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.
Emerging New Channels
E-commerce and On-Demand-Mobility (ODM) players are attracting a lot of attention as well. E-commerce players that focus on auto parts, led by Tuhu and JD.com, allow car owners to directly purchase auto parts online and have them installed in the designated offline service shops (see Exhibit 8). Currently, some e-commerce portals are mainly used as a benchmarking tool for price comparison, since most car owners have technical barriers in terms of installing auto parts by themselves. E-commerce players also lack the capability of last mile delivery, and do not offer credit sales or financing to service shops as traditional distributors do.
On the other hand, ODM fleets, such as Didi Chuxing, are growing rapidly in China. Many people are satisfying their mobility needs by using ODM services, which drives higher penetration cars in the total car parc being used in ODM fleets. Such cars have significantly higher utilization rates with a correspondingly high need for parts replacement. In most cases, ODM companies and fleet car operators would aggregate the demand for IAM services for their drivers and fleet operators in order to reduce fleet maintenance costs. In fact, ODM service operators will likely become major key accounts for companies competing in the independent aftermarket.
Digital Marketing Is Efficient
With the world’s largest population of internet users, with an extraordinarily high penetration of the mobile internet, China’s digital landscape is unique (see Exhibit 9).
Compared with Western markets, Chinese car owners and technicians are in general younger and more open to embrace new ideas, especially digital solutions. A typical Chinese car owner would use Autohome or Bitauto to specify and comparison shop for their new car before going to a physical dealership. Likewise, a technician would use Baidu to research a vehicle and its service parts bill of materials online before determining and place a repair order.
This brings unique opportunities for digital marketing and online customer engagement platforms. OEMs and auto parts suppliers can leverage digital tools to engage car owners and service shops and create more touch points along the customer journey. For example, OEMs are now beginning to organize WeChat groups for car owners in order to strengthen the bond between customers and brands. Through online communities and O2O activities, car owners can be converted into brand advocates. Auto parts suppliers can offer technical guidance and online training to technicians through an official WeChat account. Such new and emerging tools provide a mechanism to deepen the relationship with customers and build trust and raise brand awareness.
Implications For Key Players
OEMs and 4S Dealers
As car owners increasingly choose independent service shops when their warranty expires, OEMs should aim at retaining car owners in the out-of-warranty period. Possible solutions may include extended warranty, introducing a secondary brand for auto parts to deliver good value at lower price, and investing in chained service shops. OEMs could also improve their service delivery capabilities and improve retention through CRM programs.
4S dealers share a similar mission as for OEMs, and they should also consider setting up their own IAM service shops in order to capture the inevitable “leakage” of customers seeking lower price and more convenient service options.
Auto Parts Suppliers
Auto parts suppliers must first protect their core B2B customers: the OEMs and their 4S dealers who are the primary buyers of their products. However, they must aggressively pursue the explosive growth potential in the IAM. Achieving this may require a wider product portfolio to capture a more value-conscious service customer or through partnerships with other downstream parts makers and service providers in order to expand their penetration of the IAM. A multi-brand approach is an option to target customers in different price segments. A new “key account” strategy may be needed to capture a share of the IAM business served through E-commerce and ODM platforms. Key success factors include, but are not limited to, flexible production of differentiated products, recognizable brand names, consolidated marketing and an effective multi-tier distribution channel.
Distributors should consolidate and aggregate their businesses to optimize their ability to balance supply and demand while achieving scale. Carzone and Autozi are examples of Chinese consolidators and aggregators. Distributors must also expand their product portfolio and explore e-commerce partnerships to broaden coverage of 4S dealers and service shops.
Service shops should build their trustworthiness and reputation by providing better and consistent services, as well as by joining alliances which improve their bargaining power relative to their upstream partners. E-commerce should also be leveraged to attract online car owners to offline shops. Unlike 4S dealers, service shops must serve a wide range of brands and models which drives a significantly larger pool of auto parts, creating opportunities for segmenting and serving the market in a more flexible way. Service shops must also leverage CRM programs to retain the loyalty of service customers, which may include brand affiliations, targeted marketing, and local community and auto enthusiast events.
China’s auto aftermarket is an explosive growth opportunity for organizations that are prepared to adapt their approach to the China context. As the China market enters a more mature stage with slower new car sales growth, key players must act now to find opportunities to profitably grow their participation in this business. Unlocking this potential will require an expanded set of capabilities, often developed in collaboration with new partners offering a combination of products and services to a maturing market.
About the authors
Bill Russo is Managing Director and the Automotive Practice leader at Gao Feng Advisory Company based in Shanghai. With 15 years as an automotive executive, including over 11 years of experience in China and Asia, Mr. Russo has worked with numerous multi-national and local Chinese firms in the formulation and implementation of their global market and product strategies. He was previously Vice President of Chrysler North East Asia, where he managed the business operations for the Greater China and South Korea markets. Prior to this, Mr. Russo was Head of Product & Business Strategy for Chrysler. He also has nearly 12 years of experience in the electronics and IT industry, having worked at IBM Corporation as a manufacturing and systems engineer, and formerly served as Vice President of Corporate Development at Harman International.
Jason Zhang is a Senior Associate at Gao Feng Advisory Company based in Beijing. He provided strategy and operational consulting service to clients in Greater China and globally, ranging from market entry strategy, growth strategy, portfolio prioritization, go-to-market model design and M&A opportunities assessment. He previously worked at other consulting firms as project manager, with 14 years of experiences in Industrial Goods, Life Science and Consumers goods.
Jackie Tang is a Consultant at Gao Feng Advisory Company based in Shanghai. She provided strategy and operational consulting service to multinational and local clients and she is experienced in automotive, digital/e-commerce, asset management industries, specializing in strategy formulation and business model development.
Peter Hu is a Consultant at Gao Feng Advisory Company based in Shanghai. He has worked with clients from various industries including Automotive, Technology, Consumer Goods and Hospitality, and focused on go-to-market strategy and market opportunity assessment. He has worked and studied in China, Japan, Singapore and the United States.