China’s Auto Retail Market

Spurred by growth and evolving consumer expectations, car dealerships and finance companies have revamped their offerings. by Kyle Sullivan China has emerged from the global recession as the world’s largest auto market, with a total sales volume that eclipses the United States by a substantial sum. In 2009, China’s fresh vehicle sales reached 13.6 million units and total output hit 13.8 million units, up 46.Two percent and forty eight percent from 2008, respectively (see Tables one and Two). Tho’ sales in two thousand ten may not grow as rapid as they did in 2009, China’s auto market is poised for more incredible growth. According to latest China Association of Automobile Manufacturers statistics, China sold 7.6 million cars and produced 7.Five million cars in the very first five months of 2010. The association forecasts that total sales and total output are each on track to exceed fifteen million units this year.

Original equipment manufacturers (OEMs) and auto distributors have grown significantly, along with the rest of China’s auto market. As a result, foreign and domestic OEMs are looking to expand their distribution networks across China, with a concentrate on second- and third-tier markets (see Foreign Auto Companies Expand Sales Networks in 2010). Auto sales in these markets have outpaced sales in first-tier cities in the last five years. According to latest data, inbetween January and September 2009, auto sales in second- and third-tier cities grew forty one percent and 51.Four percent, respectively, while sales in first-tier cities rose 33.6 percent.

Switching market landscape for auto dealerships

China’s auto market has switched significantly in the past two years. At the onset of the global financial crisis, many dealerships and suppliers faced low liquidity levels and high debt ratios. As a result, OEMs began to cut vehicle prices to encourage consumer request. Meantime, tighter access to credit and weaker OEM support led many analysts to believe that dealerships would fold in large numbers.

Auto sales in China rebounded after the PRC government in mid-2009 unveiled stimulus measures that suggested tax cracks, subsidies for new-vehicle purchases, and looser credit for companies and individuals. According to the China Association of Automobile Manufacturers, year-on-year vehicle sales grew 83.6 percent (reaching one million cars) in September two thousand nine and fifty percent in January 2010. By late two thousand nine and early 2010, request had grown so dramatically that many dealerships were fighting to keep cars in stock.

Evolving retail formats

China’s auto retail market is responding to a host of pressures. Since the onset of the global financial crisis, OEMs and independent distributors have been integrating their distribution networks to achieve economies of scale and greater financial viability. Fresh retail formats that have emerged within the past several years display that retailers are becoming larger to adapt to market pressures and increasingly sophisticated consumer tastes.

Very first established in China in one thousand nine hundred ninety eight and considered the most advanced marketing model, the 4S model offers sales, showrooms, services, and spare parts all under one roof. These types of stores are expensive to operate and require significant investment and start-up capital. This is largely because they suggest high-end facilities located in expensive districts in downtown areas where rental fees are high. Top brands typically maintain numerous 4S stores in a major market, compounding costs and forcing some stores into the crimson. A report published by the Cheung Kong School of Business early this year stated that almost eighty percent of 4S dealerships along China’s coast operate at a loss.

Despite its popularity among consumers, OEMs are not entirely sated with the 4S model. Manufacturers note that high-quality, reliable dealers are hard to find and relationships with dealers are generally difficult to manage. This is because 4S dealers tend to be local businesses that cater to a localized market and do not necessarily share the same strategies and objectives as OEMs, which have broader or national interests. Nonetheless, the 4S format’s high popularity among Chinese customers, who choose the five-star treatment that these outlets suggest, will likely keep this model in operation.

In ordinary terms, auto supermarkets are large dealerships. They come in many formats—1S, 2S, 3S, and 4S—and can be single- or multiple-brand dealerships. (1S outlets suggest only sales; 2S outlets suggest sales and services; and 3S outlets suggest sales, services, and spare parts.) The advantage of this structure is that it attracts more customers, who can find a multiplicity of brands and models at a single auto supermarket without having to travel to different dealerships. The disadvantage is that many foreign OEMs reject to sell directly to auto supermarkets because they do not want their models displayed alongside rival brands. Consequently, auto supermarkets must often purchase their stock from OEM-authorized dealerships at a higher rate.

Several domestic OEMs are building their own auto supermarkets. For example, Jianghuai Automobile Co., Ltd. is building auto supermarkets at the county level to sell the utter range of its vehicles, from sedans to light trucks. Chang’an Automobile (Group) Co., Ltd. is also building auto supermarkets in second- and third-tier markets, where it will suggest autos produced by its wholly wielded entity, Chana International Corp., and by its joint ventures (JVs). Chang’an presently has seven supermarkets and plans to expand this number to one hundred by the end of 2010.

Media reports indicate, however, that auto supermarkets that suggest low- and mid-range vehicles face serious cost pressures and are at risk of failure. Facing rising operating costs and long-term price decreases (despite short-term price increases), low- and mid-range automakers might fight to afford distribution through supermarkets and may need to identify more cost-effective distribution channels.

Possessed by a single distribution company, mega-dealerships are a network of OEM-authorized auto dealerships that sell numerous brands. Mega-dealerships are performing well. According to Beijing Business Today, about twenty five percent, or Two,472 authorized dealers, belonged to mega-dealerships and accounted for forty four percent of China’s total auto sales in 2008. Prominent mega-dealerships in China include Guanghui, Pangda, Yongda, and Zhongsheng.

Auto trade markets are essentially clusters of separately possessed 3S and 4S car dealerships that suggest multi-brand auto sales and services. They are comprised of numerous dealers, vendors, and traders of thousands of vehicles. The advantages of auto trade markets are their economies of scale, one-stop shopping for maintenance, and spare parts supply—which permit dealers to reduce operating costs and lower prices for consumers. Used-car buyers also favor auto trade markets, which permit car owners to trade in their old cars and receive a discount on fresh vehicle purchases. China’s largest auto trade market, North Asia Car Market in Beijing, has over one hundred sixty dealers.

