China’s Auto Retail Market

Spurred by growth and evolving consumer expectations, car dealerships and finance companies have revamped their offerings.by Kyle SullivanChina has emerged from the global recession as the world’s largest auto market, with a total sales volume that eclipses the United States by a substantial sum. In 2009, China’s new vehicle sales reached 13.6 million units and total output hit 13.8 million units, up 46.2 percent and 48 percent from 2008, respectively (see Tables 1 and 2). Though sales in 2010 may not grow as fast as they did in 2009, China’s auto market is poised for more impressive growth. According to recent China Association of Automobile Manufacturers statistics, China sold 7.6 million cars and produced 7.5 million cars in the first five months of 2010. The association forecasts that total sales and total output are each on track to exceed 15 million units this year.

Original equipment manufacturers (OEMs) and auto distributors have grown significantly, along with the rest of China’s auto market. As a result, foreign and domestic OEMs are looking to expand their distribution networks throughout China, with a focus on second- and third-tier markets (see Foreign Auto Companies Expand Sales Networks in 2010). Auto sales in these markets have outpaced sales in first-tier cities in the last five years. According to recent data, between January and September 2009, auto sales in second- and third-tier cities grew 41 percent and 51.4 percent, respectively, while sales in first-tier cities rose 33.6 percent.

Changing market landscape for auto dealerships

China’s auto market has changed significantly in the past two years. At the onset of the global financial crisis, many dealerships and suppliers faced low liquidity levels and high debt ratios. As a result, OEMs began to cut vehicle prices to encourage consumer demand. Meanwhile, tighter access to credit and weaker OEM support led many analysts to believe that dealerships would fold in large numbers.

Auto sales in China rebounded after the PRC government in mid-2009 unveiled stimulus measures that offered tax breaks, subsidies for new-vehicle purchases, and looser credit for companies and individuals. According to the China Association of Automobile Manufacturers, year-on-year vehicle sales grew 83.6 percent (reaching 1 million cars) in September 2009 and 50 percent in January 2010. By late 2009 and early 2010, demand had grown so dramatically that many dealerships were struggling to keep cars in stock.

Evolving retail formats

China’s auto retail market is responding to a host of pressures. Since the onset of the global financial crisis, OEMs and independent distributors have been integrating their distribution networks to achieve economies of scale and greater financial viability. New retail formats that have emerged within the past several years show that retailers are becoming larger to adapt to market pressures and increasingly sophisticated consumer tastes.

4S model

First established in China in 1998 and considered the most advanced marketing model, the 4S model offers sales, showrooms, services, and spare parts all under one roof. These types of stores are expensive to operate and require significant investment and start-up capital. This is largely because they offer high-end facilities located in expensive districts in downtown areas where rental fees are high. Top brands typically maintain multiple 4S stores in a major market, compounding costs and forcing some stores into the red. A report published by the Cheung Kong School of Business early this year stated that nearly 80 percent of 4S dealerships along China’s coast operate at a loss.

Despite its popularity among consumers, OEMs are not entirely satisfied with the 4S model. Manufacturers note that high-quality, reliable dealers are hard to find and relationships with dealers are generally difficult to manage. This is because 4S dealers tend to be local businesses that cater to a localized market and do not necessarily share the same strategies and objectives as OEMs, which have broader or national interests. Nonetheless, the 4S format’s high popularity among Chinese customers, who prefer the five-star treatment that these outlets offer, will likely keep this model in operation.

Auto supermarkets

In simple terms, auto supermarkets are large dealerships. They come in many formats—1S, 2S, 3S, and 4S—and can be single- or multiple-brand dealerships. (1S outlets offer only sales; 2S outlets offer sales and services; and 3S outlets offer sales, services, and spare parts.) The advantage of this structure is that it attracts more customers, who can find a variety of brands and models at a single auto supermarket without having to travel to different dealerships. The disadvantage is that many foreign OEMs refuse to sell directly to auto supermarkets because they do not want their models displayed alongside rival brands. Consequently, auto supermarkets must often purchase their stock from OEM-authorized dealerships at a higher rate.

Several domestic OEMs are building their own auto supermarkets. For example, Jianghuai Automobile Co., Ltd. is building auto supermarkets at the county level to sell the full range of its vehicles, from sedans to light trucks. Chang’an Automobile (Group) Co., Ltd. is also building auto supermarkets in second- and third-tier markets, where it will offer autos produced by its wholly owned entity, Chana International Corp., and by its joint ventures (JVs). Chang’an currently has 7 supermarkets and plans to expand this number to 100 by the end of 2010.

Media reports indicate, however, that auto supermarkets that offer low- and mid-range vehicles face serious cost pressures and are at risk of failure. Facing rising operating costs and long-term price decreases (despite short-term price increases), low- and mid-range automakers might struggle to afford distribution through supermarkets and may need to identify more cost-effective distribution channels.

Mega-dealerships

Owned by a single distribution company, mega-dealerships are a network of OEM-authorized auto dealerships that sell multiple brands. Mega-dealerships are performing well. According to Beijing Business Today, about 25 percent, or 2,472 authorized dealers, belonged to mega-dealerships and accounted for 44 percent of China’s total auto sales in 2008. Prominent mega-dealerships in China include Guanghui, Pangda, Yongda, and Zhongsheng.

