The auto aftermarket encompasses a number of direct-to-consumer products and services, including auto accessories, repair and maintenance, performance tuning, trading of used cars, logistics and transportation, financial services, leasing and renting, auto clubs, auto inspection and testing, auto certification, auto piloting, parking lots, and gas stations.
The auto beautification and maintenance industry emerged in as early as the 1930s in the U.S. and U.K., setting the stage for the formation of the auto aftermarket. During the post-World War II economic recovery, the auto industry began to develop rapidly and the auto beatification and maintenance industry rose with it. This period also saw a shift from major dismantling in auto repair and maintenance to a more focused maintenance approach that required less parting of the vehicle. It was also at this time that the auto aftermarket matured. Today the auto after-sales market is enjoying a golden age in the U.S. And in Europe, auto after-sales service has become a major profit source for the auto industry. Meanwhile, 4S stores and chain stores have emerged as mainstream business channels in the rising after-sales market.
Opportunities for the Chinese Auto Market
China’s auto beautification and maintenance industry emerged in the 1990s. Along with an increase in private car ownership, motorists are paying more attention to keeping their cars attractive and smooth running. At the same time car owners are placing more attention to auto maintenance rather than just taking the car into the shop when it breaks down. These trends have boosted the scale of the Chinese auto aftermarket into an industry employing 2.4 million and boasting an annual production value of 30 billion yuan.
The auto aftermarket offers something for every stage of a vehicle from the time it leaves the factory until it ends up at the junkyard. Unlike new car sales, there is virtually unlimited growth potential in the auto aftermarket, and margins in this segment are among the steadiest in the auto industry.
The aftermarket auto-parts sector is rapidly rising in China.
According to industry insiders, the auto aftermarket accounts for 50% to 60% of the total auto industry by revenue, compared to only 20% each for auto sales and parts supply. In the U.S., for instance, the auto service industry has surpassed auto sales in terms of revenue, with the auto beautification industry alone boasting a scale in excess of US$350 billion.
In recent years, the Chinese auto market has continued to heat up and the number of private vehicles on the road has been rising constantly, creating huge development potential for the after-market there. In 2003, China overtook Germany to become the third largest auto market in the world. In 2004, output and sales of automobiles in Chinese autos grew 14.2% to break the 5-million unit mark. In 2005, the volumes jumped another 13% to 5.92 million, surpassing Japan to make China the world’s second largest auto market, trailing only the U.S.
Along with the rapid development of the auto market, the Chinese auto aftermarket, especially the markets for auto products and services, has become a critical component in the Chinese auto market. In 2005, the production value of the auto industry hit 42 billion yuan, and by 2010 it is expected to reach 190 billion yuan.
Market surveys show that presently over 60% of private high-end auto owners regularly have their cars undergo beautification and maintenance, while 30% of private lower-end auto owners do likewise and over 30% of public high-end autos undergo such treatment regularly. Over 50% of private car owners are willing to do the work themselves if they have the means. Statistics indicate that the typical car owner in China spends thousands of yuan on decorative accessories, underscoring the huge market potential.
The capital requirement for an auto service startup is a few hundred thousand yuan, far less than what is needed to enter the auto production industry. Cinep, the leading auto beautification and maintenance chain in China, sells franchise rights for 68,000 yuan for a basic shop, 100,000 for an economic shop, 180,000 for a standard shop, 380,000 for a central shop, and 800,000 for a flagship shop. Franchise fees for other brands are even lower. With good management, the investment can be recouped in half a year, underscoring the high investment returns.
Challenges Facing the Chinese Auto Aftermarket
Statistics show that 87% of private startups in the auto aftermarket go bust within 10 years of startup. And chain operators account for 87% of those who survive. The trend of business concentration will continue in the auto after-sales market, enabling large-scale chain stores with strong competitiveness and wholesalers to develop steadily, while forcing smaller companies to sell out or exit the market.
Service quality is critical in the auto aftermarket. Due to the low entrance threshold, lack of discipline by industry associations, and absence of specific supervisory government agency, many operators in the line emphasize expansion and have put less effort into technology, equipment, maintenance and repair product quality, market management, industry norms, and management methods. The development of the industry is not only slow but also imbalanced.
The Chinese auto service industry is still at the budding stage and there is a lack leading brands in the auto aftermarket, which far lags behind international levels. The market suffers from a surfeit of fake and inferior products, as well as a shortage of the highly professional assistance customers’ demand. Due to the lack of uniform national standards for quality inspection and testing, consumers are unable to effectively discern the quality of products, leading to numerous consumer complaints. The Chinese auto service industry needs the leadership of professional enterprises with strong brands, so that it can develop in an orderly and focused way.
Statistics show that the number of registered auto maintenance and repair enterprises in China has hit 300,000, including over 9,000 auto-beautification businesses. Compared with their foreign counterparts, China’s enterprises in the line feature single service, limited scale, and low quality. The industry is also fiercely competitive and lacks strong market mechanism and service systems. In line with its commitment for accession to the World Trade Organization, the Chinese auto service market will be opened up and some enterprises will inevitably be ousted due to their shortcomings in capital, management, and brand recognition.
With a market scale of 80 billion yuan, the Chinese auto beautification market has attracted many foreign enterprises to set up shops in China, including such international auto service giants as Autobacs and Yellow Hat of Japan and AC Delco of the U.S. There are currently more than 200 foreign auto beautification shops. Despite the advantages of in-depth market knowledge, flexible management, and localized products and services for domestic chain operations in the line, large-scale foreign chain enterprises for auto aftermarket have a strong edge in terms of capital, technology, quality, experience, and management know-how.