Some large auto companies are beginning to form massive regional auto parks that include clusters of 4S outlets, repair and service outlets, refinishing services for used cars, and outsourcing centers that provide insurance and auto financing services. Chongqing presently has one, and such regional parks are expected to grow in number.

Auto finance takes off

Auto finance in China has grown significantly in latest years. According to the People’s Bank of China, auto loans totaled ¥158.Trio billion ($27.1 billion) by the end of 2008—of which ¥31.8 billion ($Four.7 billion) came from auto finance companies. To regulate this market, the China Banking Regulatory Commission (CBRC) issued the Administrative Measures on Auto Finance Companies and related implementing rules in two thousand three and revised and combined the two regulations in 2008. The measures define auto finance companies as non-bank financial entities approved by CBRC to suggest financial services for auto purchasers and dealers in China. Major investors of these companies must be non-bank financial entities or enterprises that produce or sell motor vehicles (see China’s Ten Automotive Finance Companies).

To support the auto finance industry, CBRC in August two thousand nine began permitting auto finance enterprises to issue public bonds to raise capital, with the hope that the companies will expand their portfolios of financial products to attract consumers. According to PRC media reports, the number of Chinese consumers that take out loans will increase 40-50 percent in the next decade, and total auto finance loans will reach more than ¥550 billion ($80.Five billion) by 2025.

China’s used-car market grows—supported by government policies

As fresh auto sales have grown, so have sales of used cars. China Automobile Dealer Association statistics demonstrate that the trade volume of used vehicles has soared from 250,000 in two thousand to more than Three.Three million in 2009. To take advantage of this growing market, major auto manufacturers have begun to suggest used-car services for their branded autos at their certified dealerships in China. Most of the service packages cover used-car quality accreditation and assessment, certification, replacement, quality assure, and trading and transactions. Mega-dealerships also play an active role in the used-car market. For example, Shanghai Yongda Auto Management Service Co., Ltd. began its used-car business in two thousand two and now possesses a trading market, evaluation enterprise, agent, and two operating companies to provide a total range of services.

Apart from consumer request, several government policies and regulations have boosted the used-car market.

• The Administrative Measures on Used Cars, released in 2005, are the primary regulation governing the used-car market. The measures introduced a competition mechanism that permits OEM-authorized auto dealerships to run used-car businesses. The measures also regulate different parties—including trading markets, agents, and operators—and strengthen the administration of organizations that appraise the value of used cars.
• The Notice on Upgrading the Used-Car Trade Market was announced by the ministries of Commerce and Finance in July 2009. The circular aimed to improve the used-car industry. Primarily, the PRC government selected ten provinces and municipalities—Beijing, Hubei, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Tianjin, and Zhejiang—to receive fiscal funding to conduct pilot programs that focused on the management and information on used-car transactions to improve transparency.
• The Auto Industry Revitalization Plan, released in two thousand nine by the State Council, calls for the establishment of a national appraisal and evaluation standards system and a makeshift ownership registration system. The plan also calls for adjusting the value-added tax rate on used-car transactions and encourages dealerships to participate in vehicle replacement programs.

Challenges and opportunities ahead

China’s auto market is unlike any other in the world. In 2007, it overtook Japan to become the world’s second-largest car market and, in 2009, surpassed the United States as the world’s largest. China is selling cars quicker than any other country in the world, but it is doing so with relatively immature retail formats, OEM-to-dealer relationships, consumer tastes, and financing options.

China’s auto market is maturing, however. Retailers are consolidating and improving services with an eye toward retaining customers. Numerous retail formats have emerged in latest years, such as the mega-dealership and auto supermarket, suggesting consumers in different market segments a range of options for vehicle purchases. In addition, more dealerships are suggesting auto financing plans, permitting consumers to rely less on bank loans and individual savings to purchase vehicles. Used cars are also gaining traction among Chinese consumers. As these market trends develop, so will opportunities for retailers, OEMs, and consumers in China’s auto market.

The major challenge ahead for auto retailers is the capability to retain customers. Consumers are paying more attention to brand, picture, and style, and some buyers turn to a certain car solely based on its photo and branding. This is particularly true for second- and third-time buyers. Foreign retailers must therefore understand and cater to local consumer preferences to ensure long-term success in China’s auto market.

In addition to branding, retailers must also concentrate on the overall practice of purchasing a car. Chinese consumers tend to love 4S or similar types of dealerships that suggest the entire package: fancy showrooms, attentive sales personnel, after-sales service, and spare parts. Dealerships that make the process of buying a car an pleasant one will attract more customers in China.

Foreign Auto Companies Expand Sales Networks in 2010

China’s promising auto market has foreign original equipment manufacturers (OEMs) looking to expand their sales network in two thousand ten and beyond. According to media reports, several major foreign brands have announced plans to open fresh dealerships across China, particularly in second- and third-tier markets.

• Ford Motor Co. announced that it will significantly expand its network of dealerships in two thousand ten but did not indicate by how much. At the end of 2009, Ford’s authorized dealer network included two hundred forty one full-service dealerships and more than three hundred fifty sales and service outlets across China.
• General Motors Corp. Chevrolet plans to open one hundred twenty more Chevrolet dealerships by the end of 2010.
• Honda Motor Corp. has announced that it will increase dealerships in China to seven hundred and boost annual output capacity by about twenty percent to 650,000 units by the end of this year.
• Mercedes-Benz GmbH will reportedly establish another one hundred thirty dealerships in China in 2010.
• Nissan Motor Co., Ltd. has said that it will extend its network of dealerships from the current three hundred sixty seven to four hundred eight by the end of the year.
• Saab Automobile AB plans to dual its number of dealerships to thirty two by the end of 2010.
• Toyota Motor Corp. plans to add another one hundred dealerships in China this year to bring its nationwide total to 650.
• Volkswagen AG plans to expand its distribution network in China from 1,000 to Two,000 dealerships by 2018.

