solidiance Comparison of Automotive Aftermarket Industry Consolidation: USA vs China

Transcription

1 solidiance Comparison of Automotive Aftermarket Industry Consolidation: USA vs China 1

2 INTRODUCTION China is rapidly closing the gap to become the largest automotive aftermarket in the world. Its light passenger vehicle parc (or VIO) reached almost 140 million units by end 2015 and continues to grow at double digit rates to 237 million units on the road by The market for service on these vehicles is growing even faster as the average vehicle age goes from <5 years today to over 7 years by the end of the period. As vehicles age, a spectrum of new service and parts replacement will be needed. When vehicles reach the 150,000 to 200,000 kilometer mark, additional repairs for items such as shocks, water and fuel pumps, starters, alternators, exhaust systems, transmissions, etc. will come into the picture. These added repairs plus the continued growth of the parc due to new vehicle sales will support growth in the aftermarket of an average 14% per year to It is only a matter of time until China surpasses the U.S. market as the largest in the world. 2

3 U.S. Market Comparisons US Auto Aftermarket Million Vehicles on USA Roads 11.5 Average Age 11,244 Average Miles Driven China Auto Aftermarket Million Vehicles on China Roads ~5 Average Age 11,185 Average Miles Driven New PC Sales (mln) ,665 ~79,000 ~4 6-7 $257 20% ~27% 3-4% Light Vehicle Parc (mln) No. of Car Dealers No. of Garages Major Program Groups National Retail Chains Auto Care Sales ($Bn) Share DIY OES vs IAM Auto Care Growth Rate ~24,000 ~460, ~$100 Neg % ~14% Source: Solidiance; Auto Care Association 3

4 A major challenge facing China s aftermarket is its ability to efficiently support this high level of growth. The current distribution structure in China is highly fragmented at all levels of the value chain. The OES channel serving the car makers 4S shops remains the dominant channel at an estimated 60% of the parts and service aftermarket value. There are over 23,500 authorized 4S shops in China which continue to expand into central and west China as those new vehicle markets grow. Further, as new car sales slow, parts and repair revenue will become more important for these car dealers. The supply chain for the IAM channel in China can be characterized by its multi-layered structure, primarily using parts cities as the platform for supplying parts to garages. Today, garages, which number over 460,000 outlets, have to source from various players at different levels (OES, retailers, 1st/2nd tier distributors, suppliers, import agents) to get the parts they need. The parts cities, of which there are an estimated 900 across China, have become a bottleneck to efficient distribution due to their fragmented structure and low technology orientation. PARTS SUPPLIERS DISTRIBUTION CHANNELS SERVICE CENTERS Over 10,000 suppliers Multinationals and locals Good, better, best, plus fakes ~500,000 players No national structures OES dominates channel Parts cities are key hubs E-commerce evolving ~460,000 registered repair shops ~24,000 car dealers Few independent chains 4

5 DISTRIBUTORS GENERAL CHARACTERISTICS TENURE Many started in the year ~2000 OWNERSHIP CHANNEL REVENUE SELLING Typically private Most distributors go through multiple channels lots of wholesaling USD 5 million is a good sized distributor. Very few are over USD 100 million Larger, more established players sell tires, lubricants, batteries STORE DEVELOPMENT Becoming more active but most have only stores GEOGRAPHIC COVERAGE Local, regional and aspiring national IT CAPABILITY Very small IT Team. If any, will use local ERP supplier E-COMMERCE Many active to setup their e-commerce sites (both in-house and 3rd party) In general, most distributors are relatively small scale (< USD 5-10 million) and are regionally, even locally, oriented. A larger distributor would have USD 50 million in revenue versus over USD 250 million for a large distributor in the US. Some of the leading local players, like Carzone, ZC Parts and Jaipei, are actively expanding their two-step model with their While the distribution system is working it is severely stressed and needs to evolve to effectively support the market s growth. own stores. There are no big retailers like Advance, AutoZone or NAPA that exist in the USA. 5

6 In many ways, China s aftermarket profile looks a lot like the US market in the 1970s, dominated by specialist distributors with limited lines and geographic coverage. As in China today, there was no complete parts catalog 25% wrong part selection was common. Program Groups (PGs) evolved in the early 1970s in the U.S. as a first step to consolidation at the distribution level, initially as just buying groups but then to full service distributors. Retail groups such as Genuine Parts/NAPA, Autozone and O Reillys also started to come together. The market naturally evolved from specialist to generalist broad-line distributors. Today, except for hard parts and tools, specialist distributors no longer exist LIGHT PASSENGER PARC: USA VS CHINA China Today USA CHINA 6

