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.

Trump Threats Push Top China SUV Maker to Review Mexico Site

Bloomberg News, March 10, 2017

China’s biggest SUV maker is reconsidering its plan to build an auto plant in Mexico that would have made its best-selling vehicles for the U.S. market, joining a growing list of global automakers reviewing investment plans after tax threats by President Donald Trump.

Great Wall Motor Co., led by billionaire Chairman Wei Jianjun, may choose the U.S. instead for its first North American plant, General Manager Wang Fengying said in an interview. The company has a research center in Los Angeles and will accelerate preparations to develop U.S.-certified versions of its Haval SUVs for sale by 2020, Wang said.

“Your decisions should always adapt to the dynamic changes,” said Wang, a delegate at this week’s National People’s Congress in Beijing. There used to be many carmakers building plants in Mexico but Trump’s changes have affected their decision making, Wang said.

Trump has promised to renegotiate the North American Free Trade Agreement and criticized auto companies including General Motors Co. and Toyota Motor Corp. for shifting production south of the border. Under threats of punitive import duties, Ford Motor Co. and Japanese auto-parts maker Nisshinbo Holdings Inc. said they’ll scrap or reconsider new plants in Mexico.

Great Wall, based in Baoding, Hebei province, is one of several Chinese automakers hoping to break into the U.S. with their own brands. Guangzhou Automobile Group Co. plans to start exporting its Trumpchi models to the U.S. from next year, while Warren Buffett-backed BYD Co. and Volvo Cars owner Zhejiang Geely Holding Group Co. have also declared American ambitions.

Lowering Risks

“Building in the U.S. is a hedge against a potential future trade barrier with Mexico,” said Bill Russo, managing director of Gao Feng Advisory Co. and a former head of Fiat Chrysler Automobiles NV’s Chrysler unit in China. “It would add cost to producing the vehicles but it reduces the potential tax risk.”

For more than 20 years, China has asked foreign carmakers wanting to set up manufacturing plants in its country to do so through joint ventures with domestic auto companies, a move that allowed many Chinese manufacturers to gain technology and eventually set up their own brands. Local marques like Geely, Trumpchi and Haval now account for almost half the Chinese market.

The Chinese carmakers are trying to reverse the tide and sell their own models to Europe and the U.S., just as the Republican-led House of Representatives is considering implementing a border-adjustment tax on companies’ imports but not their exports.

The proposals by Trump and lawmakers would raise the average cost of a car in the U.S. by about $3,300 and could even cost American jobs because carmakers source parts from around the world, Munich-based consultant Roland Berger GmbH. said in a presentation on March 8. The price increases would lead to about $34.6 billion in higher costs to consumers, assuming U.S. sales at the 17.5 million level recorded in 2016, the Center for Automotive Research said in a report Thursday.

Local Sales

In China, Great Wall is enjoying a sales surge as Chinese drivers embrace SUVs, despite government efforts to curb fuel consumption and emissions. The company’s domestic sales rose 26 percent last year to 1.1 million units, putting it ahead of Japan’s Mitsubishi Motors Corp. in global vehicle production. Abroad, though, it’s had less success, selling only 17,379 units last year, mainly in countries such as Russia, South Africa, Bulgaria and Australia.

The company is exploring opportunities in developed markets and wants to make the Haval brand global by 2020, said Wang. The company markets its SUVs in China as offering good value for money and prints ads with the title “See. Drive. Believe.” While overseas it also uses pictures of its vehicles driving in the off-road Dakar rally competition.

More than four out of every five vehicles Great Wall sells is an SUV and the company is under pressure at home as China tries to clean up the choking air in its biggest cities. The government has proposed rules that would require automakers to improve fuel economy and produce a higher proportion of so-called new-energy vehicles such as battery-powered cars. Wang said Great Wall plans to invest at least 60 billion yuan ($8.7 billion) in developing new-energy vehicles by 2025, without giving details on how the investment would be funded.

Click here to read the article at bloomberg.com

GM, Ford China Car Sales Decline in February

The Wall Street Journal, March 7, 2016

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Many car makers posted declining sales in China in February. Above, a SAIC-GM-Wuling Automobile manufacturing plant in Qingdao, Shandong Province. Photo: European Pressphoto Agency

By Christina Rogers

General Motors Co. and Ford Motor Co. both posted steep sales declines in China last month on a year-over-year basis, part of a wider slowdown attributed in part to a drop-off around the Lunar New Year holiday.

Sales for both U.S. car makers fell 9% in February, the companies said, following a string of monthly gains driven by new government subsidies introduced late last year to stimulate demand for fuel-efficient cars.

China’s auto market has bounced back from a slump in the summer of 2015 due to the incentives, which can be applied to 70% of cars sold in the country. But the recent sales declines raise a potential red flag, signaling the world’s largest new-car market could be permanently cooling amid the country’s slowing economic growth.

