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The 2nd wave of fast service shops, breaking the “invisible monopoly”

China’s aftersales service market has been on the radar waves of investors for a long time because of the exorbitant profit enjoyed by the franchised 4S dealership stores.

“We just received ¥10 million ($1.61 million) initial investment on September 15 for the wuytx.com,” said Chen Wenkai, founder of the so-called “no worries” online aftermarket parts supply startup portal as well as CEO of gasgoo.com.

A month earlier, CDH Investments took over controlling shares of New Focus Auto, a public-listed parts manufacturer and distributor. About 60 percent of the investment will be dedicated for building new fast service shops and acquisition of existing ones.

Earlier efforts by overseas fast service stores created a first wave of investment in China but few had succeeded. The Yellow Hat for example made a splashy wave a decade ago by building a series of chain stores in Shanghai, Guangdong and Beijing but eventually had to close shops.

“A major reason has been the virtual monopoly by OEMs,” said Chen. “They don’t really fight against counterfeits in the aftermarket. Instead, they fight against genuine OEM parts being filtered by suppliers into the non-4S aftermarket parts providers. The result is that genuine parts in the aftermarket are priced similar to those in 4S dealerships and become uncompetitive in the aftermarket, which made it possible for counterfeits to dominate.”

Cost optimization

To Chen, investors are taking a smarter approach towards the business of aftermarket parts supply. Chen’s wuytx.com in August received its biggest online order from an Audi A6 owner in Wanzhou District of Chongqing. The owner paid more than ¥6,000 for brake pads, brake drums, spark plugs, etc. In the first year of its business, wuytx.com has received 200,000 registered users of which 65,000 customers purchased aftermarket parts and accessories for 100,000 vehicles.

In the second wave of investment in fast service stores, investors have summarized the lessons learned from the failure in the first wave.

According to gasgoo.com’s study of 1,643 sample non-4S service shops, the poor service as well as the lack of quality parts is due to the unavailability of OEM parts, diagnostic equipment and service technology. Between 16-17 percent of the respondents agree that the major complaint of vehicle owners is the flooding of counterfeit parts in the market.

Different from traditional fast service shops, the key to wuytx.com’s business model is to ensure the availability of quality service parts and weed out counterfeits. “What is available on wuytx.com may not all be original OEM parts,” Chen said. “But we guarantee that they have the same quality assurance plus a competitive price.”

Chen gave the example of engine belts made by Schaeffler and Gates. The two suppliers may be restricted by OEMs with regard to their respective aftersales distribution. But wuytx.com is able to sell to customers whose engines can use either brand. The customers end up paying less for the same quality parts and the OEM suppliers have not violated their exclusivity with OEMs.

The same is true for a number of other parts and components, such as the many foreign branded filters. What wuytx.com can do is to provide equal quality parts at a much discounted price.

The Wanzhou customer saves about ¥5,200 in his order of front brake drums and pads, according to Chen. He paid only ¥2,800 instead of ¥8,000 charged by 4S stores. Non-OEM quality brake drums and pads for his Audi A6 are simply not available in Wanzhou.

To reduce initial investment, Chen chose to collaborate with existing fast service shops that charge a service fee for installing parts purchased on wuytx.com.

Similarly, CDH Investments is also working on how to resolve the source of parts supply for fast repair shops after investing $97.37 million for a controlling share of New Focus Auto. In addition to optimizing the supply channel and cost, New Focus Auto has been expanding on managing parking lots at new shopping malls. Owners of underground parking garages charge a percentage of parking fees and the cost for operators are much less compared to open parking lots on the ground.

OEMs fighting against genuine, not counterfeit parts

Statistics show that 75 percent of owners of vehicles less than four years old go to 4S dealerships for maintenance and service, about 50 percent of owners of vehicles between 5-8 years continue to do so and only 15 percent of those with vehicles older than eight years go to 4S stores.

Based on the current annual sales of 20 million automobiles, China’s automobile parc may reach beyond 200 million by 2016. This would mean a gigantic size of the aftersales service market which will attract a growing size of capital and human resource investment.  

But the monopoly and chaos of China’s aftermarket have become the biggest concern for both investors and customers. To insiders, most of the replacements parts labeled Toyota, Volkswagen or other OEM brands in China’s aftermarket shops are counterfeit.

The aftermarket parts supply has been a strange loop of vested interests. For a long time OEMs have kept their eyes closed towards counterfeit service parts in the market but have taken it quite seriously with their suppliers if they discover the availability of original parts in the aftermarket.

OEMs have a tight control over the technology, diagnostic equipment, OEM parts specifications and their circulation. As a result, aftersales maintenance and repair are also controlled by OEMs. As every OEM follows the same practice, they have created an “invisible monopoly” over the aftersales parts supply, which weakens market competition and consumer rights of choices.

To ensure the absolute monopoly over the aftersales market for high profit margins, OEMs would sign agreements with their suppliers requesting that they do not supply OEM parts to outside channels other than their 4S stores. Weaker suppliers are often forced to toe the line in fear of losing their supplier contracts.

According to some analysis, OEMs normally add 30 percent on the cost of OEM parts when they sell them to dealers, which in turn, with acquiescence from OEMs, add another 30 percent margin onto their customers. In essence, OEM control of aftermarket parts supply is an indirect control of vehicle owners as well as their continued profits to be made on their customers.

In effect, OEM parts in the aftermarket are available only through OEMs and their dealers. These replacement parts are extremely high priced. Genuine service parts available from independent distributors are also quite expensive after margins being added through the layers of distribution channels before reaching the repair shops. What is worse is the flooding of counterfeit parts in the independent aftermarket distribution system. Consumers may have paid dearly and still getting non-OEM quality parts.

Supplier maneuvering

“Our aftermarket service parts comes mainly from leading global and domestic brands that are powerful enough not to be totally controlled by OEMs,” said Chen. “They have the rights to sell their brands to the aftermarket.” Wuytx.com’s direct sourcing relationship with parts manufacturers reduces the cost of intermediaries and therefore cost for customers. 

OEM suppliers such as Michelin, Hankook Tire, Bosch and Mobil have recently been expanding their supply for the aftermarket.

One of the major reasons for OEM suppliers to move into the aftermarket is the constant reduction in profit margins under pressure from OEMs. With expansion in sales and reduced vehicle prices, almost all OEMs would put pressure annually on suppliers to reduce price. Volkswagen for example demands that suppliers cut cost by 7 percent each year.

Despite efforts by suppliers and new players in fast service stores, the basic control over aftermarket parts supply is still controlled by OEMs. The replacement parts being sold through wuytx.com are mainly wearable parts and maintenance accessories. New Focus Auto’s main business areas are also in cleaning, beautifying and maintenance. It is still not easy for fast service stores to offer key replacement parts controlled by OEMs.

In a major way, the current situation of OEM control is legally protected by China’s Administrative Methods of Automobile Brand Sales, which stipulates that enterprises without franchise authorization from automobile brands are not permitted to provide automobile resources.

It is necessary, according to a number of professionals in the automotive business, for China to revise the Administrative Methods so as to break up the monopoly of OEMs over aftermarket service parts and repairs and promote a faster and better growth of China’s aftersales service market. China should learn from the European Union which has broken up similar OEM monopoly since 2002. OEMs are required to provide complete sets of diagnostic technology, tools and equipment to independent service shops and the latter are allowed to purchase service parts either from OEMs or independent parts distributors.

(Rewritten by Wayne Xing based on author’s story published in 21 Shiji Jingji Baodao or 21st Century Business Herald)

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