China’s Ten Automotive Finance Companies

China has ten auto finance companies, nine of which are foreign-invested. All ten companies are affiliated with auto manufacturers and provide credit to individual consumers for purchases and inventory financing to dealers for their branded autos.

1. Chery Huishang Bank Auto Finance Co., Ltd., established in two thousand nine as a joint venture (JV) inbetween Chery Automobile Co., Ltd. (80 percent) and Huishang Bank Co., Ltd. (20 percent), is China’s only domestic auto finance company. The company provides loans to dealers and auto buyers and, according to a two thousand nine interview, planned to provide loans for car buyers in ten Chinese cities by the end of 2009.
2. DaimlerChrysler Auto Finance (China) Ltd. entered China in two thousand five as a wholly possessed subsidiary of DaimlerChrysler AG with ¥500 million ($73.Two million) registered capital. In 2009, DaimlerChrysler merged with Fiat SpA, which now controls DaimlerChrysler Auto Finance.
3. Dongfeng Nissan Auto Finance Co., Ltd., established in 2007, is jointly possessed by Nissan Motor Co., Ltd. (65 percent) and Dongfeng Motor Group Co., Ltd. (35 percent). The company provides financing for customers of—and inventory financing for dealers of—new Nissan and Infiniti cars. It has ¥500 million in registered capital.
4. Dongfeng Peugeot Citroen Auto Finance (China) Ltd. was established in two thousand six with a total investment of ¥500 million. It is the sixth auto financing company in China and the very first to be jointly established with the Bank of China Group Insurance Co. Ltd. The company distributes loans through local Bank of China branches to individual consumers and auto dealers.
5. Fiat Automotive Finance Co., Ltd. provides retail and dealer financing services for all vehicle brands produced and sold by the Fiat Group in China, including Case Machinery, Chongqing Hongyan Intense Truck, Chrysler, Fiat, and Nanjing Naveco. Its services for dealers include loans for inventory and for construction of 4S stores. By 2009, the company had suggested loans to 1,500 individual customers and one hundred eighteen dealers and expects request for its services to increase 60-65 percent in 2010.
6. Ford Automotive Finance (China) Ltd. is a wholly wielded subsidiary of Ford Motor Credit Co., which established its representative office in Beijing in one thousand nine hundred ninety six and was licensed to provide financial services in China in 2005, with an initial investment of $60 million. The company provides auto loans and installment payment plans to individual consumers.
7. GMAC-SAIC Automotive Finance Co., Ltd. is a JV established in August two thousand four inbetween GMAC Inc. and Shanghai Automotive Group Finance Co. Ltd., a subsidiary of Shanghai Automotive Industry Corp. Group (SAIC). The company offers financial services for individuals, business groups, and dealers.
8. Toyota Motor Finance (China) Co., Ltd. was established in two thousand five in Beijing as a wholly foreign-owned subsidiary of Toyota Motor (China) Investment Co., Ltd. The company offers services such as auto loans for fresh cars and insurance products for Toyota and Lexus vehicles.
9. Volkswagen Finance (China) Co. Ltd. is a wholly foreign-owned subsidiary of Volkswagen Financial Services AG that was founded in September two thousand four with registered capital of ¥500 million. The company offers loans for auto purchases, leasing, and insurance products.
10. Volvo Auto Finance (China) Ltd. was founded in two thousand six with about ¥500 million total registered capital. The company is the very first auto finance enterprise to provide special financial services for its branded commercial vehicles, including trucks and construction equipment.

[author] Kyle Sullivan is manager of Business Advisory Services at the US-China Business Council’s Shanghai office. [/author]

China – s Auto Retail Market – China Business Review

China’s Auto Retail Market

Spurred by growth and evolving consumer expectations, car dealerships and finance companies have revamped their offerings. by Kyle Sullivan China has emerged from the global recession as the world’s largest auto market, with a total sales volume that eclipses the United States by a substantial sum. In 2009, China’s fresh vehicle sales reached 13.6 million units and total output hit 13.8 million units, up 46.Two percent and forty eight percent from 2008, respectively (see Tables one and Two). However sales in two thousand ten may not grow as rapid as they did in 2009, China’s auto market is poised for more extraordinaire growth. According to latest China Association of Automobile Manufacturers statistics, China sold 7.6 million cars and produced 7.Five million cars in the very first five months of 2010. The association forecasts that total sales and total output are each on track to exceed fifteen million units this year.

Original equipment manufacturers (OEMs) and auto distributors have grown significantly, along with the rest of China’s auto market. As a result, foreign and domestic OEMs are looking to expand their distribution networks across China, with a concentrate on second- and third-tier markets (see Foreign Auto Companies Expand Sales Networks in 2010). Auto sales in these markets have outpaced sales in first-tier cities in the last five years. According to latest data, inbetween January and September 2009, auto sales in second- and third-tier cities grew forty one percent and 51.Four percent, respectively, while sales in first-tier cities rose 33.6 percent.

Switching market landscape for auto dealerships

China’s auto market has switched significantly in the past two years. At the onset of the global financial crisis, many dealerships and suppliers faced low liquidity levels and high debt ratios. As a result, OEMs began to cut vehicle prices to encourage consumer request. Meantime, tighter access to credit and weaker OEM support led many analysts to believe that dealerships would fold in large numbers.

Auto sales in China rebounded after the PRC government in mid-2009 unveiled stimulus measures that suggested tax violates, subsidies for new-vehicle purchases, and looser credit for companies and individuals. According to the China Association of Automobile Manufacturers, year-on-year vehicle sales grew 83.6 percent (reaching one million cars) in September two thousand nine and fifty percent in January 2010. By late two thousand nine and early 2010, request had grown so dramatically that many dealerships were fighting to keep cars in stock.

