BEIJING – China’s used car market is like a half-baked cake that requires the right oven, and its future business model will be heavy-asset based rather than light-asset based, according to Jayden Zhao, CMO of haoche51.com, an online C2C+C2B2C used car transaction platform.
Zhao made the comments at CBU/CAR’s Monthly Automotive Salon (MAS) held in Beijing on June 22 with a theme of China’s Used Car Market: A Business Model Debate.
Zhao joined the used car business in 2003 when the market was unstandardized without regulations and had low entry barriers, which left customers with very bad impressions. However, over the years, used car market has developed rapidly boasting certain scale nowadays. It is now like a half-baked cake with huge potentialities and only those with foresight can find the right oven to get the cake better baked.
Zhao said that there were still problems in China’s used car market, such as trust, information asymmetry and high communication costs between buyers and sellers. Customers have doubts over used car’s prices, quality and dealer credibility. In response to this, a network platform should be established to help make the price more transparent. In terms of information asymmetry, there is a great gap between the Chinese domestic market and foreign ones. However, used car dealers can open car parameters to the public to mitigate the problem of trust; the issuing of the “eight regulation measures” by the State Council will further alleviate the problems of information asymmetry across regions; tax reform is another means to tackle the problem of trust. The high communication costs mainly refers to the fact that in the past, buyers and sellers had to negotiate for many times which was both time and money consuming, while nowadays customers can find their cars through internet portals where they can also enjoy the financial services and extended warranty provided by dealers.
Currently China’s used car market has five major entities engaged in competition: OEMs and 4S dealerships, internet transaction platforms; traditional used car transaction marts; franchised stores and others. Zhao mentioned that in the U.S. where used car market is very mature, OEMs and 4S dealerships account for the majority of used car transaction volume, with franchised stores ranking second. However, this is not the same case in China, which can be attributed to the fact that most Chinese dealers only focus on short-term interests. Compared with 4S dealerships that have venue, capital and professional staff, internet portal has become the forerunner of used car business, thanks to the rapid development of internet-related industries and the popularization of mobile devices. Zhao predicted that internet platform will pose great challenges to 4S dealerships in the future. He also gave analysis on several used car business models in the industry and said that C2C and C2B2C will be the most commonly applied ones. However, e-commerce platform’s biggest weakness lies in the lack of physical shops, technologies and car resources, therefore, more innovative business models should be created to better cater to market demands
Zhao concluded that used car transaction does not occur frequently and it is an industry with low profitability, which means that dealers cannot afford to spend much on advertisement and that it will not be a winner takes all environment. The future business model will be heavy-asset based rather than light-asset based and investment should focus on long-term interests. Moreover, given that it is a market with huge potential, the Chinese government will also issue more favorable policies to further promote its development.
During the Q&A session, Zhao said that dealers have the same methods to tackle the problems of trust, mainly centered on providing qualified services. According to him, trust is deeply rooted into consumers’ buying habits and psychology which can be compared to the process of baking and only those with the right oven can bake the most delicious cake.
In response to the fact that the “eight regulation measures” of the State Council are just proposals which do not have legal effectiveness, Zhao said that when a region lifts restrictions on used car transaction, a large amount of used cars which do not comply with emissions standards will swarm into the region, which is bound to be resisted by the local government if there is no tax benefits as well. However, with the issuing of the regulations, there will be other relevant instructions out to help further lift restrictions of used car transactions across the country. Zhao added that the trade-ins can be conducted in 80 percent of 4S dealerships, however, due to the huge investment and the inappropriate business target at initial stage, it failed to be promoted nationally. The emergence of e-commerce will force 4S dealerships to reposition used car business and there will be great transformations in the future.
As for the question of used car business returning to traditional operations, Zhao said that roughly $5 billion in capital has been poured into the used car market primarily for light-asset business models such as e-commerce which can quickly gain returns, however, many of the business models have been knocked out of competition. Venue and technology are the solid foundation for the sound development of used car business which will finally return to traditional forms of operation. The government will give instructions but not intervene.
When asked if there were some foreign business models which can be used by Chinese operators, Zhao thought that foreign operations do not comply with domestic ones. In terms of the most difficult part of the whole industrial chain, Zhao said that Chinese used car dealers should focus on work procedure. A highly efficient work procedure will enable enterprises to reach targets in very short time.
Zhao took haoche51.com for example, the company’s work procedure grants it to make profits in three months after the establishment of a physical shop. Despite the huge gap between domestic market and foreign mature ones, there are already Chinese companies embarking on vehicle data statistics and there is a possibility of success.
In regard to whether new energy vehicles have entered the used car market, Zhao said none at the moment. He added that NEVs have lower profit margin than traditional cars and only a small portion has entered into the market circulation. In terms of government cars, he said that they will be auctioned at first rather than enter into the market. He predicted that used car business will be the combination of traditional forms of operation and online portals. As for instruction standards for car inspection, he also took haoche51.com for example, cars have to undergo 280-point inspection.
In response to the question of profitability, Zhao said that price difference is a common phenomenon which can be resolved if dealers provide customers with the best services and by then the price difference can be negotiated between the two parties. In terms of tax policies, he said that in the U.S., individual income tax can be deducted if the car is purchased through financial leasing, however, this kind of incentive cannot be promoted domestically where there are no mature financial services available.
In all, Chinese used car business should find its own ways of development. Apart from improving services, used car dealers should also come up with innovative business models such as financial tools. The successful baking of the used car market cake depends on the efforts of all stakeholders.