviewing Volkswagen’s compliance after the company admitted to systematically cheating on U.S. air pollution tests, while Germany said it may investigate the matter. Europe’s biggest carmaker derived about 40 percent of its volume sales last year from Asia, home to its largest market China.

“The bigger concern is how it impacts their European reputation, which is much more important market for them, particularly in diesel,” said Janet Lewis, Hong Kong-based analyst at Macquarie Group Ltd. “To the extent that they can’t grow their U.S. business in their quest to be the No. 1 automaker by 2018, they therefore become more reliant on the China market.”

Deliveries of Volkswagen in China fell 5.8 percent in the eight months through August. Industrywide passenger-vehicle sales in the country climbed 6.3 percent in the same period, according to the China Passenger Car Association.

More than 90 percent of about 25,000 vehicles VW sold in South Korea this year through August were diesel models, according to Korea Automobile Importers & Distributors Association data. They included the models under probe in the U.S.

Shares of both Hyundai Motor Co. and its affiliate Kia Motors Corp. rose 3.1 percent in Seoul on Tuesday after brokerages including Samsung Securities Co., IBK Securities Co. and KB Investment & Securities co. said the South Korean carmakers may benefit from VW’s woes.

“It seems inevitable that Volkswagen’s image gets tarnished and sales fall,” Lee Sang Hyun, an analyst at IBK Securities Co. wrote in a report. “We expect Hyundai Motor Group to benefit from VW’s recall.”

In China, VW sells gasoline versions of the models involved in the U.S. probe. The automaker didn’t respond to a request for a breakdown on the diesel models it sells in China or whether the regulators have contacted it about the U.S. admission.

“The way the system works in China is that it triggers a review, when somebody has a problem related to regulatory compliance in one market,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “It raises some question of whether the practices that led to that problem could exist in another market so it could cause other government organizations to take another look and see if in fact they’re complying.”

The General Administration of Quality Supervision, Inspection and Quarantine didn’t immediately reply to a fax seeking comments on whether they will inspect VW. Calls made to the media department of Chinese Ministry of Environmental Protection went unanswered.

New Zealand isn’t aware of any issues with vehicles sold in the country that are compliant with European or Australian standards, Transport Minister Simon Bridges said in an e-mailed response. Australia’s transportation regulator said it’s seeking clarification from Volkswagen as to whether vehicles supplied to the Australian market utilize similar software to that used in the U.S.

There’s no emission issue yet in Malaysia, said Madani Sahari, chief executive officer of Malaysia Automotive Institute. Singapore’s National Environment Agency said it’s working on a response. Taiwan’s air quality regulator said it’s checking with VW’s local agent on imported cars.

KEYNOTE SPEECH ON STATE OF CHINA’S AUTO INDUSTRY AT CITIGROUP CHINA AUTO CONFERENCE

Beijing, China, July 22, 2015

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Gao Feng’s Managing Director and Auto Practice leader Bill Russo will join a panel discussion titled Opportunities and Challenges of the China Auto Industry at 11:10am, and after this will deliver a keynote speech titled “China’s Automotive Industry in Transition:  Is the Golden Age Over?” at 12:00 noon.

Topic: China’s Automotive Industry in Transition:  Is the Golden Age Over?

Following a decade of rapid growth that culminated in a stimulus-driven surge in demand in 2009-2010, the China auto market sharply decelerated, with growth slipping to 2.5% in 2011 and 4.3% in 2012.  This brief slowdown was followed by 14% growth in 2013 and 7% growth in 2014, with overall sales exceeding 23 million units.  While the market growth has been spectacular, there are rising concerns on the sustainability of this performance as the market may be approaching a saturation point in the traditionally strong coastal regions.  Intense competition among automakers as they pursue emerging growth opportunities in specific regions and segments is anticipated.  Mr. Russo will address opportunities and challenges faced by different competitors as they deal with this a transitional period in the world’s largest automotive market.

