China’s government is intent on assisting its growing population of independent service centers by facilitating the flow of aftermarket parts into the industry’s supply chain. Enhanced quality standards are also being implemented.
“The most far-reaching reform currently underway in China’s automotive sector is the overhaul of the so-called 4S market – sales, service, spare parts and surveys – and related changes,” reports Dr. Benjamin Kroymann, a partner at the Squire Patton Boggs international law firm.
Several agencies are involved in formulating a series of new standards under China’s overall “13th Five-Year Plan” plus its underlying “Made in China 2025” program, and they are currently promulgating “Guiding Opinions” and a “Circular” to address acceptance of non-OEM components, a significant shift from the nation’s previous policy of allowing only OEM parts to be utilized by maintenance providers and repairers.
“In order to open the aftermarket for more competition, the Guiding Opinions introduce the concept of ‘same quality spare parts,’ i.e. spare parts that are of comparable quality to the original parts,” says Kroymann, who spoke at October’s Automotive Aftermarket Summit in Shanghai.
“At the same time, under the Guiding Opinions and the Circular, automakers are required to publish certain technical information with respect to the repair of their vehicles. This measure aims at enabling after-sales service providers and repair shops to enter a market that has previously been dominated by OEMs and their authorized dealers and repair shops,” he explains.
A final set of rules has yet to be issued, but under a set of proposed “Draft Measures” being debated the existing 4S dealership model will essentially be abolished. Dealers will no longer be required to obtain an authorization from OEMs to sell their vehicles, and “tie-in sales” of vehicles, parts and other products are explicitly prohibited.
In a tie-in sale, the seller requires the buyer to purchase a package of differing models instead of selecting a particular nameplate that may prove to be more popular. “Due to their strong bargaining position, some carmakers in China have, in the past, been said to be engaging in tie-in sales to sell off less successful car models to dealers and distributors. By prohibiting tie-in sales, the government is aiming to weaken the dominant market position of OEMs and to create more competition in the market,” Kroymann explains.
“The exclusive supply of auto spare parts by automakers is broken up, with auto parts suppliers now being allowed to sell their products to any repair shop or customer in the market,” he says. “Also, dealers will be allowed to sell same quality spare parts to their customers provided that they bear the China Compulsory Certification (CCC) certificate.”
Precise standards remain in flux. “China’s approach to legal reform usually is one of trial and error,” says Kroymann, typically conducted via pilot programs and trial runs at the local level, with new requirements officially rolled out in a piecemeal fashion.
“Once a main piece of regulation has been issued, be it in the form of a law or of regulations, a series of implementing provisions usually follow,” he notes. “This is why it seems likely that there will be more regulations issued in the course of the ongoing reform.”
Treading carefully
A huge potential maintenance and repair marketplace is in play as China has become the world’s No. 1 automotive purchaser with 24 million vehicles sold in 2015 (versus 15.5 million in the U.S.), presenting a 4.7 percent growth rate over 2014’s sales figures.
“Generally speaking, the reform of the 4S market is good news for most market participants, including foreign aftermarket parts manufacturers, since the use of same quality spare parts will be encouraged in the future, leading to a higher percentage of such products in the market,” Kroymann tells Aftermarket Business World. “The main challenge in the months to come will be to determine how the Chinese authorities will actually implement the new rules in practice.”
Kroymann cautions that “companies should tread carefully and rely on their advisers. Much will be determined by how the regulations will be put in practice by the respective authorities, so it is important to have legal advisers on the ground who are in direct communication with the authorities in a given region or city. With an increased number of market participants, product liability is an issue that will become increasingly relevant for aftermarket parts suppliers.”
Establishing relationships with existing distributors in China can ease an American firm’s entry into the market by being able to tap into their sales networks. “There is a high number of repair shops in China,” says Kroymann, “and the markets are still quite regional/local.”
He anticipates that China will eventually move in the direction of American-style national maintenance and repair chains. “The market is highly fragmented, and a consolidation seems likely for the years to come.”
