Published on April 25, 2014

China entering 'aftermarket' era years behind U.S.

Steve Ganster

CHICAGO—In the constantly evolving global economy, China continues to grow and compete across the board with North American companies, including the tire and automotive aftermarket.

Steve Ganster, managing director of Technomic Asia, a market entry and strategy consulting firm, told Tire Business China’s economy is No. 2 in the world right now and growing at about 7 percent, with the vehicle parc expanding at a rate of about 15 percent annually.

In about five years, he said, the car parc will exceed 200 million vehicles, whereas the U.S. market is growing at only a percent or two.

“It’s only a matter of time when the China market will exceed the U.S. market. Same is true in the (automotive) aftermarket in China,” Mr. Ganster said.

Growth and progression

China is “kind of entering its aftermarket era,” Mr. Ganster said.

By Technomic Asia’s calculations, the car parc—which includes all light passenger vehicles—has hit 100 million units.

Mr. Ganster said that taking a look at the composition of that aftermarket, most cars are no longer new. The middle-aged bracket of four- to nine-year-old cars is “becoming much more sizable and that’s bringing into it then many, many more opportunities for car repair and service.”

As China’s vehicles reach the 30,000-40,000 mile mark, he said, they begin to clock some replacement incidence rates.

Because of that, the Chinese automotive aftermarket is becoming more important, Mr. Ganster said. While it is yet to hit the level of the U.S. aftermarket, that segment’s growth in China is a combination of its absolute size and the fact that it is beginning to mature.

“By our estimates, it’s probably 40 percent the size of the U.S. car parc,” he said, “so it’s still a big gap between the size of China’s and the size of U.S. (aftermarket).”

However, just like new vehicle sales continue to increase each year in China, that country can catch up and surpass the size of the U.S. aftermarket quickly, Mr. Ganster said.

“New vehicle sales in China surpassed the United States,” he said, “and now China is the No. 1 new vehicle sales market.”

He said it’s only a matter of time before “that gap in the aftermarket closes as well.”

Mr. Ganster told Tire Business there are two phenomena occurring in China, and both are represented in the aftermarket. First, its pace of development will be more rapid than how the U.S. grew. “We use the phrase that ‘China years are like dog years,’” Mr. Ganster said, explaining that one year in China is like seven years in the U.S.

The second phenomenon is that the phases China goes through could be very different from what the U.S. experienced. While, for instance, the U.S. went sequentially through Phases 1-4 and so on, China might leap from Phase 1 to 3 to Phase 6, skipping steps along the way.

Mr. Ganster noted that as eCommerce is getting a lot of attention in the U.S. now in the aftermarket, it also is getting that kind of interest and focus in the Chinese aftermarket as well.

“So things like different technologies, like eCommerce and the Internet, will have an impact on the market and accelerate in terms of how that market may develop,” he added.

Structure of aftermarket

One major difference between the U.S.’s and China’s automotive aftermarkets is their structures. Mr. Ganster said a critical part of China’s is what he called the “auto-parts cities” (“Qi Pei Chen”).

These auto-parts cities create a fragmented market. Mr. Ganster said that historically, the auto parts cities formed because the aftermarket was served by “an extremely fragmented base of mom-and-pop distributors” so “garages needed to cover a wide number of these distributors to secure the parts they needed.”

This led to these distributors “congregated into central areas for convenience and exchange of parts.” Today there are more than 890 “parts cities” across the country, generally falling into two types: regional parts cities—like in Shanghai Dongfang—where sub-distributors from neighboring provinces come to buy parts and bring them back to their local market; and local parts cities, which are smaller in scope and primarily serve the local urban market, with 50 to 150 dealers.

Mr. Ganster said turnover for large auto cities such as Hangzhou Zhejiang Auto City, which has about 500 to 1,000 parts dealers, can be roughly $655 million a year.

Some industry observers believe the future role of auto cities will be to have a stronger logistics/warehouse service function, he said.

Independent aftermarket

Because of this structure, the independent aftermarket in China operates differently than in the U.S.

“In the U.S., we have a very robust, mature independent aftermarket,” Mr. Ganster said.

