The aftermarket in China is lagging behind the manufacture of and demand for cars but there are encouraging signs that consolidation and specialisation of services is on the rise.
By late 2010, China’s total volume of cars on the road had reached 80m, a growth that is continuing unabated. While in other markets this would spell opportunity for ancillary sectors such as aftermarket parts and supplies, in China this is not the case–yet.
In North America and Europe, where the service sectors are mature, the aftermarket sector is a stable source of profit generating more than 50% of the total profits of the automotive supply chain. Estimates suggest that if the number of cars in China reaches 100m–not out of reach even in the next few years–the aftermarket will generate a market of more than $30 billion. This potential and the ongoing attention to China’s automotive market is drawing global, regional and local logistics service providers to look at it from a strategic and profit potential point of view.
An overview of China’s aftermarket
China’s auto aftermarket largely runs through four general channels. At the top level there are authorised car dealerships, referred to as 4S dealers, working with particular brands. Besides selling cars, they also sell parts, provide repairs and process warranty claims. Another channel represents the more comprehensive repair centres that, unlike the 4S dealers, serve a variety of car brands. A third channel is the auto parts markets, initially organised by parts wholesalers but now doing both retail and repair. Along with these three, there are more informal, small roadside repair shops, which offer low prices and quick service to a particular market.
Buying replacement parts and getting a car serviced at 4S dealerships can be expensive, but the advantage is assurance of quality in parts and services, and properly trained technicians. Comprehensive car service workshops may not offer such a comfortable service environment, but they also employ qualified car mechanics and charge less. The auto parts market attracts customers with a lower cost positioning but they also carry a reputation of consumer concern over sub-standard parts. Roadside repair shops are small in scale and less well-equipped, but flexible and convenient.
Compared to mature markets, China’s automotive aftermarket is still in a relatively early stage of development, in that, while there are multiple options for services in developed markets and the quality and cost are consistent, car owners have to struggle with the trade-off between cost and assurance of quality parts, especially after the warranty period is over.
“The big difference is that in developed markets there are many alternatives to dealer service. You have specialised companies that have numerous outlets that do specialised things like brakes and mufflers. While there are differences in cost and quality, there are more options that have similar quality and cost,” notes Dr Thomas Callarman, professor of operations management and director with CEIBS Center for Automotive Research. Dr Callarman is looking at relationships with automotive suppliers and dealers in China, as well as the impact of logistics infrastructure on the industry.
China’s commercial vehicle sector is something of an exception in that it has a more mature aftermarket supply chain given that maintenance demand happens sooner and the country started building commercial vehicles much earlier than the private passenger cars.
Lacking consolidation and attempting to be more of a generalist is another feature of China’s aftermarket. While in theory one workshop is not capable of handling all repair jobs, in practice, fearing a shortage of business, many independent car servicing businesses in China tend to do whatever repair business comes their way. As a result, a small repair shop might deal with up to 100 parts suppliers. Unfortunately, such non-specialisation results in low efficiency and unstable quality.
“In mature markets, a lot of companies specialise in certain aspects of the vehicle such as engines. You also see repair shops in the US that specialise in German vehicles. They have developed in that way in the last 15 years,” adds Dr Callarman. “If I want to work on engines, I have to be certified by an OEM. Also if I’m a certified BMW repair person, it’s not too difficult to get Audi, Mercedez-Benz or Daimler; in general, to be a German specialist. In China, we haven’t seen that. What we’ve seen is either the 4S deals with the OEM or if they are private, they’ll do anything.”
The aftermarket versus the auto market
Whereas in developed markets, a higher percentage of profits come from the aftermarket, in China it’s the other way round. “Right now, the profit is more on the vehicle side. Growth is so strong, and the car park still isn’t there, so the balance is still tilted to new cars. OEMs are more focused on manufacturing the car than the supply chain or the aftermarket. They want to have the right plants and the right models to keep up with
the Chinese growth. The aftermarket is secondary,” says David Dudek, automotive director, Asia Pacific with Ceva Logistics. Inbound manufacturing, aftermarket warehousing and aftermarket distribution are three of Ceva’s priorities and the company has a joint venture in China providing automotive logistics services called Anji-Ceva, which it set up in 2002.
That view of the aftermarket as a secondary consideration, by extension, seems to apply to its logistics aspect. In places where the market is more balanced, efforts are made to optimise the logistics supply chain to improve cost effectiveness. There are many innovations as well as collaborative practices such as pooling. In this regard, China is still not there. “Most attention here has been placed on building the capability to keep up with market growth versus looking at innovative logistics strategies such as pooling,” says David Dudek. “These methods have been talked about, but not really implemented. As new dealers appear, they have more models and are having to stock more parts. There is always a focus on cost, but more focus on the service aspect to keep up with growth.”