Through the first two months of 2016, GM and Ford sales rose 11% and 18%, respectively, the companies said. Analysts typically look at January and February sales together to account for the disruption caused by the New Year holiday. The China Association of Automobile Manufacturers will report official February new-vehicle sales in China for all car makers later this month.

Other auto makers also posted declines in February, including Hyundai Motor Co. and Mazda Motor Corp. Sales for SAIC Corp., China’s largest domestic auto maker, dropped 7%, dented by declines reported by joint-venture partners GM and Volkswagen AG , both market leaders in the country.

China car-sales reached a new high in 2015, rising 7.3% from a year earlier to 24.6 million. But the growth rate was slower than the double-digit gains recorded in 2013 and 2014.

The China auto makers’ association projects passenger-car sales in 2016 will expand 7.8% to 22.76 million. Car makers have rushed to build factories and boost production in China, hoping to tap surging demand for new cars created by a rising middle class and rapid urbanization in what is considered one of the industry’s most profitable markets outside the U.S.

January was a particularly strong month for auto makers in China, with sales up 9.3% from a year earlier, as buyers snapped up new-cars before the holiday. Travel tends to be heavy around the holiday, contributing to a decline in showroom traffic last month.

“It’s like a vacuum effect in February,” said Nigel Griffiths, chief automotive economist for researcher IHS Automotive. March results will be the real test to see whether demand created by the government stimulus is starting to fizzle, Mr. Nigel said.

IHS Automotive has issued a cautious forecast for new-car sales in China this year, with growth likely to benefit only certain auto makers. Demand is also starting to shift to local brands with a number of global auto makers posting weaker sales of late.

Ford has 4% of the market in China and recently completed a $5 billion expansion to build new factories and add models. The Dearborn, Mich., auto maker also plans to spend another $1.8 billion on research and development there. GM, Ford’s crosstown rival and among the largest sellers in China, is also trying to increase market share with new models and an expanded lineup of Cadillac luxury vehicles.

“It is a very densely crowded market,” particularly on factory capacity, that can dent sales and profits across auto makers, said Bill Russo, a managing partner with consultants Gao Feng Advisory.

Government tax incentives are helping to prop up new-car demand in China this year but the subsidies only last through December, analysts say.

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:

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)

China plans to ease rules on car market

The Financial Times, January 6, 2016

China plans to ease rules on car market - FT.com Safari, Today at 2.50.51 PM

Beijing plans to shake up the domestic car market by relaxing restrictions on dealers so they can sell vehicles from multiple makers.

China’s Ministry of Commerce, which oversees car sales, has published for public comment rules that would bar manufacturers from forcing unilateral sales quotas on dealers or requiring them to take on unpopular models or inventory. Dealers would also be permitted to stock cars from more than one manufacturer and sell excess stock to each other.

Global carmakers are already facing a challenge in the world’s largest market as China’s economic slowdown and vehicle licensing restrictions in many big cities start to eat into years of reliable profits.

Yu Jianliang, a China-based motor industry analyst, said: “This is really good news for car dealers and will reduce their business risk.

“Car dealers in China have less say and more restrictions than their foreign peers. But now the industry is in a downturn and dealers are complaining a lot about pressure on their business. The draft policy could ease that.”

The draft rules would also benefit smaller manufacturers, enabling them to sell their cars through distributors of more popular brands without having to build up a sales network independently, analysts said.

“In the short term it will boost dealer confidence and in the long term, [I expect] it will bring more models to the market,” said Mr Yu.

The measures would be in line with efforts over the past few years to increase competition in the market, with Beijing penalising some foreign vehicle and parts makers for what it said was anti-competitive behaviour.

Multinational groups are already under pressure from steps by authorities to legalise so-called parallel imports of cars that manufacturers originally intended to sell in other markets, but which make their way into China at a substantial discount.

Bill Russo, a Shanghai-based motor industry consultant, said the dealer rules, if adopted, would be a “major move that is consistent with the themes of recent years including the recent anti-monopoly campaign and permitting parallel imports”.

“They are attempting to give more leverage to dealers, as well as create price competition,” he added. “Pricing and margins have been high in China relative to other markets, and this will serve to change that.”

Tax cut for small models drives Chinese car sales

The Financial Times, November 11, 2015

Patti Waldmeir in Shanghai

Tax cut for small models drives Chinese car sales - FT.com Mail, Today at 11.13.18 AM

Beijing’s stimulus plan for the Chinese car market helped October motor vehicle sales to grow at their fastest pace in 10 months, driven by a tax cut on small cars.

Chinese car buyers have been holding back on purchases of big-ticket items such as cars, while consumer spending on other items remained strong on the mainland, which today celebrated another record “single’s day” shopping holiday.

However, the industry has seen some signs of recovery in recent months, with October motor vehicle sales rising 11.8 per cent year-on-year, to 2.2m vehicles, according to the state-backed China Association of Automobile Manufacturers. This was an acceleration from the 2.1 per cent pace recorded in September.