In China, because it’s a younger market, the dealer channel still dominates the aftermarket.

Mr. Ganster explained that when cars are newer, people typically go back to the dealership where the vehicle was purchased during the warranty period. Also, because China’s independent aftermarket is not well structured, “there’s not a lot of quality (or) reliable options to go to the independent aftermarket.”

The vehicle dealer channel in China is still very dominant, but there is pressure to change the structure as vehicles get older and people want more options, Mr. Ganster said. As better aftermarket options evolve, he sees the independent service chains evolving as well.

“We’re seeing a real tension now between the OES channel and the independent aftermarket channel,” he said.

That has already happened in U.S. as vehicle owners look to the independent service segment. On the other hand, it didn’t happen that way in Europe, where car dealers are still a very strong competitive force in the aftermarket.

“So there’s a lot of debate on how that’s going to evolve in China,” Mr. Ganster said, adding that Technomic Asia sees the independent market taking a greater share in China as time goes on.  

Opportunities for U.S. companies

From parts suppliers to the retail and service side of the business, Mr. Ganster said he believes there are plenty of opportunities in the Chinese aftermarket’s value chain.

For a parts supplier considering doing business in China, the opportunity “clearly is new growth,” he said, because the aftermarket, as it gets older, is growing at or near 15 percent a year. This feeds a parts and service business “that we forecast is going to grow at 19 percent a year.”

For a retailer or distributor, there is an opportunity to “be able to play a role there in shaping that future opportunity,” Mr. Ganster said, because of the fragmented structure.

With opportunity comes the chance to push the Chinese aftermarket to the next level. For instance, in the U.S. there are places like NAPA Auto Parts and AutoZone stores for aftermarket parts along with big program groups, whose members operate within the market.

That kind of structure for China is very different—and interesting—right now, according to Mr. Ganster, because from a distribution standpoint, it’s made up of many small, regional, unsophiscated distributors. A big distributor in China may make between $20 million and $25 million in sales, whereas a big independent distributor in the U.S. is going to be at a quarter of a million dollars in sales.

“So you can see there’s that need for consolidation” in China, he said.

For companies on the service side of the business, there may be opportunities to use technologies such as service diagnostics tools that are just beginning to come into use there.

“I think up and down the value chain because of that growth and lack of sophistication, there are all sorts of opportunities,” Mr. Ganster said.

Challenges and perceptions

Although there are opportunities in the Chinese aftermarket, there are many challenges as well.

“China’s not for everybody,” Mr. Ganster said.

He added that it can be a chaotic and difficult market to deal with, very price competitive and “margin is squeezed at many levels of the value chain.”

One of the key problems in the Chinese aftermarket is the presence of counterfeit parts.

“There is no formal and effective regulations—the administration of auto parts cities is only responsible for property management, so the market is full of fake parts,” Mr. Ganster said.

Additional issues include dealing with corruption and the lack of appreciation for brands in the aftermarkets.

“So while there are all these opportunities, there are also a number of challenges that you have to deal with,” he said.

There are many international players in the Chinese market and Mr. Ganster said that “most of the major tire guys are active, to some degree, in China.”

Some started in the OE market as other parts suppliers did, and are now looking to continue into the aftermarket. He said China is a very ripe market for the tire business. As vehicles age, they need replacement tires, so there is opportunity for growth, although the tire market there faces similar challenges on the distribution side as elsewhere in the world.

China is, he noted, very open to investment in most segments. In tires, for instance, there are options that include doing a single project or a joint venture. There is a lot of legal freedom there in the aftermarket, he added, vs. in car assembly, where there needs to be a 50/50 venture.

“The market is dominated by foreign players,” he said.

A lot of the big tire manufacturers, including Group Michelin, Continental A.G. and Goodyear, “are rapidly expanding their own retail outlets” around China, much like they have in other markets, he said.

So overall, the Chinese automotive aftermarket and the tire industry there are continuing to grow rapidly, Mr. Ganster, with continuing opportunities for companies in the industry to expand their brand.

To reach this reporter: jkarpus@crain.com; 330-865-6143.

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