Navigating the increasingly competitive Chinese automotive aftermarket
The competition in China’s auto aftermarket has been skyrocketing as e-commerce puts businesses in touch with consumers more easily than ever before. Understanding how to effectively navigate the automotive aftermarket is crucial in this high-stakes business environment. Justin Wang, Yong Teng and Solodias Wu, from L.E.K. Consulting, provide advice on how companies can develop their own sustainable, cutting-edge business models to compete in China’s automotive industry.
In the booming automotive aftermarket, business-to-consumer (B2C) online business is increasingly the focus of development. The average vehicle age in China is nearly four years and will reach five years by 2022. An increasing number of cars with expired warranties will move into the aftermarket for servicing, providing greater opportunities for participating companies. By 2016, China’s automotive aftermarket (parts sales only) reached Chinese yuan (CNY) 360 billion with 40 per cent of the revenue coming from the independent aftermarket (IAM). Business opportunities will arise as parts sales in China’s automotive aftermarket, by 2021, will reach CNY 800 billion with 60 per cent of total revenue coming from the IAM.
The automotive aftermarket has been driven by a group of increasingly diverse players with B2C companies playing an especially active role. There are four companies that have a prominent role:
1. Online service catalogues: consolidate resources from 4S stores and IAM repair stores, leading car owners to offline repair facilities.
2. B2C e-commence platforms: operate under the guise of large e-commerce companies, facilitating parts suppliers/wholesalers to sell directly to car owners.
3. Online parts sales and onsite services: operate as online repair service providers whereby car owners can make appointments online and then maintenance teams provide repair services onsite.
4. Online parts sales and repair shop services: sell parts online to car owners and enter into franchise agreements with repair shops that provide installations and repairs.
Rapid expansion and loss of direction
According to L.E.K. estimates, total investment in the B2C segment of China’s auto aftermarket in 2014–2017 reached CNY 9–10 billion. Over 60 per cent of investments occurred before mid-2015 with the market slowing down significantly in the second half of the year.
Many B2C companies are under financial pressure. At least 30 well-known B2C aftermarket players have gone into bankruptcy. One of the bankrupted ventures is the once high-flying start-up Bopai. Despite receiving United States dollar (USD) 18 million in funding from Jindong and Yiche in early 2015, the company declared bankruptcy in 2016. Zhegexiuche received over CNY 500 million in 2015 and 2016. However, it was sold at a discounted price in early 2017.
Why did these companies fail? It might appear that the slowdown of investment starting in mid-2015 was the cause. In truth, it was not only the slowdown but the following three reasons for companies declaring bankruptcy.
1. Deficiencies in business models made companies unable to generate a sustainable customer base: Many B2C companies adopted business models that required limited investment in physical assets but heavy investment online. These players attracted customers via the Internet and provided the actual services either onsite or through cooperation with brick and mortar businesses. In the former model, the types of services provided were limited. In the latter, quality of the service was not guaranteed. Due to the problems associated with either option, B2C retailers struggled to develop a sustainable customer base.
2. Non-differentiated products and services resulted in an inability to operate in a competitive market: Many B2C aftermarket companies focused on low margin, low barrier to entry products (e.g., retail sales of tyres and windscreen wiper blades). These product categories were highly substitutable with varying quality and price points. These B2C retailers had difficulty in outlining their value proposition which made securing consumer loyalty difficult.
3. Limited internal capabilities and an inability to scale up: Most car owners had to go to an offline provider for vehicle diagnostic testing, service and parts installation. Hence, a core competency for B2C e-commerce platforms was the ability to manage the relationship with offline outlets. Managing suppliers to achieve agreed service levels was critical to success.
Build up core competencies
Despite B2C companies positioning themselves as online players, the key is to success is offline service fulfilment and operations. Connecting the online customer experience with offline service delivery, and managing service delivery effectively are two ways to ensure success. Knowing how to innovate and having core competencies are also ways B2C companies can succeed.
Differentiate core competencies
Market players should design business models and build core competencies based on customer needs. A B2C company choosing a light asset business model should consider how to retain customers over the long term and how to optimise offline partners’ resources. For instance, market players can leverage unique, proprietary technology alongside high-quality partners to ensure customer satisfaction and loyalty along with return business.
Establish brand advantages
Current B2C companies need to provide differentiated products and service items in order to establish branding advantages and create market entry barriers for competitors. For instance, B2C companies should consider how to introduce high-quality branded auto parts that are recognised by customers to establish customer awareness.
Establish high-efficiency internal capabilities
These companies should have full control over their whole operation’s value chain starting from upstream parts sourcing, logistics planning, warehousing and transportation all the way to downstream outlets’ operation and management of customer complaints.
The next five years will be a crucial period of transition in the auto aftermarket. Clearly positioning core competitiveness, designing sustainable strategies and business models, and establishing efficient internal competencies will be key for B2C companies to convert customer flow to profit.
L.E.K. Consulting is a world leading management consulting firm founded in Europe in 1983 and started business in China from 1998. L.E.K. Consulting now has 20 offices in Europe, USA, Asia and Australia, with over 1,200 employees and over 100 partners.