As with other markets, OEM customers in China also expect dedicated delivery at least on a daily basis to replenish inventory. More frequent deliveries allow dealers to keep less stock, but also enable them to provide better customer service and reduce emergency orders. “The general move we’ve seen is the dealers want more deliveries per week. It’s moving to daily and even more than daily,” says Dudek.
“We’ve seen big OEMs adding warehouses in different locations to handle requirements,” he adds.
Considering the disparity in development, certain parts of the country are more able to fulfill dealer aftermarket requirements than others. Aftermarket warehouses in big cities are usually located where the OEMs or 3PLs can give more prompt or frequent service to dealers. In smaller cities, service levels are less mature.
Another area of concern in aftermarket logistics in China is packaging. Packaging from suppliers can go right to the dealer without any need for repacking, although in some cases, packaging needs to be redone. “If it’s something the OEM has produced, like sheet metal, the doors or the hoods, they have to be packaged and that is typically done by the service providers. There are many different shapes and sizes. Those have to be designed appropriately,” explains Dudek.
Some packaging solution specialists, such as Chep, have shown interest in developing this area. Chep is a global leader in pallet and container pooling services to the automotive and consumer goods industries. Fortunately, in view of the production volume, China has got away from disposable packaging in most plants and uses quality returnable packaging for inbound parts. When shipping parts to dealers, expendable packaging is used instead. With an existing presence in the inbound packaging business, Chep has long been considering the packaging potential in China’s aftermarket logistics. “OEMs are very much concerned about who is going to help return the returnable packaging in the aftermarket because there is high logistics cost involved. The current practice is using lower quality wooden pallets and disposing of them after finishing delivery to dealers. This is where Chep introduced pallet sharing as a solution. After delivering these pallets to a dealer in a certain location, they are returned to Chep locally,” says Duncan Deng, automotive service director at Chep.
While OEM dealerships are a strong channel in China’s aftermarket, some shortfalls have been identified, especially at the government level. Repetitive construction and the focus on luxury are seen to bring excess costs to the aftermarket supply chain. Convenience can also be an issue, especially where there are fewer authorised dealers in China’s tier two and tier three cities. Of course, higher costs have always been a major complaint to car owners.
There is a growing demand in China for a consolidated aftermarket with more competition introduced through specialisation and offering customers more alternatives at both the quality and price level. Such specialisation is already taking shape in China’s online auto parts market. At qichepeijian.com (autoparts.com), parts are categorised based on both car makes and parts themselves, such as engine systems and brake systems.
However, these online businesses bring challenges in terms of logistics capacity, which directly impacts service quality. Also, as with the bricks and mortar auto markets, there is quality concern for parts sourced online. While the concept of specialisation is there, in reality, there is a lack of consolidation. Going forward, more competition will certainly impact the market and drive non-dealer channels to scale and ready themselves for a more streamlined supply chain through specialisation. Meanwhile, the dealerships will continue to be a major force in China’s aftermarket.
High costs at dealerships are often a result of a large initial capital outlay and less flexibility with taxation, salaries and other costs. Non-dealership channels can usually mitigate some of these costs.
In the meantime, statistics have shown that more than half of Chinese car owners surveyed say they would abandon 4S dealers on the basis of higher costs, especially after the warranty is over, but in reality this is not always possible.
“After warranty, there are decisions to be made, depending on the value of the car, how complicated it is, and whether they trust a local mechanic versus the dealer. If they have good experience when under warranty, they go back. When off warranty, they may be nervous to get less-quality parts from independent dealers,” comments David Dudek.
Higher costs make dealers lose some of their competitive edge to non-dealer channels. However, as with other markets, dealers will always have a role. People tend to go to dealers for more complicated things. “The automobile today is a computer with wheels. It used to be completely mechanical. If everything is mechanical, you can fix it easily. Nowadays, electronic parts can account for at least 30% to 40% of the car,” notes Dr Callarman.
“In China, the problem is amplified by the fact that they are starting from a low base, with no experience in aftermarket sales and service. All of a sudden these complicated electromechanical machines have to be fixed,” adds Dr Callarman. “If it’s something electronic, something difficult to work out, even if it’s out of warranty, you still get it serviced at dealers.”
How excited should companies get?
Relative to the size of the auto market, China’s aftermarket still has a long way to go. “Though China is still a relatively small car park from an aftermarket perspective compared to North America or Europe, it is growing much faster,” says David Dudek. “OEMs will be able to capitalise on this growth and there are big opportunities for service providers as well because more warehouses and transport are needed to service the growing demand.”
Dr Callarman echoes these remarks about the growth. “In China, even as the automobile industry is such a new industry, it is maturing rapidly. The aftermarket will eventually grow and become more efficient, and in the next few years should be the biggest aftermarket.”
