China turns to second-hand cars to rev up consumption

The Financial Times, May 31, 2016

665d2137-7310-4ec8-929f-0afb57c2e09e.img

As China revs up its shift to a consumption-led growth model, policymakers are trying to get more mileage out of a sputtering part of the economy: the used car market.

In most developed economies, sales of second-hand cars outnumber those of new vehicles by about two to one but the opposite is true in China, the world’s largest market for new vehicles.

“The majority of the vehicles in China are still owned by the first owner; secondary-owned vehicles are the minority,” says Bill Russo, a Shanghai-based consultant. “That is unlike any other country.”

To help stimulate the nascent market, Beijing recently introduced a policy that allows old cars from big cities to be resold in smaller ones, a move that will take full effect at the end of May. Previously, to protect local businesses, government regulations prevented cars being sold across provincial borders.

This will “open the pipeline”, according to Mr Russo. “Cars [in China] may be born in upper-tier regions but they tend to retire in lower-tier regions,” he said.

Though huge, China’s car market is in its infancy. Until 1984 it remained technically illegal for individuals to own a car and low personal wealth meant sales did not take off until the mid-2000s.

The country’s transition into a “new normal” of annual economic growth below 7 per cent following years of double-digit rises is potentially painful for carmakers accustomed to breakneck demand for new models. For used-car sales, however, newly thrifty consumers and a growing number of ageing vehicles are a promising combination.

China turns to second-hand cars to rev up consumption - FT.com Safari, Today at 11.57.42 AM

Rising supply, combined with government support and moves by manufacturers to encourage car-owners to upgrade sooner, promises to see the second-hand market grow at more than double the speed of that for new cars, according to Alex Klose, founder of JZWcars.com, a used car website.

The entrepreneur, Volvo’s former chief executive for China, set up his company in 2014 with the aim of becoming a trusted platform for a nascent market. “One thing holding people back from buying a used car is not knowing whether they can trust it,” he says.

Mr Klose is not alone in seeing the potential for second-hand cars. A flock of online platforms and technology start-ups have recently entered the sector.

“Everyone thinks that the space for growth in second-hand cars is very big — they think the sector is a very big cake,” says Li He, founder of Limiku.com, a used-car financing platform.

The government sees the used-car market as a way to boost consumption among those with lower incomes.

Mr Li, a tech industry veteran, believes online platforms are helping to improve the supply chain — a job he says big distributors are failing to do.

“The vast majority [of major distributors] have a second-hand car department but in reality they don’t have standards for the whole supply chain, including pricing and evaluation,” he says.

Big carmakers are now encouraging their dealerships to stop dragging their feet, however, as they seek a new source or profit for dealers.

Over-dependence on a single stream of revenue has sparked tensions between manufacturers and dealers in the past, when distributors asked for compensation for their losses during slow sales periods.

As dealerships look to evolve their business models, there is one set of people who are watching with trepidation: the original used-car salesmen.

Dong Wei has been selling used cars from his shoebox office at Beijing’s oldest and largest “old car market” since the 1990s.

“Before they [big dealerships] didn’t bother with second-hand cars, because the profits for new cars were so high,” he says. “Now they are starting to change their model.”

Mr Dong is nervous that disruption in the sector means the glory days for small-time salesmen are over.

“Before, the market would be full of people,” he says waving a hand at the unattended rows of shiny cars roasting in the heat. “These days, people prefer to go online.”

Click here to read this article at FT.com

China’s secret weapon: used car salesmen

The Financial Times, March 1, 2016
779e8513-3d7f-4271-a7c1-9f09c007e184.img

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:

Presentation on Internet of Vehicles at Citigroup China Auto Conference

Shanghai, China, November 14, 2014

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 11:15am, and after this will deliver a keynote speech titled “Reinventing Mobility in China” at 12:15pm.

Topic:  Reinventing Mobility in China

With the auto industry developments and the increasingly prevalence of the wireless internet and mobile devices,  the Internet of Vehicles will create discontinuous opportunities for product and business model innovation. 
 
The conditions in China – the world’s largest auto market and the market with the largest number of both internet and “smart phone” users – will likely make it the incubator for rapid commercialization of such innovations. China’s urban transportation challenge, the high rate of adoption of connected mobile devices, combined with the rapid and aggressive introduction of alternative mobility and vehicle ownership concepts from new entrants, will ultimately compress the time needed to commercialize smart, connected car technologies and related services. Such developments will dramatically alter not just the feature content of vehicles, but may also usher in a revolution to the business model of the automotive industry – where a model focused on “users of mobility services” could emerge as a real alternative to the traditional model of “car ownership”.
 

Conference Agenda

8:00 – Breakfast / registration

8:30 – 8:45 – Opening Remarks

8:45 – 9:30 – China Economic Outlook: Moderation, Mobility and a New Normal

9:30 – 10:15 – Tri-dimensional view of the Automotive Landscape –  China, Asia, Global

10:30 – 11:15 – The Global M&A Context

11:15 – 12:15 – Panel: Opportunities and Challenges of the China Auto Industry

12:15 – 1:00 – Lunch and Keynote Session: Reinventing Mobility in China

2:00 – 3:00 – Key Developments in the China Debt Markets

 

Venue: Mandarin Oriental

Mandarin I + II LG I

111 Pudong Road (South)

Pudong, Shanghai

200120, China

+86 21 2082 9888

 

Hunting for deals on wheels in China’s developing used car market

Nikkei Asian Review. September 11, 2014

SHANGHAI — Zhu Xiaohong closely examines a 4-year-old Volkswagen Touran, using the flashlight on his mobile phone. The gray VW sits in what looks like a multistory parking lot but is in fact the Shanghai Used Car Trade Market, the largest of a cluster of secondhand dealers on the city’s Zhongshan North Road.

