The auto stock market in China will soon become the largest market in the world, as its rapid and large growth attracts an increasing number of companies and capital. Deloitte Automotive Sector Team published Digitalization, Impact the Future: Aftermarket Industry Transformation 2020 White Paper of China Aftermarket based on an all-round analysis covering policy, capital, and customers. This paper shared Deloitte’s insight and judgment about the future trend for the auto aftermarket industry.
Market: This golden opportunity to transform into high-quality development, as the largest single market in the world has just grown up
The development of the auto maintenance market in China has been shaped by the economy, industrial foundation, and social characteristics of China collectively. These include a large market size and rapid growth, prominent social benefits, and low industry maturity.
China’s auto market will continue to grow rapidly in the coming ten years. The maintenance market is expected to grow at an acceptable rate and reach 1,7 trillion in 2025.
There was no policy in the previous stage. Recent policy changes have been frequent, but the effectiveness of their implementation needs to be improved. A review of detailed guidelines on the auto aftermarket over the last five years shows that regulation is mainly focused on three ideas and directions. Openness, Transparency, and Standardization. The capital end of the auto aftermarket is still capital-focused. Industry reform has been boosted over the last three years by capital. In the industry, there are more than 50 financings exceeding RMB 100m. Capital investment is also starting to become rational.
Digital and customer-oriented are the macro opportunities that China’s aftermarket auto maintenance industry embraces to meet the challenges of the future. Deloitte is of the opinion that digital technology development has reached a point where it can support transformation. Digital technology is expected to improve the traditional pain points with great efficiency, scale, and high quality. The key to success for future industry changes lies in those who are able to use digital technology.
Consumer: Online retailing is the best way to satisfy consumers who are looking for “quality assurance” and “convenience, comfort, and convenience in one place.”
Chinese consumers have a few basic characteristics: they are not very knowledgeable about cars, their attitude to auto consumption is sensitive, and they prefer convenient services.
A busy lifestyle leads to higher expectations from consumers for maintenance services, such as “quality assurance,” “convenience,” “comfortable experience,” and “cost efficiency.” Chinese consumers in the auto-maintenance market are more open to digitalization, as they want to receive better quality information and a better service experience. Digital touchpoints offer differentiated opportunities to the highly competitive aftermarket for autos.
Figure: Consumer Focus in the Auto Aftermarket
Source: Deloitte researched and sorted the data
China is the largest online retail market in the world, and Chinese consumers are the leaders of the world when it comes to online shopping. The auto aftermarket is also showing a clear trend towards online sales. Deloitte, based on incomplete statistics and interviews with industry experts, estimated that, through modeling, the domestic auto maintenance rate online would increase by over 22 percent from 2019 to 2025.
The average age of online users tends to be younger, and the number of female users increases rapidly. The middle class is dominant. Users who have been driving for more than four years are concerned with cost-performance ratios, which makes them the majority of online users. Deloitte estimates that tire sales are the leading auto part category, and they continue to grow. Engine oil, battery, and tire are the maintenance consumables with the highest rates of online retailing. These rates range from 5% to 10 percent in general. The penetration rate for online retailing is expected to increase in the future. As the competition rises, consumers begin to take initiative. This forces the industry to upgrade its industrial infrastructure based on consumer demands.
3. Industry Development: Digitalization transforms value chain integration, from capital integration into dataflow integration
According to the DIFM model, the original factory demand still dominates the market in terms of the terminal consumption output value. However, in a long time, this share will likely continue to be dominated by non-original demand for factory maintenance, which is primarily caused by a decline in network size, a higher service cost, and an inconvenient geographical location.
Figure: The status quo in China’s auto repair market
Value chain integration is improved, which promotes the improvement of concentration in industries. The S2c Model is currently taking shape. It will be the best model for supply chain efficiency, production, and sales synergy and achieve deep optimization from all supply chain links and the lowest spare parts costs. The M2B2b2c model and the S2c model have already been adopted as mainstream models of transformation.
Figure: Comparison between traditional model M2B2b2c and S2c
Source: Deloitte Research
Deloitte has observed four main models, as shown in the above figure:
Model 2: M2B2b2c Value Chain Model. The traditional multi-level distribution model is characterized by the presence of the 4S original factory network system, which the conventional dealer groups represent, and the maintenance chain brands, which are represented by the conventional third-party automotive service chains, OEMs, and traditional parts manufacturers.
Model 2: S2c value chain model. Model 2: S2c value-chain model. The S2c value-chain model is currently dominated primarily by internet-based enterprises. The general development path for this model is to begin with the ecommerce platform and integrate the value chain both upstream and downstream at the same time. Deloitte, therefore, believes that the S2c vertical integration model offers many advantages over the traditional vertical model. It also provides a guarantee of more differentiated value compared to both the conventional model and M2B2B2c model in terms of customer operation, the cost of spare parts, and the operation quality of the auto service network. This model has a great deal of development potential.
