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Boom years for China’s used car market

China’s automobile parc passed 100 million in 2011 and will likely reach 200 million by 2017 at the current growth pace, according to data from the Ministry of Public Security.

With new automobile ownership in the 1st– and 2nd-tier cities close to saturation, analysts predict that the market would enter into a period of replacement sales promising boom years for used cars.

China’s used vehicle sales reached 7.94 million units in 2012 valued at ¥359.5 million ($58.5 million), up 22.6 percent year-on-year, according to the Ministry of Commerce.

Vehicle ownership in Beijing for example has reached more than 5.2 million. As a result of the city’s restriction on annual vehicle registrations, used vehicle sales reached 690,000 units in 2012 surpassing for the first time new vehicle sale of 580,000 units. Analysts suggest that the same trend would happen in other 1st– and 2nd-tier cities and used car sales would dominate the country’s future automobile market. 

 

Big market, small players

By contrast, annual used car sales in the U.S. are over 30 million. With 200 million automobiles on the road, the ratio of used car sales to new car sales is around 3.5:1, four or five times higher than in China.

Monthly used car sales have kept rising at a rate of 40 percent in China since 2005, according to China Automobile Dealers Association (CADA). CADA forecasts that sales of used cars would reach 10 million in 2014 and 20 million in 2018.

“Used car sales would be triple or quadruple of new car sales in the future,” said Yi Duoduo, vice president of Bertelsmann Asia Investment Fund, in an interview with Diyi Caijing Ribao or China Business News. With annual sales of new vehicles at 20 million, China’s used car market has a huge potential.

The majority of used cars are older models price around ¥50,000. With growing demand for replacement, the price of used cars will be higher. The average price of used cars in Hangzhou, for example, is ¥70,000 and in Shanghai ¥80,000, according to data from Cheyipai (www.cheyipai.com), an online used car sales company. “At ¥50,000 a car, China’s used car market would be valued at ¥1 trillion by 2018,” said CEO Yang Xuejian.

In 1st– and 2nd-tier cities, new car sales would be mainly driven by replacement purchase. The ratio of new cars to used cars sold has been around 1:1 in Beijing and Shenzhen. This trend is rapidly extending into 3rd– and 4th-tier cities.

Despite an alluring huge potential, China does not yet have strong used car players in the market. Used car dealers are still quite small today.

Yang Jian, for example, got into used car sales in 2011 after operating a small steel business in Beijing. Through a relative who is the general manager of a Benz 4S store, Yang started selling luxury used cars.

“Whoever has access to the source of used cars would have the opportunity to make a deal,” said Yang. Yang sells at most three used cars a month, but he makes ¥600,000 a year. “It’s much easier than selling steel,” he said. But Yang is uncertain about the future, especially if his relative leaves the dealership.

 

Expanding efforts

Entrepreneurs and investors have already sniffed opportunities in used car sales. The spectacular growth of Beijing’s used car market has convinced many investors about the high future potential. In April, www.youxinpai.com gained an investment of $30 million from Bertelsmann and Tencent.

Yi Duoduo believes that China’s used car market is still scattered, disorderly and highly regionalized. It lacks transparent information between buyers and sellers and involves complicate sales procedures. Companies that can provide solutions to these problems may attract customers and valuable investment.

Youxinpai.com started business in September 2011. Thanks for its powerful public relations, it has quickly won support from some automakers, especially FAW-Volkswagen, and attracted 800 sellers and 3,000 buyers in less than a year.   

People in Beijing may notice a lot of advertisements in subways of a used car e-commerce company, souche.com. It has initiated an online consignment sale in order to make transactions transparent for the benefit of buyers.

Owners drive their cars into the company where two professional appraisers would spend around one and half hours per vehicle in inspection, making sure the vehicle is qualified to be sold. The seller can set the price and consign the car to the shop for sale. Potential buyers can check the vehicle’s conditions online before going to the shop to see the targeted car and inspection result. Souche.com charges a 3 percent commission on each car sold.

 

Small brokers losing business

There are about 500-600 small brokerage firms involved in used car sales in Beijing. With changes in market demands, brokers are beginning to pay more attention to the growing replacement needs.

Mr. Li, a broker for many years in Beijing, said that around 80 percent of used car demand normally came from customers in local areas in the past. But today 80 percent of the customers come from outside of Beijing. Operating without branding, the old way of selling used cars may no longer work in the future. Li hopes to elevate his brokerage into a small used car operation.

Analysts believe that traditional brokerage firms will face a tough challenge because the upstream sources of used cars are going into 4S dealer stores. Some larger brokerage firms have started to cooperate with 4S stores, hoping to combine their professional service with the increase in replacement demands through 4S dealerships.     

 

Consumer acceptance

While new cars still outsell used across China, they are losing momentum after a period of high growth. The potential for used cars as the industry’s growth engine is prompting foreign automakers to move into used car business and consumers are gradually accepting buying used cars.

Jiang Meng, a 32-year-old office worker in Guangzhou, went shopping for a sport utility vehicle as a replacement. She had not considered a second-hand car until she visited a used car dealer run by Dongfeng-Nissan.

“There are so many models in the store and they offer a warranty,” said Jiang, who eventually traded in her two-year-old Nissan Tiida sedan for a four-year-old silver Qashqai. The deal cost her ¥25,000 ($4,000). In comparison a new Qashqai is priced at around ¥189,000.

“The car is very clean inside and outside and it drives very well. Many of my friends thought it’s new,” she said.

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