Zhu’s conclusion: “I want to buy this car.”

Zhu, who has bought used cars twice before, said he cannot afford to buy new. But while used cars are significantly cheaper than new ones in China, prices are higher than in developed overseas markets, and there is often greater uncertainty about quality.

Yasuhiro Konta, a senior manager responsible for secondhand sales at Dongfeng Nissan Passenger Vehicle, explained that it is rare to see a standard going rate for a used car in China. “Each price is decided by negotiation,” he said.

This informal system reduces the pressure on sellers to keep prices down, according to Cameron Macqueen, general manager of Southern Cross Warranty, the Chinese arm of Australian financial company Presidian.

“Pricing in China is a lot higher than in the U.S. or Australia — maybe up to 30% or more for some makes and models,” Macqueen said. He estimated average secondhand sale prices at 60,000 yuan ($9,770) nationally, but added that the figure rises to 200,000 yuan in big cities such as Shanghai, where top-end luxury cars are popular.

Trust issues

China’s used car market has expanded alongside a dramatic rise in demand for new cars. Sales of new passenger vehicles hit 17.92 million in 2013, according to Deloitte’s 2014 China Auto Finance Report, confirming China’s status as the world’s largest car market.

Bill Russo, managing director of consultancy Gao Feng Advisory, said the supply of used cars is increasing as owners sell into the market rather than handing on vehicles to other family members. Demand, Russo said, is picking up as younger drivers become more comfortable buying preowned.

On the other hand, Russo pointed out that the ratio of secondhand sales to new car sales is much lower in China than overseas, suggesting that there is a lot of room for growth. In the U.S., three used cars are sold for every new car purchased, whereas in China only one used vehicle is sold for every four new ones.

While those numbers could change, the used car market faces considerable challenges. For a start, growth in new car sales appears to be slowing, although it is still high by Western standards. Deloitte, which tracks the industry closely, says it expects annual growth in China’s new passenger car sales to fall from 15% in 2013 to 7% over the next few years, with the expansion of the used car market slowing from around 20% a year to 15%.

Used car sales are also hampered by a lack of transparent vehicle records, which often makes buying a matter of chance. Sometimes, sellers cross the line into outright fraud.

“I would say the majority of cars have their odometer wound back, and therefore credibility issues are rife,” Macqueen said. “Chinese are not yet up to speed with how to look after their cars, so it is normal for a customer not to trust the history, the quality, of the car they’re looking at, or the dealer.”

Turning pro

The hit-and-miss nature of the used car market reflects the dominance of independent dealers and brokers.

Wang Meimei’s corner of the Shanghai Used Car Trade Market is taken up by a BMW, a Mercedes-Benz and a Volkswagen Passat. “Sometimes I sell a car a day, sometimes a car a week. It varies,” said Wang, who is preparing to retire after 10 years on Zhongshan North Road.

The market is changing, however. Alibaba Group, China’s largest e-commerce company, recently announced plans to launch a platform for selling used cars online. Conventional dealers are also beginning to offer warranties on preowned vehicles, prodded by companies such as Southern Cross.

New car dealers, known in China as 4S shops, are increasingly moving into the secondhand business, bringing more professional marketing and sales techniques.

Martin Kuehl, a spokesman for Audi China, said the company expects the preowned market to continue to grow and has set up 290 licensed used car dealerships — including 60 that sell only Audis. Dongfeng Nissan began selling used cars at some of its 4S shops five years ago; last year it sold around 20,000 through more than 60 dealers.

New government regulations that take effect in October are likely to accelerate the trend toward greater professionalism. Authorized dealerships will be free to sell a range of brands, rather than being tied to a single marque. Industry experts say this will give a further boost to the better-run 4S shops, whose more transparent pricing and marketing practices are likely to put pressure on independents to raise their standards.

 

Potential buyers check out vehicles at the Shanghai Used Car Trade Market. Preowned cars tend to be pricier in China than in other major countries. © Photo by Mark Andrews

“I see a trend toward businesses who want to build a brand name — meaning the quality dealers are getting more and more business,” Macqueen said.

Some problems will remain, though. Many cities, including Beijing and Shanghai, have implemented measures to try to limit car numbers, usually by restricting the supply of license plates. Many of the cars on sale at Zhongshan North Road carry suburban “Hu C” plates, which do not allow the vehicles to be driven into the city center.

Emission standards also vary between cities and provinces, hampering the creation of a national market, or even of large regional markets.

When a new Ford Fiesta was introduced to China in 2009, models sold in Beijing and Shanghai were compliant with the fourth-generation national emission standard, equivalent to the European Union’s Euro IV standard. Models destined for other parts of the country met only the older China III standard.

Today, registering a China III car is difficult nationwide. As a result, those Fiestas are hard to sell.

Click here to read the article at Nikkei Asian Review