FEATURE: Second-hand auto business on the upswing

With the rapid growth of automobile market in China, the second-hand automobile market has attracted more attention from consumers. According to statistics from Ministry of Commerce on 255 key second-hand automobile exchange marketplaces, 1,965,900 second-hand automobiles were traded in China in 2006 and the year-on-year growth rate is 31.5 percent, which is higher than the growth rates for automobile production volume and distributing volume in that year. The rapid growth of the second-hand automobile market and the increasingly improved consumption environment indicate that second-hand automobile consumption in China has entered into a new stage.

In developed countries in the world, the volume of transaction for second-hand automobiles is usually twice to three times that for new automobiles; but the situation in China is different. Last year, 7,238,000 and 7,184,000 vehicles of all categories were produced and sold respectively, while the sales volume of second-hand automobiles are less than one third of the production volume or the distributing volume for new automobiles. Therefore, it is undoubted that the second-hand automobile market in China has great potentials.

According to statistics from China Automobile Dealers Association (CADA), the second-hand automobile market in China has witnessed a rapid growth since the beginning of this year: the accumulative trading volume of second-hand vehicles increased by 18.36 percent year on year to 805,000 vehicles nationwide from January to May. Although the growth rate slightly slowed down as compared to last year, the trading in the second-hand vehicle market remains robust. What is special is that after the high tide for auto sale over the past few years, the automobile market is entering into the era of massive automobile replacement this year. The second-hand automobile market is expected to grow steadily in the future.

A survey from Sinotrust shows that 71.2% of vehicle owners choose to replace used automobiles in 3 to 5 years, with more concentration on 5 years and 6.5 years as average. The majority of vehicle owners will sell their used automobiles before having them scrapped. At present, in active automobile market such as Beijing, the potential of second-hand automobiles has become apparent and the proportion between sales for second-hand and new automobiles is increasing steadily. According to a person in charge from CADA, 170,000 second-hand automobiles were traded in Beijing in the first half of this year and the ratio between sales for second-hand and new automobiles is 0.85:1, while the figure is only 0.54:1 in 2005. 

Since Administrative Measures on Trading Second-hand Automobiles took effect on October 1 2005, the trading pattern of second-hand automobiles is experiencing great changes in China. During an interview, Chen Yuehong, Director of Department of Market System Development, Ministry of Commerce, gave a summary that the singular fair-typed trade market is converting to the pattern of branded trade covering multiple businesses.

As the product of innovations in trading patterns, branded second-hand automobiles have attracted wide attention from the public since their emergence. In recent years, more and more automobile manufacturing enterprises launched their own second-hand automobile brands one after another, such as Shanghai GM "Chengxin Second-hand Automobile", Audi "AAA Second-hand Automobile", Guangzhou Honda "Xiyue Second-hand Automobile", etc. In addition, certain large second-hand automobile dealers are making efforts to build up second-hand automobile brands.

Wang Xudong, Deputy General Manager of Guangzhou Anyi Auto Trade Co., Ltd, held that the second-hand automobile trading pattern of 4S stores with credit as the sign will rise rapidly in next 2-3 years and capture ever increasing market shares in the second-hand automobile market. Meanwhile, foreign chain auction and operation enterprises for second-hand automobiles will soon build up their respective networks all over China. "Shares for traditional trading patterns in the second-hand automobile market will be faced with a situation of being extruded. To survive, they must change their appearance and regulate their management; otherwise, they will be extruded and eliminated."

It is noteworthy that as most branded second-hand automobiles are still in their infancy for the moment, such problems as low recognition and high operation costs will hinder their development and growth seriously. How branded second-hand vehicles can get through the difficult situation and step onto the road of rapid development as soon as possible has become a key for the development of the second-hand automobile industry as a whole.

Therefore, Li Xiaokuan, Deputy Director-General of Department of Market Regulation of State Administration for Industry and Commerce (SAIC), gave three recommendations. Firstly, automobile manufacturers should take the sale of branded second-hand automobiles as a link, which can promote the sale of new automobiles and vice versa. "Replacement of second-hand automobiles can not only become a new point of profit growth for enterprises but also stimulate the sale of new automobiles." Secondly, automobile manufacturers should make greater efforts to promote branded second-hand automobiles while promoting the sale of branded second-hand automobiles as a main business to make second-hand automobiles an effective instrument to make automobile brands more influential. Thirdly, automobile dealers should extend the business scope of 4S stores and take replacement of second-hand automobiles as one of their main businesses. When some people doubt whether 4S stores have the right to deal with second-hand automobiles, Li Xiaokuan said, "Actually, there is no provision restricting 4S stores from dealing with the replacement of second-hand automobiles in Administrative Measures on Trading Second-hand Automobiles".

A rapidly growing automobile market must be built on a firm basis on trading second-hand automobiles. However, the trade of second-hand vehicles in China is being puzzled with difficult problems concerning credit. Such issues as information asymmetry, inadequacy of relevant industry standards, hidden tricks in automobile purchase contracts and second-hand automobile valuation discretion during trading process are seriously hindering the normal circulation of second-hand automobiles.

In respect of the issue of credit, the most pivotal part in the trading process of second-hand automobiles, Li Xiaokuan disclosed that the administration system for industry and commerce had begun to implement classified control according to corporate credit and were classifying enterprises into four categories based on credit status, announced the credit status of enterprises to the public and performed focused monitoring and activity restriction to enterprises with poor credit. "The establishment of such a system can make it possible to effectively understand and master the credit status of various enterprises and make it convenient to exercise supervision over enterprises, urge second-hand automobile dealers to improve their own credit and make themselves more competitive; it will be propitious for maintaining market order so as to promote the prosperity and development of second-hand automobile market."