7 Consolidation caused significant change in the industry. From the 1980s to today, the market structure has flip flopped, from ~32,000 distributors and ~2,000 retailers to ~12,000 distributors and 25,000 retailers, with an emphasis on controlling, if not owning the jobber. At the same time, the market has moved and continues to move from 3-step to 2-step. Today it is easy look up any part for any model. On-line sales are forecasted to grow from 6% to 20% of total parts sales over a 10- year period. Importantly, the power has shifted from parts suppliers to distribution/retail as consolidation occurred. The main forces behind this consolidation were group purchasing by distributors banding together and technology which supported more efficient parts sourcing and delivery. These were supported by sufficient capital and legislation that supported a more level playing field for the independent aftermarket. Photo by: Larry Chen, 7

8 How Will China s Market Evolve? It must consolidate to thrive and this consolidation needs to start at the distribution level. The typical Chinese parts distributor is faced with many challenges that will be difficult to overcome without help. We believe the same forces that played in the U.S. market, group purchasing and technology, need to drive consolidation. DISTRIBUTOR CHALLENGES Chinese distributors have many challenges to address as they attempt to serve the IAM market. Lack of scale No leverage, insufficient revenue base to support resource needs Low technology Poor processes, systems with limited tools available at affordable cost Parts selection Challenging to get the right part at the right time for the right price Professional management Significant need for training, marketing skills, brand development techniques Margin stress Thin margins on branded parts. Gross margins have dropped from >30% to 15-20% in the last 5 years Financial strength Limited investment resources for expansion, compounded by difficult cash flows 8

9 But who will bring these forces into play and what form they will take is still subject to much debate We see several business models evolving in the Chinese market: Business Model Example Advantages Challenges Regional distributor platforms Hangzhou LianPeiTong Easy to set up, flexible Simple sharing, e.g. DC Limited cooperation Unstable long-term Single by-makes distributor group DeZhiFu, HuaNuoWei Easy to set up, flexible Good product supply advantage Unstable long-term Mainly wholesaling, limited support National retail chain stores Carzone Proven international model True consolidation Long-term stability Acquisition model, volume driven Standardization is challenge Integration challenges Independent E-commerce platforms AutoZi, Tqmall Potential efficiencies of e-commerce focus on transaction volume Top-down setup using allowance to stimulate transaction volume Vertical HQ + open platform, high operational cost Price driven, no real customer service Participation downstream by parts companies Federal Mogul Control of brand Vertical integration Disruption to existing distribution Scalability Full service Program Groups CAAPA Scalable and efficient use of resources Profit driven from bottom up Common IT back-end system, customized e-shop for different members Requires close and intimate cooperation Lack of trust a barrier 9

10 About Us What We Do Soldiance is a corporate strategy consulting firm with focus on Asia, from Dubai to Shanghai. We advise CEOs on makeor-break deals, define new business models and accelerate Asia growth. Through our 12 offices across Asia, we provide our clients with a better understanding of intrinsic regional issues. To learn more about how Solidiance has helped many Fortune 500 and Asian Conglomerates to succeed in Asia, please visit: What We Focus On Our industry experience is centered on the automotive industry, with expertise in advising clients across the passenger cars, commercial vehicles, automotive aftermarket, as well as automotive and commercial lubricants segments. Our Asiawide market entry and growth strategy services provide the required insights and the necessary roadmap to capture a profitable market share in the region. Our Footprint Solidiance has offices in China, India, Indonesia, Lebanon, Malaysia, Myanmar, Philippines, Singapore, Thailand, United Arab Emirates, and Vietnam. We also have a client liaison office in Berlin, Germany. We are fast expanding and always on the lookout for exceptional people. Connect With Us Solidiance 10

11 Our Offices Website: Plan on entering the China market? We would like to hear from you. Reach us at: China - Shanghai Hong Kong Plaza, Suite 2101 No 283 Middle Huaihai Road, Shanghai China - Beijing Sanlitun SOHO, Suite th Floor, Building 2 8 Gongti North Road, Beijing India IBC Tower, Suite M-38/1 3rd Floor, Middle Circle, Connaught Place, New Delhi, Indonesia BRI Agro Building 6th Floor, Unit 612 Jl. Mampang Prapatan Raya No. 139A, Jakarta Lebanon Markaziah Building, Suite 517 5th Floor, Beirut Central District Malaysia Binjai 8 Premium SOHO Suite 23A-02, 8 Lorong Binjai Kuala Lumpur Myanmar Shwe Gon Plaza 4th Floor, Kabar Aye Pagoda Road Bahan Township, Yangon Philippines Tycoon Centre Pearl Drive, Unit 2105 Ortigas Centre Pasig City, Metro Manila Singapore High Street Centre, Suite North Bridge Road Singapore Thailand Interchange Tower 21, # st Floor, 399 Sukhumvit Road North Klongtoey, Wattana Bangkok UAE TwoFour54 Building 4, Suite 402D Sheikh Zayed Road Abu Dhabi, United Arab Emirates PO Box (0) Vietnam Satra Dong Khoi Building Suite 704, 58 Dong Khoi street District 1, Ho Chi Minh City