Harmonizing the process
Having achieved approval in September from the Certification and Accreditation Regulatory Department of the State Council of China (CNCA) to assist in documenting the mandated “same quality spare parts” standards, the U.S.-based Certified Automotive Parts Association (CAPA) is joining with Intertek, a global “total quality assurance” provider, to introduce CAPA’s voluntary aftermarket parts certification process into the nation.
“We understand the government is considering, and working with various entities, on a government-deployed certification program,” says CAPA executive director Jack Gillis. “In fact, both Intertek and CAPA are involved at various levels of these discussions. This process will likely take some time, and in the interim, manufacturers can leverage the Intertek/CAPA program today to demonstrate matching quality. If and/or when other programs evolve, we’ll work to harmonize processes as much as possible to drive reciprocity and limit bureaucracy for the manufacturers.”
Gillis says that “we look forward to working with new manufacturers in China and helping our existing program members enter the Chinese market through a smooth, seamless process.”
Debbie Klouser, CAPA’s director of operations, points out that “because of the worldwide acceptance of the CAPA program, CAPA certification for Chinese parts will greatly expand their international marketability.”
“As CAPA’s long-time validator in the U.S., we look forward to helping them grow their program as we expand our footprint in providing comprehensive solutions to customers around the world,” says Intertek Vice President Tim Hubbard Sr.
“CAPA’s vision, openness and expertise, along with that of Intertek, is greatly appreciated by the Chinese aftermarket industry,” reports Jie Ma, vice director of the Automotive Engineering Research Institute at CATARC, the China Automotive Technology and Research Center. “We look forward to working with both groups to promote the development of part certification standards in China and providing more options for our domestic automobile industry.”
Rising to the challenge
In May 2016 Dana hosted a symposium at its technical and manufacturing campus in Wuxi, Jiangsu Province, to promote “innovation and manufacturing excellence in China” in support of the country’s ongoing “Made in China 2025” initiative.
“We succeeded in our initial goal of bringing together thought leaders from various vehicle markets, and the discussions we held will help us determine the strategies we need to follow as we move forward,” says Dana spokesman Jeff Cole.
“A single company working alone cannot achieve the goals set forth by the Made in China 2025 plan. It will take the cooperation of vehicle manufacturers and their suppliers, industry associations, research institutions, universities and government officials to design, supply, manufacture and deliver the best-made, highest quality products in the world,” he says.
“The Chinese supply chain is improving its capabilities at a rapid pace, and one of the keys to our success as a top-tier supplier in China is identifying and cultivating our own suppliers who can meet our high global standards,” Cole continues.
“As Chinese vehicle manufacturers take steps to move toward Made in China 2025 goals, their suppliers are also rising to the challenge, and they will continue to do so as expectations rise for performance, efficiency, quality, durability and delivery.”
Celebrating its 25th anniversary of doing business in China, Cole says that “Dana continues to improve our position by engaging in joint ventures with established Chinese companies; expanding our manufacturing capabilities; offering new, innovative product lines to vehicle manufacturers; and delivering world-class engineering capabilities to our customers here and around the world through the Dana China Technical Center in Wuxi.”
Dana’s conference in May received high honors from the China Construction Machinery Association for its usefulness.
According to the U.S. Department of Commerce’s International Trade Administration (ITA), China is the fourth-largest overseas market for American-produced construction equipment, amounting to $9.9 billion in sales from 2011 to 2015.
Although a proliferation of counterfeit car parts remains an issue, “China’s automotive aftermarket is still developing, with large opportunities for growth,” says the agency, which assists American businesses eager to venture into overseas markets. An impressive 298-percent growth potential by 2025 is in the offing. The average age of China’s car parc is currently five-years-old.
Several policies have been implemented to encourage the development of new energy vehicles; sales of NEVs were up 340 percent in 2015. In addition to NEVs, RVs present market-growth opportunities as China’s recreational vehicle segment is on the move in keeping with the government’s push to spur domestic tourism, and the country’s expanding middle class appears to have embraced motorized camping.
“China ranks second only to Canada as a destination market for U.S. RV exports. While exports to China are small compared to Canada, these are expected to grow considerably over the next three years,” according to the ITA, estimating that American-manufactured RV purchases in China will amount to $80.2 million in 2017 with an annual growth rate of 22 percent.
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