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Parallel Import Dilemma to Be Addressed

Date:04-15 18:44 Source:China Industry News Authour:Wu Ying

 Parallel Import Dilemma to Be Addressed

One year has passed since parallel imports were given the green light, but sales have not met industry expectations, and have even fallen. Why is it that parallel imports, once seen as the weapon to check the prices of expensive imported cars, are in such a difficult position today?

In 2014, the anti-monopoly campaign in China's auto industry shone a light on the chronic problem of excessively high prices of imported cars. Parallel imports, for so long part of a “grey zone”, began to receive policy support and joined the mainstream.

One year has passed since parallel imports were given the green light, but sales have not met industry expectations, and have even fallen. Why is it that parallel imports, once seen as the weapon to check the prices of expensive imported cars, are in such a difficult position today?

Legal identity:three difficulties to be addressed

On August 1, 2014, the State Administration for Industry and Commerce (SAIC) issued the Notice on Stopping the Registration of Exclusive Auto Distributor and Authorized Auto Dealer, which specified that parallel import dealers are completely legal and are no longer restricted by the registration system. The identity issue that had troubled parallel imports for so many years was finally solved at the policy level.

After that, a series of local authorities issued policies to promote parallel imports. On January 7, 2015, Shanghai Municipal Commission of Commerce (SCOFCOM) released its Notice on Implementing Pilot Parallel Auto Import in China (Shanghai) FTZ (the Notice), becoming the first pilot project of this type in China. In March, MOFCOM gave Shenzhen's Qianhai approval to carry out parallel imports on a trial basis too, followed by the approval of similar projects in the Guangzhou, Tianjin and Fujian pilot FTZs.

However, unlike NEVs, whose sales have rocketed thanks to supportive policies, parallel auto imports have remained lukewarm.

Take Shanghai FTZ for example. Sales of parallel imported cars were still weak six months after the pilot project was launched. At a press conference held by the Information Office of Shanghai government, Jian Danian, deputy director of the administrative committee of Shanghai FTZ and deputy head of Pudong New Area, acknowledged that "some cars have been imported and sold in the form of parallel imports, but it's on a very small scale, less than ten vehicles."

According to data provided by SCOFCOM, Shanghai FTZ gave its approval to a first batch of 17 enterprises to carry out pilot parallel imports, but only four of them have signed auto purchase contracts so far, totaling less than 100 cars, and only a few dozen cars have actually been delivered. The boss of a company in the FTZ engaged in parallel imports told the media that it had sold only two cars in six months.

There are no complete statistics yet, but reports from local media suggest that sales of parallel imports have been poor throughout the country. Shenzhen, which started its pilot parallel import project immediately after Shanghai, sold less than 200 cars in June 2015. JHD, which is the largest dealer of American-spec cars in southwest China's Chengdu and has been in operation for four years, filed for bankruptcy earlier this year.

Why have parallel imports moved from "great prospects" when they first received policy support to "poor sales" today? We'll analyze the reasons from three standpoints - source of goods, price, and afterservice.

American-spec cars restricted:source of goods halved

There is a contradiction in the parallel import market. As the state issues favorable policies and pilot projects are launched across the country, the sources of cars have been on a steady decrease.

Statistics from China Automobile Dealers Association (CADA) showed that about 83,000 cars came to China as parallel imports in 2013, accounting for 8% of China's total auto imports that year. These numbers rose to about 100,000 and 7% in 2014. It seems that parallel imports increased from 2013 to 2014.

But the issue of the new Regulations on Auto Sales (draft for opinions, hereinafter referred to as Regulations) at the end of 2014 dealt a heavy blow to the source of parallel imports. The Regulations expressly stated that "vehicles that have been registered or used at home and abroad cannot be sold in China in the name of auto sales". In other words, the resale of imported cars in the Chinese market was prohibited.

It is well-known that parallel imported cars mainly come to China from the U.S. and the Middle East, and American-spec cars account for 50% of the total. According to American laws, all vehicles are taxed and registered when they leave the production plant, and most American-spec cars in China are bought from retailers in the U.S. and then shipped to China. But according to the Regulations, this kind of "second-hand car" that has been registered overseas should not be sold in China even if it has never actually been used.

This cut the source of parallel imports coming to China through standard channels by half. Although cars imported from the Middle East are not limited by the Regulations, all countries have quotas on auto production and wholesale, so the shortage arising from the restriction of American-spec cars cannot be made up by increasing imports from other regions.