Evolving retail formats

China’s auto retail market is responding to a host of pressures. Since the onset of the global financial crisis, OEMs and independent distributors have been integrating their distribution networks to achieve economies of scale and greater financial viability. Fresh retail formats that have emerged within the past several years demonstrate that retailers are becoming larger to adapt to market pressures and increasingly sophisticated consumer tastes.

Very first established in China in one thousand nine hundred ninety eight and considered the most advanced marketing model, the 4S model offers sales, showrooms, services, and spare parts all under one roof. These types of stores are expensive to operate and require significant investment and start-up capital. This is largely because they suggest high-end facilities located in expensive districts in downtown areas where rental fees are high. Top brands typically maintain numerous 4S stores in a major market, compounding costs and forcing some stores into the crimson. A report published by the Cheung Kong School of Business early this year stated that almost eighty percent of 4S dealerships along China’s coast operate at a loss.

Despite its popularity among consumers, OEMs are not entirely pleased with the 4S model. Manufacturers note that high-quality, reliable dealers are hard to find and relationships with dealers are generally difficult to manage. This is because 4S dealers tend to be local businesses that cater to a localized market and do not necessarily share the same strategies and objectives as OEMs, which have broader or national interests. Nonetheless, the 4S format’s high popularity among Chinese customers, who choose the five-star treatment that these outlets suggest, will likely keep this model in operation.

In elementary terms, auto supermarkets are large dealerships. They come in many formats—1S, 2S, 3S, and 4S—and can be single- or multiple-brand dealerships. (1S outlets suggest only sales; 2S outlets suggest sales and services; and 3S outlets suggest sales, services, and spare parts.) The advantage of this structure is that it attracts more customers, who can find a diversity of brands and models at a single auto supermarket without having to travel to different dealerships. The disadvantage is that many foreign OEMs turn down to sell directly to auto supermarkets because they do not want their models displayed alongside rival brands. Consequently, auto supermarkets must often purchase their stock from OEM-authorized dealerships at a higher rate.

Several domestic OEMs are building their own auto supermarkets. For example, Jianghuai Automobile Co., Ltd. is building auto supermarkets at the county level to sell the utter range of its vehicles, from sedans to light trucks. Chang’an Automobile (Group) Co., Ltd. is also building auto supermarkets in second- and third-tier markets, where it will suggest autos produced by its wholly wielded entity, Chana International Corp., and by its joint ventures (JVs). Chang’an presently has seven supermarkets and plans to expand this number to one hundred by the end of 2010.

Media reports indicate, however, that auto supermarkets that suggest low- and mid-range vehicles face serious cost pressures and are at risk of failure. Facing rising operating costs and long-term price decreases (despite short-term price increases), low- and mid-range automakers might fight to afford distribution through supermarkets and may need to identify more cost-effective distribution channels.

Wielded by a single distribution company, mega-dealerships are a network of OEM-authorized auto dealerships that sell numerous brands. Mega-dealerships are performing well. According to Beijing Business Today, about twenty five percent, or Two,472 authorized dealers, belonged to mega-dealerships and accounted for forty four percent of China’s total auto sales in 2008. Prominent mega-dealerships in China include Guanghui, Pangda, Yongda, and Zhongsheng.

Auto trade markets are essentially clusters of separately wielded 3S and 4S car dealerships that suggest multi-brand auto sales and services. They are comprised of numerous dealers, vendors, and traders of thousands of vehicles. The advantages of auto trade markets are their economies of scale, one-stop shopping for maintenance, and spare parts supply—which permit dealers to reduce operating costs and lower prices for consumers. Used-car buyers also favor auto trade markets, which permit car owners to trade in their old cars and receive a discount on fresh vehicle purchases. China’s largest auto trade market, North Asia Car Market in Beijing, has over one hundred sixty dealers.

Some large auto companies are beginning to form massive regional auto parks that include clusters of 4S outlets, repair and service outlets, refinishing services for used cars, and outsourcing centers that provide insurance and auto financing services. Chongqing presently has one, and such regional parks are expected to grow in number.

Auto finance takes off

Auto finance in China has grown significantly in latest years. According to the People’s Bank of China, auto loans totaled ¥158.Trio billion ($27.1 billion) by the end of 2008—of which ¥31.8 billion ($Four.7 billion) came from auto finance companies. To regulate this market, the China Banking Regulatory Commission (CBRC) issued the Administrative Measures on Auto Finance Companies and related implementing rules in two thousand three and revised and combined the two regulations in 2008. The measures define auto finance companies as non-bank financial entities approved by CBRC to suggest financial services for auto purchasers and dealers in China. Major investors of these companies must be non-bank financial entities or enterprises that produce or sell motor vehicles (see China’s Ten Automotive Finance Companies).

To support the auto finance industry, CBRC in August two thousand nine began permitting auto finance enterprises to issue public bonds to raise capital, with the hope that the companies will expand their portfolios of financial products to attract consumers. According to PRC media reports, the number of Chinese consumers that take out loans will increase 40-50 percent in the next decade, and total auto finance loans will reach more than ¥550 billion ($80.Five billion) by 2025.

China’s used-car market grows—supported by government policies

As fresh auto sales have grown, so have sales of used cars. China Automobile Dealer Association statistics showcase that the trade volume of used vehicles has soared from 250,000 in two thousand to more than Trio.Trio million in 2009. To take advantage of this growing market, major auto manufacturers have begun to suggest used-car services for their branded autos at their certified dealerships in China. Most of the service packages cover used-car quality accreditation and assessment, certification, replacement, quality assure, and trading and transactions. Mega-dealerships also play an active role in the used-car market. For example, Shanghai Yongda Auto Management Service Co., Ltd. commenced its used-car business in two thousand two and now wields a trading market, evaluation enterprise, agent, and two operating companies to provide a utter range of services.

