No, I don’t speak the language, but I do recognize that the development of the used cars (Èrshǒu chē) market marks a milestone in the maturity of the Chinese auto sector. In 2011. China passed the US as the largest new car market with 14.5 million passenger vehicle sales and from 2007-2011 the market saw more than 50 million new cars sold.
Going forward, the market may slow, but will remain at least in the 20 million range with foreign brands growing faster and more consistently than the overall market. During the first quarter of 2012, domestic brands fell 8.1% while foreign brands picked up 3.2 pts of market share, now accounting for 42.9% of total sales.
This trend could push the development of a local used car market as international brands work to import their experience in managing used car markets in the US, Japan and European markets. Among other pressures on the demand side are tightening emissions restrictions. Wholesale buyers are avoiding older, low-end units in favor or more recent mid-to-high-end and luxury cars. While there is currently a net oversupply of used vehicles in Beijing, luxury models such a used Mercedes have seen double-digit growth in China.
The steady growth has built a considerable park of existing vehicles in China. While there is no solidly reliable data on how long a first buyer (and more than two-thirds of buyers today are first time buyers) hold onto a car, we are seeing a burgeoning used car market. In 2009, the state had already begun efforts to reform the used market including standards for city and regional used car exchanges. Today, market participants are waiting for additional reforms to establish a uniform system on pricing, terms of sales as well as protection and guarantees for consumers. These reforms should bolster the opportunity for dealers, supporting higher prices that would allow buyers to feel more confident in paying for the pricier non domestic used cars.
This foreshadows a tremendous opportunity and risk for foreign brands in China. If they can corral the used car market, bringing it in into their dealership networks from the regional and city market traders, it offers a new source of profits to drive network growth.
Today, Chinese dealers generate less than 2% of revenue from used car sales, compared to US dealers who generate 33% from used cars. In terms of profit, US dealers realize the bulk of operating profit from used car, parts and service, while their Chinese counterparts see most profits from new car sales. If global OEM’s miss this opportunity to support dealers, other players will step into this lucrative market. 20 million units, even at a low residual of 50,000 rmb ($7,800) with foreign brands making up 40% of the market, is conservatively a 500 billion rmb ($75 billion) revenue potential.
Western markets support profit margins between 20-30% on used car sales. Recent reports indicate many smaller Chinese dealer groups are seeing a profit squeeze on slower volume growth and used cars could be a big part of the answer to their problems.
High end brands that hold residual value easier have already started the process. BMW announced earlier this year that it is setting up two to four second-hand dealerships in major metro areas during 2012. BMW cited forecasts that used car sales will increase five-fold over the next five years. With more than 1 million used units sold in the first quarter 2012, this would make the Chinese used car market the second or third largest auto market in the world. At the same time, buyers from second and third tier markets are less inclined to take the low-end options as we see more and better quality products coming out of first owners and providing a much better value. These newer products offer an opportunity to larger dealers who can control their flow back into the market rather than wholesaling them into the large regional and city markets.
We’ve seen other positive developments in dealer evolution such as Zhongsheng’s investment into parts and accessories when it took a 70% stake in German Carlsson Autotechnik GMBH to manage accessories for its Mercedes dealerships.
Overall, the market will evolve; the question is whether global automakers can bring the best of their best practices to this opportunity, making it a win-win-win situation for the customer, dealer and themselves.
There is no real relevance for the photo below; I just found the juxtaposition a humorous analogy for a country developing so quickly.
Disclosure: the author does have business arrangements with the following companies mentioned in the article: Zhongsheng Auto Group 881.HK