China’s automotive industry has entered a new phase where new car sales growth decelerates, while the car population expands and the average car age increases. This brings enormous opportunities for expansion of the independent aftermarket.
In this paper, we examine the complexity of China’s independent aftermarket including the distribution channel and service shops. We also examine the key success factors, market dynamics and emerging marketing channels in the independent aftermarket. We will highlight the implications of these developments for key players along the value chain.
China’s Independent Aftermarket Is Rapidly Expanding
China’s automotive market is entering a “new normal” phase as the new car sales volume growth decelerates. New car sales volume is estimated to increase at a CAGR of 3.8% from 2017 to 2022, significantly lower than the growth of recent years (see Exhibit 1).
Meanwhile, the overall car population is aging and the average car age is expected to reach 5.2 years by 2022, compared with 4.4 years in 2016. As a result, we expect a golden era for the independent aftermarket (IAM) service growth. As cars age, come out of warranty, and are re-sold, car owners are more likely to have them inspected and served in an independent service shop rather than a 4S dealer. Owners of older cars are more value conscious, and seek flexibility and convenience when choosing a service provider, which will shift the car owner’s preference for car maintenance over to the IAM (see Exhibit 2). This offers new opportunities for players in the IAM ecosystem, including auto parts suppliers, original equipment manufacturers (OEMs), 4S dealers, distributors and service shops.
China’s Aftermarket Landscape Is Complex And Not Easy To Serve
While large and expanding, the IAM market is fragmented and complicated, making it very difficult to profitably serve. In addition, the automotive market has very diverse characteristics across regions and provinces in China. China’s car parc is concentrated in Eastern China, and the mix of car models varies significantly among provinces and different city tiers (see Exhibit 3). Each province or region can be treated as a separate market which requires a different mindset and strategy to conquer.
Further complicating the situation, there is no universal standard or integrated matching system for auto parts in China. Thousands of car models of varying specification from multiple manufacturers and brands are on the road, and each has a different matching system for auto parts management.
The service parts distribution channel is complex as well (see Exhibit 4). A multi-tier distribution channel is in place to serve the huge pool of car models in different provincial markets. Typically, a few tier 1 national or regional leading distributors are connected with auto parts suppliers, who then sell to hundreds of tier 2 and lower-tier distributors for city coverage. Each distributor may supply different categories of auto parts for different car models. These distributors then serve over 500,000 service shops, of which only a small portion are regional chained service shops. The vast majority are small local outlets with limited resources and capability.
Service Shops Must Be Trustworthy And Offer Convenience To Car Owners
Most car owners don’t like spending a whole lot of time waiting at a service shop. Therefore, a key success factor for a service shop is to have replacement parts delivered from local distributors as quickly as possible, also known as the “last mile delivery.” A service shop is usually supplied by 20 to 30 distributors to cover all auto parts for different car models, and they ensure that delivery can be achieved within 1 to 2 hours for common auto parts.
With strong last mile delivery capability, service shops can build long term trusted relationships with car owners. Trust is the key since Chinese car owners are generally young (in 2016, 30% of licensed drivers have been driving less than 1 year).
There is also no “do-it-yourself” repair culture in China when compared with mature markets like the U.S., and thus Chinese car owners rely on the service technician’s advice for diagnosis and specification of repairs needed. Typical car owners shop for service within their local neighborhood and the relationship may begin with simple and regular services such as a car wash or oil change (see Exhibit 5 and 6). After building trust after several routine service experiences many become loyal customers for routine or even more complicated repairs. A typical service shop has 3 to 4M RMB annual revenue, and 80% of revenue is contributed by these regular customers. Service shops are increasing investment in technician training to improve customer service quality in order to retain customers.
Mergers and Disruptors in the IAM market
Since the IAM market is huge and fragmented, single players find it difficult to serve the entire market well. Key players along the value chain are collaborating, both vertically and horizontally, in order to strengthen their market influence and share resources (see Exhibit 7). For example, Hella has formed supplier partnerships with Dolz and Bilstein, in which Hella would offer its distribution channels in China. Also, SAIC-GM acquired ACDelco’s business in China, and is currently using Delco in the IAM as a secondary auto parts brand targeting price-sensitive customers who are seeking alternatives.
In addition, there are two other types of disruptors emerging in the market: aggregators and consolidators. An aggregator brings together market players and forms strategic alliances, for example the China Aftermarket Auto Parts Alliance (CAAPA) is an alliance among distributors and chained service shops, offering global purchase support to its members. Such an alliance increases the bargaining power of distributors against suppliers. On the other hand, a consolidator consolidates players along the value chain. Carzone is currently one of the largest distributors and covers 27 provinces with over 80,000 SKUs. It competes aggressively through a digital distribution platform and teams up with a wide portfolio of international auto parts suppliers including Bosch and 3M.
The above transformations would take a long time given the complexity of China’s automotive aftermarket. Yet, the trend of integration is inevitable and relevant companies must take action.
(To be continued in the next issue)