Apart from consumer request, several government policies and regulations have boosted the used-car market.

• The Administrative Measures on Used Cars, released in 2005, are the primary regulation governing the used-car market. The measures introduced a competition mechanism that permits OEM-authorized auto dealerships to run used-car businesses. The measures also regulate different parties—including trading markets, agents, and operators—and strengthen the administration of organizations that appraise the value of used cars.
• The Notice on Upgrading the Used-Car Trade Market was announced by the ministries of Commerce and Finance in July 2009. The circular aimed to improve the used-car industry. Originally, the PRC government selected ten provinces and municipalities—Beijing, Hubei, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Tianjin, and Zhejiang—to receive fiscal funding to conduct pilot programs that focused on the management and information on used-car transactions to improve transparency.
• The Auto Industry Revitalization Plan, released in two thousand nine by the State Council, calls for the establishment of a national appraisal and evaluation standards system and a improvised ownership registration system. The plan also calls for adjusting the value-added tax rate on used-car transactions and encourages dealerships to participate in vehicle replacement programs.

Challenges and opportunities ahead

China’s auto market is unlike any other in the world. In 2007, it overtook Japan to become the world’s second-largest car market and, in 2009, surpassed the United States as the world’s largest. China is selling cars swifter than any other country in the world, but it is doing so with relatively immature retail formats, OEM-to-dealer relationships, consumer tastes, and financing options.

China’s auto market is maturing, however. Retailers are consolidating and improving services with an eye toward retaining customers. Numerous retail formats have emerged in latest years, such as the mega-dealership and auto supermarket, suggesting consumers in different market segments a range of options for vehicle purchases. In addition, more dealerships are suggesting auto financing plans, permitting consumers to rely less on bank loans and individual savings to purchase vehicles. Used cars are also gaining traction among Chinese consumers. As these market trends develop, so will opportunities for retailers, OEMs, and consumers in China’s auto market.

The major challenge ahead for auto retailers is the capability to retain customers. Consumers are paying more attention to brand, pic, and style, and some buyers turn to a certain car solely based on its picture and branding. This is particularly true for second- and third-time buyers. Foreign retailers must therefore understand and cater to local consumer preferences to ensure long-term success in China’s auto market.

In addition to branding, retailers must also concentrate on the overall practice of purchasing a car. Chinese consumers tend to love 4S or similar types of dealerships that suggest the entire package: fancy showrooms, attentive sales personnel, after-sales service, and spare parts. Dealerships that make the process of buying a car an pleasurable one will attract more customers in China.

Foreign Auto Companies Expand Sales Networks in 2010

China’s promising auto market has foreign original equipment manufacturers (OEMs) looking to expand their sales network in two thousand ten and beyond. According to media reports, several major foreign brands have announced plans to open fresh dealerships across China, particularly in second- and third-tier markets.

• Ford Motor Co. announced that it will significantly expand its network of dealerships in two thousand ten but did not indicate by how much. At the end of 2009, Ford’s authorized dealer network included two hundred forty one full-service dealerships and more than three hundred fifty sales and service outlets across China.
• General Motors Corp. Chevrolet plans to open one hundred twenty more Chevrolet dealerships by the end of 2010.
• Honda Motor Corp. has announced that it will increase dealerships in China to seven hundred and boost annual output capacity by about twenty percent to 650,000 units by the end of this year.
• Mercedes-Benz GmbH will reportedly establish another one hundred thirty dealerships in China in 2010.
• Nissan Motor Co., Ltd. has said that it will extend its network of dealerships from the current three hundred sixty seven to four hundred eight by the end of the year.
• Saab Automobile AB plans to dual its number of dealerships to thirty two by the end of 2010.
• Toyota Motor Corp. plans to add another one hundred dealerships in China this year to bring its nationwide total to 650.
• Volkswagen AG plans to expand its distribution network in China from 1,000 to Two,000 dealerships by 2018.

China’s Ten Automotive Finance Companies

China has ten auto finance companies, nine of which are foreign-invested. All ten companies are affiliated with auto manufacturers and provide credit to individual consumers for purchases and inventory financing to dealers for their branded autos.