Auto trade markets

Auto trade markets are essentially clusters of separately owned 3S and 4S car dealerships that offer multi-brand auto sales and services. They are comprised of multiple dealers, vendors, and traders of thousands of vehicles. The advantages of auto trade markets are their economies of scale, one-stop shopping for maintenance, and spare parts supply—which allow dealers to reduce operating costs and lower prices for consumers. Used-car buyers also favor auto trade markets, which allow car owners to trade in their old cars and receive a discount on new vehicle purchases. China’s largest auto trade market, North Asia Car Market in Beijing, has over 160 dealers.

Auto parks

Some large auto companies are beginning to form massive regional auto parks that include clusters of 4S outlets, repair and service outlets, refinishing services for used cars, and outsourcing centers that provide insurance and auto financing services. Chongqing currently has one, and such regional parks are expected to grow in number.

Auto finance takes off

Auto finance in China has grown significantly in recent years. According to the People’s Bank of China, auto loans totaled ¥158.3 billion ($27.1 billion) by the end of 2008—of which ¥31.8 billion ($4.7 billion) came from auto finance companies. To regulate this market, the China Banking Regulatory Commission (CBRC) issued the Administrative Measures on Auto Finance Companies and related implementing rules in 2003 and revised and combined the two regulations in 2008. The measures define auto finance companies as non-bank financial entities approved by CBRC to offer financial services for auto purchasers and dealers in China. Major investors of these companies must be non-bank financial entities or enterprises that produce or sell motor vehicles (see China’s Ten Automotive Finance Companies).

To support the auto finance industry, CBRC in August 2009 began allowing auto finance enterprises to issue public bonds to raise capital, with the hope that the companies will expand their portfolios of financial products to attract consumers. According to PRC media reports, the number of Chinese consumers that take out loans will increase 40-50 percent in the next decade, and total auto finance loans will reach more than ¥550 billion ($80.5 billion) by 2025.

China’s used-car market grows—supported by government policies

As new auto sales have grown, so have sales of used cars. China Automobile Dealer Association statistics show that the trade volume of used vehicles has soared from 250,000 in 2000 to more than 3.3 million in 2009. To take advantage of this growing market, major auto manufacturers have begun to offer used-car services for their branded autos at their certified dealerships in China. Most of the service packages cover used-car quality accreditation and assessment, certification, replacement, quality guarantee, and trading and transactions. Mega-dealerships also play an active role in the used-car market. For example, Shanghai Yongda Auto Management Service Co., Ltd. started its used-car business in 2002 and now owns a trading market, evaluation enterprise, agent, and two operating companies to provide a full range of services.

Apart from consumer demand, several government policies and regulations have boosted the used-car market.

• The Administrative Measures on Used Cars, released in 2005, are the primary regulation governing the used-car market. The measures introduced a competition mechanism that allows OEM-authorized auto dealerships to run used-car businesses. The measures also regulate different parties—including trading markets, agents, and operators—and strengthen the administration of organizations that appraise the value of used cars.
• The Notice on Upgrading the Used-Car Trade Market was announced by the ministries of Commerce and Finance in July 2009. The circular aimed to improve the used-car industry. Initially, the PRC government selected 10 provinces and municipalities—Beijing, Hubei, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Tianjin, and Zhejiang—to receive fiscal funding to conduct pilot programs that focused on the management and information on used-car transactions to improve transparency.
• The Auto Industry Revitalization Plan, released in 2009 by the State Council, calls for the establishment of a national appraisal and evaluation standards system and a temporary ownership registration system. The plan also calls for adjusting the value-added tax rate on used-car transactions and encourages dealerships to participate in vehicle replacement programs.

Challenges and opportunities ahead

China’s auto market is unlike any other in the world. In 2007, it overtook Japan to become the world’s second-largest car market and, in 2009, surpassed the United States as the world’s largest. China is selling cars faster than any other country in the world, but it is doing so with relatively immature retail formats, OEM-to-dealer relationships, consumer tastes, and financing options.

China’s auto market is maturing, however. Retailers are consolidating and improving services with an eye toward retaining customers. Numerous retail formats have emerged in recent years, such as the mega-dealership and auto supermarket, offering consumers in different market segments a range of options for vehicle purchases. In addition, more dealerships are offering auto financing plans, allowing consumers to rely less on bank loans and personal savings to purchase vehicles. Used cars are also gaining traction among Chinese consumers. As these market trends develop, so will opportunities for retailers, OEMs, and consumers in China’s auto market.

The major challenge ahead for auto retailers is the ability to retain customers. Consumers are paying more attention to brand, image, and style, and some buyers turn to a certain car solely based on its image and branding. This is particularly true for second- and third-time buyers. Foreign retailers must therefore understand and cater to local consumer preferences to ensure long-term success in China’s auto market.