From this standpoint, the Regulations' restriction on American-spec cars, which constitute an important source of parallel imports, goes counter to the nation's intention of encouraging the development of the parallel import market.In addition to policy restrictions, the "small 3C" (a way to circumvent the 3C requirement on imported cars) and small-scale import approach that was generally adopted before the pilot parallel import projects kicked off, also suffered when parallel imports were legalized. A small 3C does not have the 3C certification that requires authorization by foreign automakers, but is a certification obtained by the importer itself by modifying the car at an overseas plant. However, the small 3C is an important way for imported cars to come into China (500 cars can be imported a year with such a certification). The authority's attitude toward the small 3C is unclear yet.

In the meantime, multinational automakers are controlling the upstream sources of parallel imports in order to protect their own interests. Foreign media recently reported that Mercedes-Benz has said it will penalize American dealerships that sell cars to parallel importers, and BMW has also talked with American law enforcement to investigate where the money used to buy cars is coming from and where the cars are going.

Generally speaking, the tightening of sources of parallel imports is an undeniable fact. If this problem is not solved, the parallel import market will have no cars to sell no matter how many pilot projects are launched.

Price advantage vanishes because of localization and price war

The reason why parallel imported cars have survived for such a long time is that they were formerly 15-20% cheaper than the manufacturers' authorized imports, but this price advantage is vanishing.

On the one hand, more multinational automakers have localized their hot-selling imported models in recent years. There are more configurations for consumers to choose from and there is no customs tariff, so the price is more approachable.

On the other hand, growth in China's auto market has slowed down, resulting in fierce competition. Especially in the first half of 2015, a price war among major domestic automakers kept escalating. Prices of luxury imported models fell steadily by hundreds of thousands of RMB, brining them down to a level similar to the price of parallel imported cars.

Moreover, many parallel imports have configurations that are different from the same models sold by 4S stores. If you buy such a model, you have to modify it to comply with Chinese regulations before it can be licensed. It has also been reported that to protect the interests of its exclusive distributors and 4S stores, a multinational luxury automaker said it would penalize foreign dealerships that sell cars to parallel importers. Another luxury automaker even increased the displacement of a hot-selling model in foreign markets, so that when it came into China, the customs tariff was increased considerably, leaving the parallel imported model with no price advantage whatsoever.

At the same time as there are more pilot parallel import projects, the sources of goods are being squeezed, and their price advantage is vanishing, competition among parallel importers is getting fiercer. When there is little competition, dealers can secure a firm footing based on price advantage, but once the market is open to all and competition becomes intense, it's hard for the dealers to survive. As a complete afterservice chain for parallel import has not yet been established, dealers cannot make profits from afterservice, so a price war becomes their only means of survival. But this drags down the profitability of the whole industry.

Weak afterservice despite a lot of standards

A bigger headache than the vanishing price advantage is that afterservice for parallel import has never been guaranteed, making a parallel imported car much less attractive to the customer.

When Shanghai FTZ launched its pilot parallel import at the beginning of 2015, the Notice stipulated that pilot enterprises and their registered auto dealers in FTZs are responsible for the quality of parallel imported cars and should meet a range of obligations, including product recall, quality guarantee, afterservice, three guarantees, and calculation of average fuel consumption.

Some companies engaged in parallel imports are providing consumers with repair and maintenance services by establishing their own afterservice system or cooperating with 4S stores or repair shops, but very few auto dealers have built their own repair and maintenance outlets and their service capacity and part supply system are limited too, so repair and maintenance of parallel imported cars remains a big problem for owners across the country.In addition, although some 4S stores can provide repair and insurance services for parallel imported cars, customers have to pay for them. Even if the vehicle is in the warranty period, if there is any problem the owner has to pay for the repair either directly or through an insurance company. Afterservice for luxury imported cars is usually very expensive. A regular service might easily cost over RMB1000, and repairs are even more costly.

In May 2015, CADA released its Standards for Afterservice in Parallel Import Market for immediate implementation, which set down strict requirements on the qualification of quality assurance service providers and afterservice providers for parallel imported cars. However, industry insiders have suggested that the provisions are just an industrial standard without the legal basis for compulsory implementation, so their effect will be weak.

On June 26,2015 AQSIQ Defective Product Administrative Center, China-Europe Association for Technical and Economic Cooperation (CEATEC) and PICC P&C jointly released the Notice on Implementing "Three Guarantees" Insurance for Parallel Imported Cars on A Trial Basis. They have worked out implementation schemes for the pilot project and are responsible for its implementation.

It's clear that as things stand, parallel imported cars face difficulties from three sides - source of goods, price, and afterservice, which can be attributed to policy factors as well as market changes. Although government departments and dealers are making all kinds of efforts (focused on afterservice) to improve the situation, the reality for parallel import is that easy to get a foot in the door but not so easy to close the deal.

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