1. Chery Huishang Bank Auto Finance Co., Ltd., established in two thousand nine as a joint venture (JV) inbetween Chery Automobile Co., Ltd. (80 percent) and Huishang Bank Co., Ltd. (20 percent), is China’s only domestic auto finance company. The company provides loans to dealers and auto buyers and, according to a two thousand nine interview, planned to provide loans for car buyers in ten Chinese cities by the end of 2009.
2. DaimlerChrysler Auto Finance (China) Ltd. entered China in two thousand five as a wholly possessed subsidiary of DaimlerChrysler AG with ¥500 million ($73.Two million) registered capital. In 2009, DaimlerChrysler merged with Fiat SpA, which now controls DaimlerChrysler Auto Finance.
3. Dongfeng Nissan Auto Finance Co., Ltd., established in 2007, is jointly possessed by Nissan Motor Co., Ltd. (65 percent) and Dongfeng Motor Group Co., Ltd. (35 percent). The company provides financing for customers of—and inventory financing for dealers of—new Nissan and Infiniti cars. It has ¥500 million in registered capital.
4. Dongfeng Peugeot Citroen Auto Finance (China) Ltd. was established in two thousand six with a total investment of ¥500 million. It is the sixth auto financing company in China and the very first to be jointly established with the Bank of China Group Insurance Co. Ltd. The company distributes loans through local Bank of China branches to individual consumers and auto dealers.
5. Fiat Automotive Finance Co., Ltd. provides retail and dealer financing services for all vehicle brands produced and sold by the Fiat Group in China, including Case Machinery, Chongqing Hongyan Strenuous Truck, Chrysler, Fiat, and Nanjing Naveco. Its services for dealers include loans for inventory and for construction of 4S stores. By 2009, the company had suggested loans to 1,500 individual customers and one hundred eighteen dealers and expects request for its services to increase 60-65 percent in 2010.
6. Ford Automotive Finance (China) Ltd. is a wholly possessed subsidiary of Ford Motor Credit Co., which established its representative office in Beijing in one thousand nine hundred ninety six and was licensed to provide financial services in China in 2005, with an initial investment of $60 million. The company provides auto loans and installment payment plans to individual consumers.
7. GMAC-SAIC Automotive Finance Co., Ltd. is a JV established in August two thousand four inbetween GMAC Inc. and Shanghai Automotive Group Finance Co. Ltd., a subsidiary of Shanghai Automotive Industry Corp. Group (SAIC). The company offers financial services for individuals, business groups, and dealers.
8. Toyota Motor Finance (China) Co., Ltd. was established in two thousand five in Beijing as a wholly foreign-owned subsidiary of Toyota Motor (China) Investment Co., Ltd. The company offers services such as auto loans for fresh cars and insurance products for Toyota and Lexus vehicles.
9. Volkswagen Finance (China) Co. Ltd. is a wholly foreign-owned subsidiary of Volkswagen Financial Services AG that was founded in September two thousand four with registered capital of ¥500 million. The company offers loans for auto purchases, leasing, and insurance products.
10. Volvo Auto Finance (China) Ltd. was founded in two thousand six with about ¥500 million total registered capital. The company is the very first auto finance enterprise to provide off the hook financial services for its branded commercial vehicles, including trucks and construction equipment.

[author] Kyle Sullivan is manager of Business Advisory Services at the US-China Business Council’s Shanghai office. [/author]

China – s Auto Retail Market – China Business Review

China’s Auto Retail Market

Spurred by growth and evolving consumer expectations, car dealerships and finance companies have revamped their offerings. by Kyle Sullivan China has emerged from the global recession as the world’s largest auto market, with a total sales volume that eclipses the United States by a substantial sum. In 2009, China’s fresh vehicle sales reached 13.6 million units and total output hit 13.8 million units, up 46.Two percent and forty eight percent from 2008, respectively (see Tables one and Two). Tho’ sales in two thousand ten may not grow as rapid as they did in 2009, China’s auto market is poised for more outstanding growth. According to latest China Association of Automobile Manufacturers statistics, China sold 7.6 million cars and produced 7.Five million cars in the very first five months of 2010. The association forecasts that total sales and total output are each on track to exceed fifteen million units this year.

Original equipment manufacturers (OEMs) and auto distributors have grown significantly, along with the rest of China’s auto market. As a result, foreign and domestic OEMs are looking to expand their distribution networks across China, with a concentrate on second- and third-tier markets (see Foreign Auto Companies Expand Sales Networks in 2010). Auto sales in these markets have outpaced sales in first-tier cities in the last five years. According to latest data, inbetween January and September 2009, auto sales in second- and third-tier cities grew forty one percent and 51.Four percent, respectively, while sales in first-tier cities rose 33.6 percent.

Switching market landscape for auto dealerships

China’s auto market has switched significantly in the past two years. At the onset of the global financial crisis, many dealerships and suppliers faced low liquidity levels and high debt ratios. As a result, OEMs began to cut vehicle prices to encourage consumer request. Meantime, tighter access to credit and weaker OEM support led many analysts to believe that dealerships would fold in large numbers.

Auto sales in China rebounded after the PRC government in mid-2009 unveiled stimulus measures that suggested tax cracks, subsidies for new-vehicle purchases, and looser credit for companies and individuals. According to the China Association of Automobile Manufacturers, year-on-year vehicle sales grew 83.6 percent (reaching one million cars) in September two thousand nine and fifty percent in January 2010. By late two thousand nine and early 2010, request had grown so dramatically that many dealerships were fighting to keep cars in stock.

Evolving retail formats

China’s auto retail market is responding to a host of pressures. Since the onset of the global financial crisis, OEMs and independent distributors have been integrating their distribution networks to achieve economies of scale and greater financial viability. Fresh retail formats that have emerged within the past several years display that retailers are becoming larger to adapt to market pressures and increasingly sophisticated consumer tastes.

Very first established in China in one thousand nine hundred ninety eight and considered the most advanced marketing model, the 4S model offers sales, showrooms, services, and spare parts all under one roof. These types of stores are expensive to operate and require significant investment and start-up capital. This is largely because they suggest high-end facilities located in expensive districts in downtown areas where rental fees are high. Top brands typically maintain numerous 4S stores in a major market, compounding costs and forcing some stores into the crimson. A report published by the Cheung Kong School of Business early this year stated that almost eighty percent of 4S dealerships along China’s coast operate at a loss.

Despite its popularity among consumers, OEMs are not entirely pleased with the 4S model. Manufacturers note that high-quality, reliable dealers are hard to find and relationships with dealers are generally difficult to manage. This is because 4S dealers tend to be local businesses that cater to a localized market and do not necessarily share the same strategies and objectives as OEMs, which have broader or national interests. Nonetheless, the 4S format’s high popularity among Chinese customers, who choose the five-star treatment that these outlets suggest, will likely keep this model in operation.

In elementary terms, auto supermarkets are large dealerships. They come in many formats—1S, 2S, 3S, and 4S—and can be single- or multiple-brand dealerships. (1S outlets suggest only sales; 2S outlets suggest sales and services; and 3S outlets suggest sales, services, and spare parts.) The advantage of this structure is that it attracts more customers, who can find a multitude of brands and models at a single auto supermarket without having to travel to different dealerships. The disadvantage is that many foreign OEMs deny to sell directly to auto supermarkets because they do not want their models displayed alongside rival brands. Consequently, auto supermarkets must often purchase their stock from OEM-authorized dealerships at a higher rate.

