China: The path to great aftermarket opportunities, but also obstacles

Jan. 1, 2020
China has long been anticipated to play a major role in the global aftermarket. Over the past 10 years, the vehicle population has grown dramatically.

China has long been anticipated to play a major role in the global aftermarket. Over the past 10 years, the vehicle population has grown dramatically. According to several sources, the motor vehicle population in China is currently anywhere between 80 million to 100 million vehicles. This is up from just 40 million at the end of 2007. This growth offers many current opportunities and the reward of more business in the coming years. One estimate suggests that by 2025, the Chinese aftermarket will be valued at $240 billion. But there remain significant obstacles in the path of this emerging potential. Among those obstacles are a robust dealer service network, lack of independent technicians and most importantly, no real aftermarket parts infrastructure.

According to Alex Ashmore, director, Aftermarket Asia Pacific, TRW, and also current chairman of AASA's China Aftermarket Forum, the Chinese aftermarket differs from those in developed countries in several ways. He lists a highly fragmented distribution network, the prevalence of spare parts cities, issues of quality and trust within the supply chain, weak appreciation of branding and unrealistic and sometimes unsophisticated consumer expectations as the major source of those differences. However, Ashmore states, "the Chinese aftermarket will see considerable evolution in coming years. Going forward, quality, reliability, relationships, strong logistics and brand will remain the keys for success."

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Strong dealer networks
Vehicle population growth alone does not tell the whole story of the aftermarket's potential. Much like Europe, after-sale vehicle maintenance is currently, in large part, performed by the OE service dealer network. With the sharp increase of new car ownership during the past 5 years, OE dealers are getting a very large share of vehicle repairs. But this is starting to change, as consumers become more aware of other service options.

Warranty considerations also factor greatly in making these repair decisions. Many new drivers in China fear voiding their warranties if they use non-dealer sanctioned repair facilities. Most dealers imply that this might be the case if the vehicles are serviced elsewhere, even if they don't state it overtly.

With little regulatory enforcement and a lack of consumer protection laws, the OEs are currently making this policy stick. Late last year, the Chinese government began weighing several proposals that would adjudicate warranty disputes between OEs and consumers via third-party arbitration. Statistics from the China Consumer Association showed that there were a total of 4,069 formal complaints against franchised dealers in the third quarter of 2011. That number rose 14.7 percent from the same period in 2010.

The rise of service chains
There are currently more than 150,000 accredited auto service centers around China. There are many more "mom and pop" repair facilities that are not even counted in official statistics. Among these accredited shops, service quality can range from excellent to very poor. The wide variation is due to lack of proper diagnostic equipment, basic tools and installer training levels. However, at the top end of this chain are the service shops. These chains are often a part of a 4S brand.

In China, much of the higher end work takes place in what are known as 4S shops. The four S’s in question are sales, spare parts, service and survey. Approximately 20,000 of these facilities exist throughout China. Some of these 4S facilities are highly organized, modern shops that include the latest in diagnostic equipment. Some very well known aftermarket companies have set up networks of 4S shops throughout China. Two prominent examples would be Goodyear and Robert Bosch AG. In 2011, Bosch opened its 1,000th repair facility inside China. They are expected to reach 1,500 stores by 2015. Asian brands also figure in prominently. After it established the first franchised store in China, Yellow Hat, the largest auto parts and products dealer in Japan, is planning to increase the number of direct stores and franchised stores in China to 500 by 2015.

These companies are hiring and vigorously training service technicians as fast as they can find them. Many of these techs will eventually move on and start their own shops. They are also setting the bar for quality parts and service in the aftermarket channel.

While these 4S shops aren't the least expensive repair option, they are by far the most preferred service option for car owners in China. A recent poll of 1,324 owners said they would bring their cars back to a 4S shop, even though they have been routinely overcharged. This is expected to change in coming years as new options emerge, which will improve the availability of quality service options in the independent aftermarket.
 

Auto part cities
Parts retailing is also a relatively new concept in China. The lack of an organically grown infrastructure for retailing parts has led to many smaller trade markets. These have evolved quickly into larger trading forums known as Auto Parts Cities. While not exactly cities, they are a large collection of independent shops or trading stalls that have co-located in large trading areas. As these areas have grown in size, they have become the China equivalent of the Turkish Grand Bazaar, multiplied many times over, and in many places.

There are an estimated 600-plus auto parts cities currently operating around China. Some of the larger ones, like Dongfeng Auto City in Shanghai, cater to about 1,000 parts dealers, and annual sales are estimated at close to $640 million. Most, however, fit in the mid-range, consisting of about 50 to 100 parts dealers.

As the retailing market matures, it is expected that many of the smaller dealers who are barely surviving now will give way to fewer, larger parts retailers. The current distribution model does not support such a large number of these dealer agents. However, for a supplier entering the Chinese aftermarket, making your products available to this channel would be a critical step in establishing your brand in the market.

Enter US companies
There is obviously great interest in the emerging Chinese aftermarket by US manufacturers. Many US aftermarket companies are already producing in China for either export to the US or other global aftermarkets. However, a great many of them have started exploring the China market as well. According to Paul McCarthy, vice president of Industry Analysis, Planning and Member Services for AASA, "We conservatively estimate that about a third of AASA members are doing business in China and that AASA China Aftermarket Forum (CAF) members make up 20-plus percent of the Chinese aftermarket in dollar terms."

Brands that are established in the US are attractive to Chinese buyers, because there is a high level of mistrust of locally produced or unknown brands. Western brands offer a reputation of quality and service that is recognized globally, even by Chinese consumers. McCarthy feels that "quality parts from AASA CAF members can provide Chinese consumers with higher quality, increased safety, protection of the environment, consumer choice and better value."

That brand awareness sometimes comes at a price. One of the key obstacles Western companies have found in China is a robust market for counterfeits and look-alike brands. There are hundreds of these brands operating in China, and many use similar looking colors and patterns on their packaging. Or they are outright counterfeits. Registering and defending your intellectual property is not an easy task. But it is highly critical for any brand to take that step before introducing their products to the market.

Crossing the threshold
The aftermarket in China is still nascent. While the number of vehicles on the road is increasing rapidly each year, China still has a very young national fleet. It is estimated that 79 percent of passenger vehicles in China are 5 years old or less. According to AASA's McCarthy, "the aging — or normalization — of the Chinese auto age distribution should lead to significant growth and development of the aftermarket in coming years."

Other challenges will remain. Among them, parts proliferation in a highly fragmented market. With more than 80 brands offering vehicles in China, there are few dominant models that will offer any real volume. Also, finding and keeping the right employees will be a challenge. Raiding competitors for employees has become an art form in China. Local competition is strong, and market share is not ceded easily. This will continue to keep margins suppressed in the near future.

However, a tipping point is fast approaching where interest in China's aftermarket potential will have broad based appeal to US manufacturers of all sizes. Because the market has remained fragmented until now, with no particular brands dominating, there's still time for companies to create their niche. Over the coming years, the market will organize more rapidly. Until then, various channel options are open, and will allow companies to find the one best suited for its organizations needs. Most importantly, the market will have steady, strong growth for the foreseeable future.

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