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Why Is the Parallel Import Market Struggling?

Date:02-26 11:03 Source:Tong Jiren's Auto Comment Authour:Tong Jiren

Why Is the Parallel Import Market Struggling?

Parallel import car dealing - formerly an unauthorized form of trading - was no longer restricted by the registration system and joined the official market. 16 months after legalization the parallel import market is struggling, and the anticipated prosperity is in no way matched by falling sales.

The parallel import market is like a catfish that reflects the temperature of the general imported car market. When things cool down in the overall environment the catfish naturally swims more slowly, and in 2015 it encountered an unprecedentedly cold winter.

In August 2014, the State Administration for Industry and Commerce (SAIC) issued the Notice on Stopping the Registration of Auto Distributors and Authorized Auto Dealers. As a result, parallel import car dealing - formerly an unauthorized form of trading - was no longer restricted by the registration system and joined the official market. 16 months after legalization the parallel import market is struggling, and the anticipated prosperity is in no way matched by falling sales.

In February 2015, parallel imported cars went on the market in the Shanghai FTZ, and Shenzhen, Tianjin and Guangzhou also carried out pilot projects over the following six months. Since then, the number of pilot enterprises certified by the four FTZs has kept rising and has now reached 95 - 28 in Shanghai, 14 in Guangzhou, 35 in Tianjin and 18 in Fujian. These include leading auto importers in China, such as Shanghai-based Yongda Group and Brilliance Auto and Baoxin Auto Group.

At the end of 2015, the General Office of the State Council issued Several Opinions on Intensifying Import and the Certification and Accreditation Administration of China (CNCA) issued the Notice on Pilot Measures for CCC Reform of Parallel Auto Import in FTZs. Accordingly, three major measures were to be adopted on January 1 2016 - relaxing the requirements on original authorization documents for imported cars, relaxing the restriction on the number of parallel imported cars, and streamlining factory inspection.

Those measures removed barriers such as 3C certification for the pilot parallel auto imports in FTZs, and opened up an untapped market for general auto dealers. 3C certification reform reduces the intermediary links before parallel imported cars are sold, and the certification and inspection fee is expected to drop from RMB40,000-plus to RMB3,000-5,000, which will further lower the price of parallel imports.

"As MOFCOM and CNCA have both issued favorable policies for parallel imports, this market offers greater potential compared with imported cars that meet Chinese specifications. Meanwhile, as the nation has relaxed the restrictions on the number of parallel imported cars, their cost has fallen by 30%." Zhao Yanxiang, founder of HTX, said in our interview that as those favorable policies are implemented, HTX will invest more in the parallel import business.

According to a parallel importer in one of the FTZ, "Based on a conservative estimation, more than 10,000 cars will come to China through the Shanghai port in the form of parallel imports."

But behind the seeming prosperity of the parallel import market is unreliable data. Jiang Jianqing, vice president of the Parallel Import Association, said in an interview with AutoKol that although more cars (about 120,000 units) came to China via parallel import in 2014 than 2013, the number exiting the customs has decreased. "Most of the parallel imported cars are in bond," he explained. "Conservative estimates suggest that about 50,000 cars are in bond thanks to the customs policies, or their customs clearance has been delayed." Because of the large auto stock at the customs by the end of 2014 and the macroeconomic slowdown in 2015, the total sales of parallel imported cars in both 2014 and 2015 was around 80,000 units.

Moreover, Cui Dongshu, deputy secretary general of the China Passenger Car Association (CPCA), commented that the parallel import market was shrinking in 2015.

Then we have to ask why the parallel import market has failed to prosper after it was legalized?

Macroeconomic slowdown hit parallel imports hard

In 2015, 20.20 million passenger cars were sold in China, up 9.3% YOY, which was slightly lower than the 13% wholesale growth in 2014. Due to a number of factors such as economic slowdown, auto purchase restrictions, and stock market fluctuations, growth was naturally slower than in 2015. Although a sector of the auto market offering significant scope for profits, the parallel import market has not escaped the general recession. In Cui Dongshu's opinion, the most important aspect of legalizing parallel imports has been to enhance competition in the imported car market, so that the industry can become fully competitive and consumers will be able to buy better-quality and fairer-priced products.

Chen Hong, founder of Gunlei, a parallel import car provider, holds that the legalization of parallel import encourages competition and breaks down monopolies, and is consistent with China's strategy to let the market play the decisive role in resource allocation.

In short, the parallel import market is like a catfish that reflects the temperature of the general imported car market. When things cool down in the overall environment the catfish naturally swims more slowly, and in 2015 it encountered an unprecedentedly cold winter.

Although a series of favorable policies have been issued, in the words of auto commentator Zhang Zhiyong, they can only partly address the problems faced by dealers, but cannot change market demand.

Parallel imported cars are losing their competitive edge.