Several domestic OEMs are building their own auto supermarkets. For example, Jianghuai Automobile Co., Ltd. is building auto supermarkets at the county level to sell the total range of its vehicles, from sedans to light trucks. Chang’an Automobile (Group) Co., Ltd. is also building auto supermarkets in second- and third-tier markets, where it will suggest autos produced by its wholly wielded entity, Chana International Corp., and by its joint ventures (JVs). Chang’an presently has seven supermarkets and plans to expand this number to one hundred by the end of 2010.

Media reports indicate, however, that auto supermarkets that suggest low- and mid-range vehicles face serious cost pressures and are at risk of failure. Facing rising operating costs and long-term price decreases (despite short-term price increases), low- and mid-range automakers might fight to afford distribution through supermarkets and may need to identify more cost-effective distribution channels.

Wielded by a single distribution company, mega-dealerships are a network of OEM-authorized auto dealerships that sell numerous brands. Mega-dealerships are performing well. According to Beijing Business Today, about twenty five percent, or Two,472 authorized dealers, belonged to mega-dealerships and accounted for forty four percent of China’s total auto sales in 2008. Prominent mega-dealerships in China include Guanghui, Pangda, Yongda, and Zhongsheng.

Auto trade markets are essentially clusters of separately wielded 3S and 4S car dealerships that suggest multi-brand auto sales and services. They are comprised of numerous dealers, vendors, and traders of thousands of vehicles. The advantages of auto trade markets are their economies of scale, one-stop shopping for maintenance, and spare parts supply—which permit dealers to reduce operating costs and lower prices for consumers. Used-car buyers also favor auto trade markets, which permit car owners to trade in their old cars and receive a discount on fresh vehicle purchases. China’s largest auto trade market, North Asia Car Market in Beijing, has over one hundred sixty dealers.

Some large auto companies are beginning to form massive regional auto parks that include clusters of 4S outlets, repair and service outlets, refinishing services for used cars, and outsourcing centers that provide insurance and auto financing services. Chongqing presently has one, and such regional parks are expected to grow in number.

Auto finance takes off

Auto finance in China has grown significantly in latest years. According to the People’s Bank of China, auto loans totaled ¥158.Trio billion ($27.1 billion) by the end of 2008—of which ¥31.8 billion ($Four.7 billion) came from auto finance companies. To regulate this market, the China Banking Regulatory Commission (CBRC) issued the Administrative Measures on Auto Finance Companies and related implementing rules in two thousand three and revised and combined the two regulations in 2008. The measures define auto finance companies as non-bank financial entities approved by CBRC to suggest financial services for auto purchasers and dealers in China. Major investors of these companies must be non-bank financial entities or enterprises that produce or sell motor vehicles (see China’s Ten Automotive Finance Companies).

To support the auto finance industry, CBRC in August two thousand nine began permitting auto finance enterprises to issue public bonds to raise capital, with the hope that the companies will expand their portfolios of financial products to attract consumers. According to PRC media reports, the number of Chinese consumers that take out loans will increase 40-50 percent in the next decade, and total auto finance loans will reach more than ¥550 billion ($80.Five billion) by 2025.

China’s used-car market grows—supported by government policies

As fresh auto sales have grown, so have sales of used cars. China Automobile Dealer Association statistics display that the trade volume of used vehicles has soared from 250,000 in two thousand to more than Trio.Three million in 2009. To take advantage of this growing market, major auto manufacturers have begun to suggest used-car services for their branded autos at their certified dealerships in China. Most of the service packages cover used-car quality accreditation and assessment, certification, replacement, quality ensure, and trading and transactions. Mega-dealerships also play an active role in the used-car market. For example, Shanghai Yongda Auto Management Service Co., Ltd. began its used-car business in two thousand two and now wields a trading market, evaluation enterprise, agent, and two operating companies to provide a utter range of services.

Apart from consumer request, several government policies and regulations have boosted the used-car market.

• The Administrative Measures on Used Cars, released in 2005, are the primary regulation governing the used-car market. The measures introduced a competition mechanism that permits OEM-authorized auto dealerships to run used-car businesses. The measures also regulate different parties—including trading markets, agents, and operators—and strengthen the administration of organizations that appraise the value of used cars.
• The Notice on Upgrading the Used-Car Trade Market was announced by the ministries of Commerce and Finance in July 2009. The circular aimed to improve the used-car industry. Primarily, the PRC government selected ten provinces and municipalities—Beijing, Hubei, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Tianjin, and Zhejiang—to receive fiscal funding to conduct pilot programs that focused on the management and information on used-car transactions to improve transparency.
• The Auto Industry Revitalization Plan, released in two thousand nine by the State Council, calls for the establishment of a national appraisal and evaluation standards system and a improvised ownership registration system. The plan also calls for adjusting the value-added tax rate on used-car transactions and encourages dealerships to participate in vehicle replacement programs.

Challenges and opportunities ahead

China’s auto market is unlike any other in the world. In 2007, it overtook Japan to become the world’s second-largest car market and, in 2009, surpassed the United States as the world’s largest. China is selling cars quicker than any other country in the world, but it is doing so with relatively immature retail formats, OEM-to-dealer relationships, consumer tastes, and financing options.

China’s auto market is maturing, however. Retailers are consolidating and improving services with an eye toward retaining customers. Numerous retail formats have emerged in latest years, such as the mega-dealership and auto supermarket, suggesting consumers in different market segments a range of options for vehicle purchases. In addition, more dealerships are suggesting auto financing plans, permitting consumers to rely less on bank loans and private savings to purchase vehicles. Used cars are also gaining traction among Chinese consumers. As these market trends develop, so will opportunities for retailers, OEMs, and consumers in China’s auto market.