  • Opportunities and challenges in luxury and imported vehicles market.
  • Opportunities and challenges in emerging provinces and cities, as well as in second and third tier cities
  • Sales and marketing strategies to exploit these opportunities
  • Strategies to diversify profit streams and maximize profit opportunities
  • Structural changes that may occur as the market transitions to a slower growth pattern
 Contact us for more information on this or other topics related to China and our auto practice.
20150722 China Auto Market Briefing vF Microsoft PowerPoint, Today at 6.05.33 PM

Internet Car Sales Click With Chinese Consumers

Ward’s Auto, January 5, 2015

Chinese automaker Geely will sell about 3,000 units online in China in 2014, five years after launching Internet sales on the country’s leading e-commerce site.

“The impact of Internet firms has been a major success for the company,” Geely spokesman Ashley Sutcliffe says.

Consumers have embraced e-commerce in China, the world’s most networked country. They are willing to buy just about anything online, including cars, and thus a new distribution model is being created.

But don’t count traditional dealerships out. They still play a crucial role.

“E-commerce in the automotive market is taking off,” says Paul Hu, chief marketing officer for Greater China and ASEAN at Volkswagen Group China. “In my personal opinion, online sales in the total car market in China will account for 10% in the near future.”

Shanghai Volkswagen, one of VW’s joint ventures in China, sells cars online in China though a handful of sites. Customers place orders online, but pick up the vehicle at a dealership.

“We do believe that there is some disruption to come to the distribution model, but it is not imminent,” says Kyle Dickie, CEO of Sewells Group, a dealership best-practices consultancy. “In China, there is an unusually high level of trust still placed in the sales consultant. In other words, consumers still want to interact face to face.”

Smartphones are the disruptive agent. By the end of 2014 China was to have more than 500 million smartphone users, says Wang Xiangrong, an official with China’s State Internet Information Office.

Those phones are kept busy buying stuff. Beijing-based iResearch predicts 2014 online retail sales in China will surge 45.8% to RMB2.76 trillion ($444 billion).

The explosion of online commerce in China is aided by e-commerce giants such as Alibaba, Tencent and Baidu. All are playing a role in changing the vehicle-distribution model in China.

Alibaba owns Tmall, the country’s leading e-commerce site. Formerly called Taobao, it is the site where Geely launched Internet sales. Last year, Alibaba partnered with another Chinese automaker, SAIC, to create an Internet-enabled car.

Though consumers can buy a Geely car online, dealers still close the deal. “Consumers can pay a deposit or pay for cars outright online, (but) the official sale will be handled by the nearest dealer,” says Sutcliffe.

That allows the dealer to sell additional products to the buyer and also gives the customer a point of contact for aftersales service, he says. Geely has some 800 dealerships in China.

Demise of Dealerships From Ride Sharing?

Online sales aren’t what will cut dealers out of the sales loop, argues Bill Russo, managing director at consultancy Gao Feng in Shanghai. Business-to-consumer connected-transportation applications might, however. These basically are ride-sharing applications but in China taxi drivers are used.

“Empowered with technology, consumers of mobility services are likely to make choices other than what the automakers and their dealers are offering today,” says Russo.

China’s Internet giants are deeply involved in mobility services.

Alibaba is an investor in Kuaidi Dache, a taxi application that sometimes tops 6 million daily orders. Tencent offers the taxi app Didi Dache, which claims more than 100 million registered users and says it processes more than 5.2 million orders daily.

The Baidu search engine has 500 million monthly mobile users and offers Baidu Maps and Total View, which uses satellites to show actual locations. It is a Chinese version of Google Maps’ Street View; Google is blocked in China.

The U.S. ride-sharing service Uber has just entered the China market and will use Baidu’s maps and Street View.

Internet-savvy young Chinese increasingly are becoming accustomed to using such services, says Russo. They “are increasingly likely to opt out of traditional car-ownership hassles,” he says.

Geely is one automaker that is playing both sides. It owns London Taxi, a famous brand in the U.K. A few months ago it introduced a fleet of the vehicles in Shanghai.

The iconic taxis – which in Shanghai are gold, rather than black – are larger than regular taxis and equipped to accommodate wheelchair users or others with special needs, says Sutcliffe. Right now they can only be summoned using a phone.

“There are plans for an app,” Sutcliffe adds.