Sales of sport utility vehicles, the fastest-growing segment and a car popular with the rapidly growing middle class, rose more than 60 per cent in October over the same month a year ago.

Bill Russo, a motor industry consultant in Shanghai, said: “There’s a bounce because of the tax reduction and . . . there has been a trend, even in the slowdown period, of high growth in SUVs, particularly recently launched vehicles in that category are doing quite well.”

Beijing is counting on consumers to boost economic growth as the Chinese economy shifts toward more consumption-led growth. But sentiment among car buyers had been more negative than that affecting other consumers in recent months, with some saying they were waiting for prices to fall.

Beijing responded to weak demand by halving the tax on vehicles with engines of 1.6 litres or smaller to 5 per cent — a measure in place until the end of next year. The tax cut came into effect on October 1.

China’s leaders adopted a similar strategy of cutting taxes on small-engine vehicles in response to the 2008 global financial crisis, launching several boom years for the Chinese car market.

Mr Russo said: “The tax reduction is . . . designed to do two things, stimulate demand in a slowdown but also encourage people to buy a higher mix of locally branded cars” since local automakers’ product portfolio is skewed towards the smaller end.

Tax cuts are likely to boost demand from now until the end of 2016, he said, but added: “My concern is what happens to demand in years to follow, demand may be pulled forward from 2017 into 2016.”

But Yu Jianliang, an independent motor industry analyst, predicted that the boost might not last all next year. “The market is now in the downswing of the business cycle so the policy effect might only last for half a year,” he said. Carmakers were also trying to attract customers by offering more flexible instalment terms and reducing commission charges, he added.

 Additional reporting by Jackie Cai

Click here to read the article at FT.com

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.
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Bill Russo Delivers Keynote Speech on China Innovation Going Global

Helsinki, Finland, May 12, 2015

Bill Russo delivered a keynote speech on behalf of Gao Feng Advisory Company at Team Finland’s China Day conference.  His presentation summarized the key findings of a study titled Chinese Innovations Are Going Global:  New Emerging Business Models.

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A link to the full report is provided here.

Foreign marques surge ahead in China car market

The Financial Times, January 13, 2015

by Tom Mitchell

Multinational carmakers defied slowing economic growth in China last year, increasing their lead over Chinese rivals in the world’s largest automotive market.

Sales of passenger cars, SUVs and minivans increased 9.9 per cent year-on-year to 19.7m units in 2014, the Chinese Association of Automobile Manufacturers said on Monday. That was significantly below the 16 per cent annual growth recorded in 2013, when 10 times more cars were sold in China than in India.

Overall vehicle sales, including buses and trucks, increased 6.9 per cent to 23.5m units. CAAM projected the market would grow 7 per cent this year, to more than 25m vehicles.

Chinese carmakers have blamed a broader slowdown in the world’s second-largest economy for their own poor sales performance last year. In October, the government reported its slowest quarterly economic growth figure — of 7.3 per cent — in more than five years.

Sales of Chinese passenger sedans fell more than 17 per cent last year, leaving domestic brands with a market share of just 22 per cent in the segment, compared with a 27 per cent share for German brands.

Dong Yang, CAAM secretary-general, said Chinese drivers did not appreciate the improvements made by domestic brands this year. “They improved their products and reduced their prices,” Mr Dong said. “But Chinese people care too much about [the cache of foreign] brands. I think this trend will continue in 2015.”

Dealers on the mainland for some of the world’s most best-known car companies, such as BMW, have also cited slowing economic growth in their successful negotiations for bigger rebates and more modest sales targets.

But some analysts argue that their complaints are overdone as the overall sales figures mask a large and growing discrepancy between local and foreign brands, with the latter continuing to enjoy double-digit annual sales growth.

“We’ve got a market that’s 24m units in size and is growing at 7 per cent — we should be celebrating not lamenting,” said Bill Russo, a Shanghai-based automotive analyst. “The issue is that most of the growth is captured by foreign manufacturers while local players are fighting at the bottom of the pyramid.”

“Five per cent growth anywhere else in the world is considered great,” he added. “But here we complain about anything less than double-digit growth. In a market this big, that’s crazy.”

Volkswagen reported at the weekend that its sales in China increased 12.4 per cent to 3.67m units, accounting for almost 40 per cent of its global total.

On Monday, Jaguar Land Rover of the UK said that it had recorded a 28 per cent annual surge in China, its largest market, compared with a 9 per cent increase in overall sales. Owned by India’s Tata Motors, JLR opened its first manufacturing facility in China in October as it races to catch up with VW unit Audi, BMW and Daimler’s Mercedes-Benz, which together account for about 80 per cent of premium vehicle sales in China.

The Chinese government forces overseas car companies to operate joint ventures if they want to manufacture locally. Most have linked with large state-owned auto groups, which reap a steady flow of dividends from the partnerships but have failed to develop strong brands of their own.

Click here to read this article at FT.com