In addition to branding, retailers must also focus on the overall experience of purchasing a car. Chinese consumers tend to enjoy 4S or similar types of dealerships that offer the whole package: fancy showrooms, attentive sales personnel, after-sales service, and spare parts. Dealerships that make the process of buying a car an enjoyable one will attract more customers in China.

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Foreign Auto Companies Expand Sales Networks in 2010

China’s promising auto market has foreign original equipment manufacturers (OEMs) looking to expand their sales network in 2010 and beyond. According to media reports, several major foreign brands have announced plans to open new dealerships across China, particularly in second- and third-tier markets.

• Ford Motor Co. announced that it will significantly expand its network of dealerships in 2010 but did not indicate by how much. At the end of 2009, Ford’s authorized dealer network included 241 full-service dealerships and more than 350 sales and service outlets across China.
• General Motors Corp. Chevrolet plans to open 120 more Chevrolet dealerships by the end of 2010.
• Honda Motor Corp. has announced that it will increase dealerships in China to 700 and boost annual output capacity by about 20 percent to 650,000 units by the end of this year.
• Mercedes-Benz GmbH will reportedly establish another 130 dealerships in China in 2010.
• Nissan Motor Co., Ltd. has said that it will extend its network of dealerships from the current 367 to 408 by the end of the year.
• Saab Automobile AB plans to double its number of dealerships to 32 by the end of 2010.
• Toyota Motor Corp. plans to add another 100 dealerships in China this year to bring its nationwide total to 650.
• Volkswagen AG plans to expand its distribution network in China from 1,000 to 2,000 dealerships by 2018.

—Kyle Sullivan
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China’s Ten Automotive Finance Companies

China has 10 auto finance companies, 9 of which are foreign-invested. All 10 companies are affiliated with auto manufacturers and provide credit to individual consumers for purchases and inventory financing to dealers for their branded autos.

1. Chery Huishang Bank Auto Finance Co., Ltd., established in 2009 as a joint venture (JV) between Chery Automobile Co., Ltd. (80 percent) and Huishang Bank Co., Ltd. (20 percent), is China’s only domestic auto finance company. The company provides loans to dealers and auto buyers and, according to a 2009 interview, planned to provide loans for car buyers in 10 Chinese cities by the end of 2009.
2. DaimlerChrysler Auto Finance (China) Ltd. entered China in 2005 as a wholly owned subsidiary of DaimlerChrysler AG with ¥500 million ($73.2 million) registered capital. In 2009, DaimlerChrysler merged with Fiat SpA, which now controls DaimlerChrysler Auto Finance.
3. Dongfeng Nissan Auto Finance Co., Ltd., established in 2007, is jointly owned by Nissan Motor Co., Ltd. (65 percent) and Dongfeng Motor Group Co., Ltd. (35 percent). The company provides financing for customers of—and inventory financing for dealers of—new Nissan and Infiniti cars. It has ¥500 million in registered capital.
4. Dongfeng Peugeot Citroen Auto Finance (China) Ltd. was established in 2006 with a total investment of ¥500 million. It is the sixth auto financing company in China and the first to be jointly established with the Bank of China Group Insurance Co. Ltd. The company distributes loans through local Bank of China branches to individual consumers and auto dealers.
5. Fiat Automotive Finance Co., Ltd. provides retail and dealer financing services for all vehicle brands produced and sold by the Fiat Group in China, including Case Machinery, Chongqing Hongyan Heavy Truck, Chrysler, Fiat, and Nanjing Naveco. Its services for dealers include loans for inventory and for construction of 4S stores. By 2009, the company had offered loans to 1,500 individual customers and 118 dealers and expects demand for its services to increase 60-65 percent in 2010.
6. Ford Automotive Finance (China) Ltd. is a wholly owned subsidiary of Ford Motor Credit Co., which established its representative office in Beijing in 1996 and was licensed to provide financial services in China in 2005, with an initial investment of $60 million. The company provides auto loans and installment payment plans to individual consumers.
7. GMAC-SAIC Automotive Finance Co., Ltd. is a JV established in August 2004 between GMAC Inc. and Shanghai Automotive Group Finance Co. Ltd., a subsidiary of Shanghai Automotive Industry Corp. Group (SAIC). The company offers financial services for individuals, business groups, and dealers.
8. Toyota Motor Finance (China) Co., Ltd. was established in 2005 in Beijing as a wholly foreign-owned subsidiary of Toyota Motor (China) Investment Co., Ltd. The company offers services such as auto loans for new cars and insurance products for Toyota and Lexus vehicles.
9. Volkswagen Finance (China) Co. Ltd. is a wholly foreign-owned subsidiary of Volkswagen Financial Services AG that was founded in September 2004 with registered capital of ¥500 million. The company offers loans for auto purchases, leasing, and insurance products.
10. Volvo Auto Finance (China) Ltd. was founded in 2006 with about ¥500 million total registered capital. The company is the first auto finance enterprise to provide exclusive financial services for its branded commercial vehicles, including trucks and construction equipment.

—Kyle Sullivan

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[author] Kyle Sullivan is manager of Business Advisory Services at the US-China Business Council’s Shanghai office. [/author]