Growth of Chinese light vehicle market to drop 15%

08 October 2015

The average 19.3% annual growth of the Chinese light vehicle market, clocked since 2005 to 2014, will fall to a mere 4.1% annual growth until 2018, research by AlixPartners shows. The slowdown will come to affect dealerships as well as OEMs. One way to improve margins is for dealerships to capture a share of parts and services market, the report finds

Chinese light vehicle market
The Chinese demand for light vehicle has in recent years provided a massive boost to car manufacturers globally. Since 2005, the greater China area has enjoyed sustained light vehicle sales growth of 19.3% annually, while the rest of the world has seen a mere 0.7% growth in the same period.

Chinese market slowdown

The sharp double digit upward growth trajectory is about to come to an end however, research by AlixPartners finds. According to the firm’s ‘China Automotive Study’, annual growth will fall to 4.1% in China, while global growth increases slightly to 2.3%, between 2014 and 2018. In the even longer term, between 2018 and 2023, growth is expected to slow further in China to 2.9% annually, closing on the rest of the world’s 2.3% annual growth.

The slowing rate of Chinese light vehicle sales is further complicated by overcapacity. According to AlixPartners’ analysis, slack in capacity below 85% shows a likelihood of an unprofitable operation for OEMs (original equipment manufacturers). Across the world, capacity remains high for major players: Japan’s Honda is at 95% capacity and Toyota at 87%. In Europe, plant utilisation rate is also high: BMW is at 96% capacity and VW at 92%. The American market provides a mixed picture, with Ford at 72% and GM at 95%. The big Chinese OEMs are all running considerably under capacity: Chery at 52%, FAW at 50% and SAIC at 61%.

Chinese overcapacity

Dealership consolidation
Besides decreases in sales for OEMs, the report also finds that the Chinese Auto dealerships landscape is changing. Since 2011, the share of the total market for the top 100 dealerships in China increased from 22.7% to 25.1%. Revenue since 2011 has also increased significantly for the top 100 dealers, with an average 13% yearly increase from ¥851 billion to ¥1232 billion in 2014. The reason for the revenue growth, the research finds, comes primarily from the market maturing, leading to the consolidation of dealer networks across the sector.

Profitability slowdown
Although revenue has been growing, profitability has been trending downwards for many dealer groups. Gross margins for the top 100 dropped from a high in 2012 of 8.2% to 6.1% in 2014. Net profitability has been relatively stable at 1.5% this year, after a recent high of 2.3% in 2011. Operating profitability hovers for the most part at an average of 1.5%, with outliers Baoxin pulling in a healthy 5.4% while YXQC drops below the line at -1.6%.

Chinese dealer consolidation

The decreasing growth in demand, shown by a decrease in OEM sales, will mean, according to the analysis, that dealers' inventories will increase – placing further pressure on profitability. Lian Hoon Lim, Managing Director of AlixPartners, explains: “Unless a strong turnaround is logged in the second half of the year, 2015 is likely to be a downbeat year for automakers and dealers since the market recovered from the 2008 global recession. Inventories are increasing, sales slowing and OEMs are starting to reconsider their production strategy – all signs of increasing competition and a much tougher environment.”

Capturing parts and services
Whereas sales in cars is expected to remain sluggish, there is one area in which dealers have seen increases in profitability: parts & services. The profitability of this segment of the dealerships’ offering has increased from 28% in 2011 to 44% in 2014 as car sales margins have been squeezed. The report highlights that the China passenger vehicle services & parts market is expected to grow at a 14% annually to 2018.

Revenue from parts and services dominates

However, dealerships will need to carefully manage their offerings to customers to take advantage of their needs. As warranties expire customers are likely to move from dealers to specialised services. The effect is that the total market share of dealerships in the parts and services market is expected to drop from today’s 49% to 38% as the total market hits ¥1 trillion.

Stephen Maurer, Managing Director of AlixPartners, concludes:  “As the total number of vehicles in the car market keeps growing, it becomes increasingly important for dealers to attract repeat business to their service departments. To restore growth and profitability, auto dealers should consider several strategic actions to adapt to changes in the market, including improving the customer experience, strengthening aftermarket service, exploring opportunities to expand auto financing and developing capabilities in used car sales.”


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Four ways digitalisation is transforming car brands and dealers

16 April 2019

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”