"As well as the general environment, narrowing supply channels and engine adjustments by foreign automakers on hot-selling cars have also caused parallel imported cars to lose their competitive edge." According to Jiang Jianqing, imported cars have become less popular in the market due to a range of factors.

The supply is short and limited. Data show that 55% of the parallel imported cars sold in 2015 came from the U.S. and Canada, 40% from the Middle East and 5% from Europe.

All kinds of regulations and policies place limits on the sales channels. China's new Auto Sales Regulations (Draft for Opinions) stipulated that "vehicles that have been registered or used at home or abroad shall not be sold." In other words, the resale of used imported cars is prohibited in the Chinese market, but American laws stipulate that vehicles have to complete the tax and registration procedures before leaving the country, and such vehicles are considered "used cars" in the Shanghai FTZ and cannot be sold there.

Foreign automakers will not ignore actions that threaten their profitability in the world's largest auto market. In 2014, Daimler AG stepped up efforts to prevent the unauthorized sale of their cars coming from the U.S. to China, and Steve Cannon, CEO of Mercedes-Benz America, said that the first step taken by the brand was encouraging dealers to check the address of potential buyers using online resources, so as to find the buyers that buy specific models. It also set up barriers to prevent cash payments.

In addition to cutting off the supplies of parallel imports, automakers have also adjusted the displacement of vehicles. BMW, for instance, increased the displacement of its popular X5 by 25ml in mid-2015. This caused considerable controversy because the adjustment forced Chinese parallel auto importers to pay almost RMB110,000 more in taxes on this model.

Aftersales system and regulatory procedures to be improved

Another reason why customers have concerns about buying parallel imports is that the after-sales service system for these cars is still poorly developed. No real progress has yet been made in resolving this issue.

Take the parallel imported BMW X5 sold by Yongda Group for instance, which mainly comes from the Middle East, North America, Canada and Mexico. The new X5 from the Middle East and North America is priced at RMB755,000, while the model from Mexico and Canada with M parts is priced at more than RMB900,000. In comparison, the xDrive35i 2015 edition that is currently on sale at 4S stores and has the closest configurations and specifications to the X5 carries a manufacturer's recommended price of RMB958,000, and the final retail price is around RMB868,000. It is obvious that the foreign model – bigger and with a better specification - has a price advantage.

But one point worth noting is that while the parallel imported BMW X5 benefits from repair and maintenance services at all BMW 4S stores, warranty comes at an extra cost. The cost of the warranty for chassis, engine and transmission is RMB7,500 (3 years/60,000km), and that for the warranty of the whole car is RMB15,000 (3 years/60,000km), which undercuts the price advantage of the parallel imported cars.

Experts have pointed out that although the Chinese government has strongly promoted the parallel import market, it is still in the starting phase following legalization. The rudimentary after-sales service system remains a major concern for buyers, and policy and regulatory procedures have to be improved too. There is no doubt that it will take time for this market to mature.

It would be beneficial if the Chinese authorities could draw on the experience of Japan's more mature auto market regarding after-sales service for parallel imported cars. Japan has required that multinational automakers' general distributors in Japan have to provide after-sales services for parallel imported cars, and it provides independent certification for every such model. Similar policies would give a strong push to the parallel import market in China.

Many minor players will be squeezed out of the market

"As more automakers join in the game, competition in the parallel import market becomes ever fiercer," says Jiang Jianqing.

According to its marketing executive director Zhang Cen Chun Zi, the Shanghai-based Yongda Group, one of the first pilot enterprises in the Shanghai FTZ, imports cars with non-Chinese specifications. Yongda's luxury car center website shows that in addition to parallel imported cars that differ in configuration or performance from models sold at 4S stores, Yongda's parallel import business also covers models that are unavailable in China, such as the Lincoln MKT, Mercedes-Benz GL500 and Toyota Sienna.

According to industry insiders, for domestic leaders in auto imports such as Yongda Group and Brilliance Auto and Baoxin Auto Group, parallel imports are no more than a supplement to their main businesses and an important bargaining chip when negotiating with automakers and dealers. Their main function is to weaken the automakers' control of circulation channels.

But there is no denying that compared with ordinary dealers who also want to take a slice of the parallel import pie, those groups have natural advantages in terms of capital and connections, let alone the general distributors specified by manufacturers. These differences in strength will most directly affect the future trend of the industry. According to Jiang Jianqing "More than 80% of small parallel car importers will be squeezed out of the market in 2016."

Regarding the future development of the parallel import market, Zhang Zhiyong believes that intervention on the part of the authorities and the establishment of channels take a long time. A market cannot mature overnight, so we all have to be patient.

Jiang Jianqing believes that 2016 will be the toughest year for parallel importers, but he is positive about the prospects for this market. "The market is there, and innovation is what parallel importers need to think about."

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