The major challenge ahead for auto retailers is the capability to retain customers. Consumers are paying more attention to brand, picture, and style, and some buyers turn to a certain car solely based on its picture and branding. This is particularly true for second- and third-time buyers. Foreign retailers must therefore understand and cater to local consumer preferences to ensure long-term success in China’s auto market.

In addition to branding, retailers must also concentrate on the overall practice of purchasing a car. Chinese consumers tend to love 4S or similar types of dealerships that suggest the entire package: fancy showrooms, attentive sales personnel, after-sales service, and spare parts. Dealerships that make the process of buying a car an pleasant one will attract more customers in China.

Foreign Auto Companies Expand Sales Networks in 2010

China’s promising auto market has foreign original equipment manufacturers (OEMs) looking to expand their sales network in two thousand ten and beyond. According to media reports, several major foreign brands have announced plans to open fresh dealerships across China, particularly in second- and third-tier markets.

• Ford Motor Co. announced that it will significantly expand its network of dealerships in two thousand ten but did not indicate by how much. At the end of 2009, Ford’s authorized dealer network included two hundred forty one full-service dealerships and more than three hundred fifty sales and service outlets across China.
• General Motors Corp. Chevrolet plans to open one hundred twenty more Chevrolet dealerships by the end of 2010.
• Honda Motor Corp. has announced that it will increase dealerships in China to seven hundred and boost annual output capacity by about twenty percent to 650,000 units by the end of this year.
• Mercedes-Benz GmbH will reportedly establish another one hundred thirty dealerships in China in 2010.
• Nissan Motor Co., Ltd. has said that it will extend its network of dealerships from the current three hundred sixty seven to four hundred eight by the end of the year.
• Saab Automobile AB plans to dual its number of dealerships to thirty two by the end of 2010.
• Toyota Motor Corp. plans to add another one hundred dealerships in China this year to bring its nationwide total to 650.
• Volkswagen AG plans to expand its distribution network in China from 1,000 to Two,000 dealerships by 2018.

China’s Ten Automotive Finance Companies

China has ten auto finance companies, nine of which are foreign-invested. All ten companies are affiliated with auto manufacturers and provide credit to individual consumers for purchases and inventory financing to dealers for their branded autos.

1. Chery Huishang Bank Auto Finance Co., Ltd., established in two thousand nine as a joint venture (JV) inbetween Chery Automobile Co., Ltd. (80 percent) and Huishang Bank Co., Ltd. (20 percent), is China’s only domestic auto finance company. The company provides loans to dealers and auto buyers and, according to a two thousand nine interview, planned to provide loans for car buyers in ten Chinese cities by the end of 2009.
2. DaimlerChrysler Auto Finance (China) Ltd. entered China in two thousand five as a wholly wielded subsidiary of DaimlerChrysler AG with ¥500 million ($73.Two million) registered capital. In 2009, DaimlerChrysler merged with Fiat SpA, which now controls DaimlerChrysler Auto Finance.
3. Dongfeng Nissan Auto Finance Co., Ltd., established in 2007, is jointly possessed by Nissan Motor Co., Ltd. (65 percent) and Dongfeng Motor Group Co., Ltd. (35 percent). The company provides financing for customers of—and inventory financing for dealers of—new Nissan and Infiniti cars. It has ¥500 million in registered capital.
4. Dongfeng Peugeot Citroen Auto Finance (China) Ltd. was established in two thousand six with a total investment of ¥500 million. It is the sixth auto financing company in China and the very first to be jointly established with the Bank of China Group Insurance Co. Ltd. The company distributes loans through local Bank of China branches to individual consumers and auto dealers.
5. Fiat Automotive Finance Co., Ltd. provides retail and dealer financing services for all vehicle brands produced and sold by the Fiat Group in China, including Case Machinery, Chongqing Hongyan Strong Truck, Chrysler, Fiat, and Nanjing Naveco. Its services for dealers include loans for inventory and for construction of 4S stores. By 2009, the company had suggested loans to 1,500 individual customers and one hundred eighteen dealers and expects request for its services to increase 60-65 percent in 2010.
6. Ford Automotive Finance (China) Ltd. is a wholly possessed subsidiary of Ford Motor Credit Co., which established its representative office in Beijing in one thousand nine hundred ninety six and was licensed to provide financial services in China in 2005, with an initial investment of $60 million. The company provides auto loans and installment payment plans to individual consumers.
7. GMAC-SAIC Automotive Finance Co., Ltd. is a JV established in August two thousand four inbetween GMAC Inc. and Shanghai Automotive Group Finance Co. Ltd., a subsidiary of Shanghai Automotive Industry Corp. Group (SAIC). The company offers financial services for individuals, business groups, and dealers.
8. Toyota Motor Finance (China) Co., Ltd. was established in two thousand five in Beijing as a wholly foreign-owned subsidiary of Toyota Motor (China) Investment Co., Ltd. The company offers services such as auto loans for fresh cars and insurance products for Toyota and Lexus vehicles.
9. Volkswagen Finance (China) Co. Ltd. is a wholly foreign-owned subsidiary of Volkswagen Financial Services AG that was founded in September two thousand four with registered capital of ¥500 million. The company offers loans for auto purchases, leasing, and insurance products.
10. Volvo Auto Finance (China) Ltd. was founded in two thousand six with about ¥500 million total registered capital. The company is the very first auto finance enterprise to provide special financial services for its branded commercial vehicles, including trucks and construction equipment.

[author] Kyle Sullivan is manager of Business Advisory Services at the US-China Business Council’s Shanghai office. [/author]

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