The scale of China's automotive aftermarket is expected to exceed one trillion, and standardized development requires transformation and innovation.

According to statistics from the China Association of Automobile Manufacturers, national automobile sales exceeded 28 million units in 2016. The Ministry of Public Security's Traffic Management Bureau shows that by the end of March 2017, the number of motor vehicles in the country first surpassed 300 million, with cars reaching 200 million. The transportation department predicts that the annual growth rate of China's automotive aftermarket will exceed 30%, and the market size is expected to exceed one trillion yuan after 2018.

At the same time, China's automotive aftermarket has not yet reached a level that matches the number of motor vehicles in terms of service level and quality. Most enterprises are 'small, scattered, and chaotic', with high parts-to-whole ratios and prominent issues of information asymmetry. With the arrival of the 'Internet+' era, how to achieve standardized and orderly development of the automotive aftermarket through reform and innovation has become a focus of industry attention.

The automotive aftermarket has long been 'small, scattered, and chaotic'.

China's automotive industry has gradually grown into a pillar of the national economy, but its supporting automotive aftermarket has lagged behind: on one side is a powerful 4S dealership system; on the other side are small, scattered roadside shops. Consumers can only maintain their interests in the cracks between these two.

Relatively speaking, 4S dealerships provide more assurance in terms of technology and parts, but their maintenance prices are high, leading many car owners to stop choosing 4S dealerships for maintenance after their vehicles are out of warranty. Currently, the customer loss rate for vehicles out of warranty at 4S dealerships is continuously rising, with most customers flowing to independent repair shops and chain repair enterprises. However, many independent repair shops and roadside stores offer much lower prices for parts and labor compared to 4S dealerships, but consumers often find it hard to trust their parts and technology.

Statistics show that there are currently over 400,000 auto repair shops in China, most of which operate as husband-and-wife teams, small workshops, or roadside stalls. On average, each repair shop has fewer than 400 clients, and their business model is mostly a 'one-off' sale, lacking stable customers and vehicle sources.

The small, scattered, and chaotic situation in China's automotive aftermarket not only puzzles consumers but also causes many foreign automotive aftermarket companies to fail in the Chinese market.

China's automotive aftermarket was recognized early on by some international giants. Companies such as Jiffy Lube from the United States, Autobacs from Japan, Prilink from South Africa, and Hankook Tire have all entered the Chinese market. However, for various reasons, these companies chose to close or even exit the Chinese market after operating for a period.

For example, Honeywell, a Fortune Global 500 company from the United States, established its first three direct-operated automotive maintenance centers in Shanghai in 2007, covering comprehensive services such as beauty care, maintenance, decoration, and quick repairs. However, by September 2008, Honeywell began closing its maintenance centers in China one after another.

Analyzing the reasons for this situation reveals that apart from policy factors leading to an overly strong influence of the 4S dealership system, the small, scattered, and chaotic state of China's automotive aftermarket has resulted in vicious price competition and dishonest business practices that make it difficult for international brands replicating foreign experiences and models to adapt.

Parts-to-whole ratio: A hurdle that cannot be crossed.

The parts-to-whole ratio refers to the ratio of the prices of all automobile parts to the price of the whole vehicle. Its level directly determines the cost of replacing parts during later maintenance and overall maintenance costs. A high parts-to-whole ratio has always been a major ailment in the automotive aftermarket.

Recently, the China Insurance Industry Association (CIIA) jointly released data on automotive parts-to-whole ratios with the China Automotive Maintenance Industry Association for the seventh time. The data shows that among 100 vehicle models, the highest parts-to-whole ratio is 830.49%, meaning that replacing all parts costs as much as buying 8.3 new cars.

According to reporters' understanding since starting to release automotive parts-to-whole ratio data in 2014, some ratios have even exceeded 1200%. This shows how difficult it is to achieve an overall decline in parts-to-whole ratios. A relevant person from CIIA stated that this period's automotive parts-to-whole ratio index is 327.96%, slightly down from previous times; however, foreign vehicles have a parts-to-whole ratio around 300%, indicating that there are still exorbitant profits in the automotive repair field.

Therefore, promoting a reasonable trend towards automotive parts-to-whole ratios has become an important task for standardizing and ensuring healthy development in the automotive aftermarket. In 2014, ten ministries including the Ministry of Transport and National Development and Reform Commission jointly issued 'Guiding Opinions on Promoting Transformation and Upgrading of Automotive Maintenance Industry and Improving Service Quality', requiring breaking monopolies on maintenance parts channels and encouraging original equipment manufacturers (OEMs) to provide original parts as well as independent aftermarket parts with their own brands or trademarks; encouraging authorized repair enterprises to resell or provide OEM parts to unauthorized repair enterprises; establishing an open system for automotive maintenance technical information to ensure all repair enterprises have equal rights to access technical information from automobile manufacturers.

This has broken manufacturers' monopolies on parts to some extent. Under effective government regulation of the parts market, consumers have gained the right to independently choose corresponding brand parts. In April this year, departments including the National Development and Reform Commission and Ministry of Industry and Information Technology officially issued new management measures for automobile sales that further broke down existing systems to make the automotive aftermarket more open and transparent.

With continuous policy relaxation, repair enterprises independent from the 4S dealership model have also welcomed development opportunities. The rise and growth of social automotive repair industries will force a rational return of 'parts-to-whole ratios', benefiting consumers.

Standardized development also requires transformation and innovation.

The automotive aftermarket has become one of the most dazzling gold mines in the entire automotive industry chain.

According to estimates from 'The Blue Book on China's Automotive Aftermarket (2013-2017)', overall industry profits in the automotive aftermarket can reach between 40% to 50%, with some sub-sectors even higher.

Data shows that in developed country markets, profits from automobile manufacturing and sales account for about 20% of total industry profits; profits from parts supply account for about another 20%, while other profits (60%) are generated in service areas. Since currently high profits still dominate automobile sales in China—according to industry norms where every yuan spent on purchasing a car drives an additional yuan worth of after-sales service—China's automotive aftermarket holds enormous potential.

Faced with such a potentially huge market, how to change its current backward situation has become an urgent task as well as a breakthrough point for many newcomers. From 2014 to 2016, major dealers invested heavily to enhance profitability growth in maintenance services. According to statistics from the Automotive Industry Association, there were as many as 67 instances of venture capital investment in China's automotive aftermarket in 2014—ten times that of 2013.

At the same time, driven by internet technology along with policy breakthroughs, a large number of internet startup companies have emerged in the automotive aftermarket along with many independent after-sales repair enterprises. In 2015, e-commerce giant Alibaba announced it would integrate its big data marketing capabilities with its auto finance business along with a platform advantage gathering over six million car owners by establishing an automotive division aimed at facilitating O2O services for auto e-commerce. Traditional 4S dealerships have also begun slowly transforming their service methods and reducing costs to cope with market competition.

Now, after a round of market elimination, internet companies like Tuhu Car Maintenance that have survived are gradually exploring and taking shape. Their business model has shifted from previously overemphasizing online to balancing both online and offline, and they have begun to focus on heavy asset investment online, effectively integrating the advantages of the internet and traditional enterprises.

Experts say that with the help of internet technology, the future of the automotive aftermarket will tilt more towards the end user, and the sales model will gradually transform from the original store-based sales to an e-commerce model of 'warehouse-style sales + logistics distribution.'