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Changes at the top affect downstream players
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The revolution in information technology is sending shockwaves across the auto industry, with Internet companies trying to muscle into carmaking and even downstream automotive services.
Traditional auto retail and after-sales service players are finding themselves in a vulnerable situation as digitalization sweeps the industry.
Hou Yankun, head of Asia Autos Research at UBS Investment Bank and top-ranking analyst in Institutional Investor surveys from 2010 to 2015, discusses the new opportunities and challenges.
Q: How do you see the outlook for dealerships in 2016?
A: The golden age when a single dealership could earn up to 100 million yuan (US$15.2 million) a year is gone for sure, along with high volume growth in new car sales.
Last year, the traditional profit model for Chinese dealerships, where new car sales comprised up to 70 percent of income, started to falter, though they could still achieve a 10 percent rate of return on equity. It is not that bad and might even be considered normal, given that auto retail is a business heavily reliant on upstream original equipment manufacturers without their own brands.
By comparison, in mature auto markets like the US, dealerships make only 10 percent of their money from selling new cars. The remaining income comes from used car sales, repair, maintenance and insurance — more stable sources from at long-term perspective.
Chinese dealerships attempting to move toward that profit model will certainly be held back by the Internet. They will find more customers who don’t come back to where they bought cars for after-sales service after warranties expire. The Internet, with its information-gathering and sharing abilities, is open and efficient in helping people quickly find convenient, often cheaper alternatives.
But I think dealerships still have an important role to play in the industry because they function as inventory holders for carmakers that would otherwise have to bear the risks of unsold cars themselves.
Q: How do you see the market in replacement parts, especially cheaper supplies unsanctioned by carmakers, but of the same quality as those sold by dealerships?
A: The Chinese government has promulgated a law urging carmakers to share their tech specs for spare parts. It is understandable that every company wants to guard its own research and development systems, but in China they are overly protective.
It is also worth noting that electronics are playing an increasingly important role in cars, and authorized dealerships are strengthening repair and maintenance services in new specialty areas. The work is no longer just about dealing with a car’s hardware but also with its software programming. For example, a car needs to have its factory default setting restored after a big crash. And such know-how is available only through authorized channels.
Q: What’s your take on the emergence of e-commerce in the auto industry? It has attracted a wide range of players, including carmakers, Internet conglomerates like Baidu, Alibaba and Tencent, and automotive-specific websites.
A: The auto industry’s embracing of e-commerce is more of a gesture. Dealership showrooms are still irreplaceable points of sale for branding, especially when it comes to services. Car brands need brick-and-mortar stores just like luxury fashion brands. I don’t think either side stands much of a chance for success. It would be much easier to say that if electric cars were not part of the equation. Technology as representative of future mobility, plus its vision about autonomous driving, makes technology a more compelling factor than traditional branding.
Q: What about the used car market?
A: China’s used car market is expected to grow 15 percent annually in the next few years, a rare bright spot in the auto industry. One might say an undeveloped gold mine. The question is how to dig it.
A distinct part of used car sales in China is that the price is based on the year of manufacture, not mileage because no one believes odometers, which can be easily tampered with.
Only after all the on-record information about cars can be combined into one single source for checking, like in the US, will a used car market develop trust. It is only a matter of time in China, where there is already an online used trading platform that draws on big data generated by vehicles’ maintenance and repair records from insurance companies in partnership.
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