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How Will Automakers Seize Auto Service Market?

Date:03-25 12:54 Source:21st Century Business Herald Authour:Wang Xin

How Will Automakers Seize Auto Service Market?

At present, the aftermarket business in China accounts for 3% of automakers' output value - a proportion that is likely to climb to 30% in future. In the process of aftermarket expansion, automakers have to prepare in advance, plan their future strategy of "product + service" targeting the scenarios of drivers’ vehicle use, seize share in the user service sector, and divert customer flow from independent afterservice channels.

Shifting industry policies and ambitious new players are undermining the monopolistic position of automakers and authorized dealers in the auto after-market.

On February 26, Accenture formally released its auto aftermarket study report and the results of its 2015 auto consumer survey. Its research showed that China's auto aftermarket is in the nascent stage, and aftermarket businesses centered on vehicle servicing, such as ride-sharing, mobile mobility, operational leasing, consumer finance, repair and maintenance, and used car sales, are more attractive in the capital market.

"We classified the businesses in the aftermarket. From 2015 to 2025, the general auto aftermarket will increase by an impressive 298%." According to Huang Luchuan, strategic director of Accenture Greater China, the used car business will be one of the key areas that support the development of automakers and dealers.

Automakers to enter this market

According to Accenture, the used car business, travel service, and an independent aftermarket will be the future stars in the field of aftermarket service.

First of all, the used car business is one of the key means to support the development of automakers and dealers.

Accenture holds that for automakers, the used car business is good for raising the residual value of cars, stabilizing the price of new cars, and improving the image of the main brands. It can help form synergy effects between financial leasing and big customer sales, effectively deal with overcapacity, create revenues and profits from value-added business, promote the development of financial leasing, boost new car sales, and increase market share.

For dealers, the used car business can lower the risk of falling new car sales, improve overall profitability, expand the customer base, and increase revenues from afterservices.

As automaker-owned afterservices have struggled to be economic, convenient, or innovative, the state has issued a series of policies since 2014 to boost the development of an independent afterservice market. As a result, this market has developed rapidly, not only featuring a variety of business models, but also covering many emerging industries such as travel services.

At present, the aftermarket business in China accounts for 3% of automakers' output value - a proportion that is likely to climb to 30% in future. In the process of aftermarket expansion, automakers have to prepare in advance, plan their future strategy of "product + service" targeting the scenarios of drivers’ vehicle use, seize share in the user service sector, and divert customer flow from independent afterservice channels.

Regarding mobile mobility, Accenture's research showed that the utilization rate of private cars in China is only 7%, meaning that private cars are not used for 93% of the time. Time-of-use leasing can raise the vehicle utilization rate to 40%-60% and consequently help mitigate road congestion and parking difficulty in large cities.

Shen Jun, managing director of Accenture Greater China, said in an interview with 21st Century Business Herald on February 26: "On the one hand, if users all rent cars, even for a short period, they may not buy cars, and that will adversely affect auto sales. On the other hand, for low-income groups that couldn't afford to buy cars in the past, car leasing enables them to own a car temporarily, which will expand the auto consumer base and boost future sales."

According to him, automakers should actively try their hand at travel services, so they can shift from manufacturers to service providers, and travel services can also provide them with the opportunity to have real-time contact with the consumer.

"In the past, automakers had limited contact with their customers and didn't know whether their products were targeted accurately. But once they start to get hold of customer driving data, automakers will be able to make more accurate decisions about the market and launch customized schemes when designing next-generation products. Those data are big data that are worth mining for automakers," said Shen Jun.

"Three-stage rocket" theory needed in aftermarket

With ongoing reform in the auto aftermarket, the authorization system focused on 4S stores will face immense challenges, and independent afterservice channels will develop with great momentum.

Surveys suggest that the average age of vehicles in China is 4.3 years, which will increase with the development of the independent aftermarket. Following the opening of the circulation channels for auto repair parts this year, the state is encouraging original part producers to provide the aftermarket with original parts and independent parts of self-owned brands, and allow authorized part dealers and repair shops to resell original parts to unauthorized repair shops or end users. In such circumstances, automakers need to consider how to cooperate with the independent aftermarket.

In 2015, Accenture conducted a survey on auto after-sales consumer behaviors involving nearly 1,800 car owners in tier-1 and tier-2 cities in China. The results showed that 70% of the interviewees chose 4S stores and other authorized channels for fear of warranty problems, and only 30% thought the price of auto parts and services at 4S stores were transparent. Over 80% of them would choose other repair channels than 4S stores after the warranty period expires because repairs at 4S stores are too expensive and there are very few outlets.

In addition, over half of the interviewees said they would only purchase services from independent afterservice channels when their price is 30%-50% lower than the price at 4S stores.

Although consumers are still hesitating, there has been a succession of mergers and acquisitions among domestic auto dealers. China Grand Auto, for instance, acquired luxury auto dealer groups like Baoxin Auto Group and Prestige in 2015. Recently there have been indications that it will acquire Ganghong Auto too.

Shen Jun said reshuffles among dealers are normal when the industry is at a low ebb. "Listed dealer groups have ample capital, so it's reasonable that they will carry out M&A during such periods because a large network of 4S stores and brand combinations can improve their ability to manage risk. Therefore, 4S stores are a smaller risk given the same operating environment."

By means of illustration, there were more than 120 M&As in the auto aftermarket last year, especially in e-commerce, and the highest-profile failure was Bopai Car Care.

The quick emergence and death of an enterprise is a natural phenomenon because startup companies mostly use venture capital instead of mature capital. For the customer, the problem lies in trust and service level. “If users experience the service once and are not impressed, they won't come back," said Huang Luchuan, consulting director of Accenture Greater China.

Internet companies have a famous "three-stage rocket" theory. First-stage means burning money to cultivate a customer base, second-stage means the company is transforming while cultivating its customer base, and third-stage means, based on the transformation, making money and establishing the profit model.

Therefore, only good user experience can retain consumers. To win target users with real needs, companies in the aftermarket have to consider service combinations in order to increase user adhesion. "There should be activities aimed at generating customer flow and activities aimed at making money."

"There are 440,000 auto repair shops of various standards across China, but it is hard for them to go online because their physical service is poor. Only when physical service is good is it possible to successfully apply Internet thinking and innovative thinking." According to Huang Luchuan, it will take time for the aftermarket to mature, during which M&A is a legitimate strategy, but companies should refrain from unwise and random investments.

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