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Trust is the biggest problem in China’s aftermarket

Despite its huge potential, China’s automotive market has many problems, the biggest of which is trust, according to Chen Min, founder and CEO of Tuhu.cn.

Chen made the comments while speaking at CBU/CAR’s Monthly Automotive Salon (MAS) held on March 22 in Shanghai, which had a theme of Aftermarket under the New Regulatory Environment. Joining him is Andorfer Andreas, president of Bosch Automotive Aftermarket Greater China.

“Many companies have spent many efforts to solve this problem, but in the last 10 years, it has not been solved,” said Chen, whose company was founded five years ago as a B2C e-commerce platform that mainly sells tires, engine oil and accessories.

Some of the major issues confronting the market, according to Chen, include counterfeit parts, high servicing fees and non-transparent pricing. Customers often pay different prices for repair and maintenance at different shops depending on their sex, income level or the type of car they own. There are many layers of logistics vendors which lead to inefficiency of parts logistics. China’s aftermarket is also fragmented, with about 1 million repair stores for the roughly 170 million vehicles on the road, compared with just around 300,000 repair shops for 250 million vehicles in the U.S.

“There are many stores that do not have enough technical capabilities to repair cars and many technicians and workers in those stores do not have enough knowledge, skillset or training to repair cars,” said Chen. “Vehicle owners do not trust the stores, the logistics, the channel and the products sold by these stores.”

Tuhu.cn’s solution to this problem, according to Chen, is a business model whereby customers order parts such as tires online through its website or mobile app, which are then delivered to partner workshops where installation is completed and Tuhu.cn pays for the service. Chen believes this business model ensures trust from customers because it is Tuhu.cn, rather than the shops, that sell products to the customers. The shops act as service vendors for Tuhu.cn and if customers have any problems, they go to Tuhu.cn for help.

Currently Tuhu.cn has about 10,000 offline partner stores in about 330 cities covering every province. It has also established 20 warehouses to be doubled to 40 in 40 cities which will cover roughly about 50 percent of the car population in China, according to Chen, who believes having its own warehouses and logistics/supply chain ensures operational efficiency. It also purchases directly from suppliers such as Bosch, 3M, Goodyear, Continental and Bridgestone. In fact it is the biggest retailer for the three tire brands. Tuhu.cn also utilizes leading open e-commerce platforms such as JD.com and Alibaba’s Tmall.com besides its own website and Wechat platform.

There are roughly 6 million registered users on Tuhu.cn, 200,000 of which are active daily. Daily maintenance order is about 2,000 and growing by about 20 percent per month. Chen expects revenues this year to triple to ¥3 billion ($461.54 million) from ¥1 billion in 2015. In Shanghai, according to Chen, for every 10 tires sold in the city, two are through Tuhu.cn

Chen forecasts that China’s automobile parc will reach 300 million units by 2020 from the current 170 million units, exceeding that of the U.S. By then, China will also become the largest automotive aftermarket worldwide. Chen estimates that based on an average of ¥6,000 spent per vehicle on maintenance and repair services on tires, oil, filters and brakes, the value of China’s aftermarket is already over ¥1 trillion.

Tuhu.cn has focused on the B2C model in China, according to Chen, because Chinese car owners often do not know much about their cars in terms of when and what to repair. “China’s automotive aftermarket is a DIFM (do it for me) market, not a DIY (do it yourself) market,” said Chen. “Ninety percent of the customers do not know the difference in engine oil labeling, and they don’t know when they need to change the windshield wiper.” The fact that the average age of car ownership is only four years in China also means that Chinese car owners tend to focus more on tires, maintenance service and beauty, rather than repair, according to Chen.

But he emphasized the importance of offline store partners, saying that the internet platform is just a tool to help improve efficiency. “The aftermarket is still an industry that heavily relies on offline capabilities,” said Chen. “Our job is to make logistics more efficient and offer customers lower standard prices for parts and service.”

Andorfer Andreas, president of Bosch Automotive Aftermarket Greater China, believes the current aftermarket conditions and car owner habits in China offer great potential for new business models, and Bosch is also adapting to the fast changing aftermarket accordingly.

“The world is changing, therefore we have to become more and more user-focused and user-centric,” said Andreas. “We are monitoring and joining the so-called customer journey. Where are the touchpoints of a vehicle owner or driver with components, workshops and services? We want to make sure we provide the respective support and services to the business partners who are active in this field.”

Bosch, according to Andreas, is essentially transforming from a so-called “parts & bytes” supplier, which used to be the benchmark in the industry providing equipment and diagnosis, to a total solutions provider.

Some of the solutions that Bosch has already launched in China include the Franchise Bosch Car Service where hundreds of workshops are contracted to provide all kinds of support, dealer equipment turnkey solutions for the independent aftermarket and OES or 4S shops, O2O businesses for fast moving goods such as batteries, brake pads and maintenance services through Tmall.com and JD.com (offering more than 1,000 parts numbers and 110 authorized workshops) and connected cloud services to provide customers predictive maintenance services.  

The fact that the average age of a passenger car is only 3.6 years in China (instead of the more than 10 years in the U.S. or Europe) creates huge growth potential for the independent aftermarket, more so than the OES business, according to Andreas. But the big challenge for independent workshops is efficiency.

“The efficiency of the independent workshops has to increase because the average work shop visits per car is decreasing as well, from 3.4 going down to 2.9 visits per year,” said Andreas. “We see a consolidation. Traditional OEMs are also stepping into the independent aftermarket working together with internet companies. This combination creates a very high dynamic in the aftermarket. We also have to make sure we are a part of this.”

Both Chen and Andreas welcomed the changing policy and regulatory environment, which will provide a more transparent and liberal market environment benefiting car owners. “It gives you more freedom and provides more choices. Competition will be good and at the end of the day it’s beneficial for the customers,” said Andreas. “Most of the policies will be good for the internet platforms like us. The parts channel will be more open, customers do not have to go to 4S shops and they can go to independent repair shops,” said Chen.

Asked about the future prospects of the 4S dealership model, Chen predicted that it will not disappear anytime soon but its market share will be smaller as they face increasing cost burden. “The independent aftermarket network will have about 70 percent of the aftermarket in five years,” said Chen.

“They will not disappear, but they have to change their setup. The transparent ones will survive,” said Andreas.

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