Executive Briefings

Rate of New Car Sales to Dip in Much of China as Aftermarket Products, Services Rise

A mere four years after overtaking the U.S. as the world's largest car market, China's automotive industry has arrived at an important inflection point. The days of growth rates above 20 percent are over, and rates may dip as low as 6 percent by the end of the decade. Several factors are driving this shift.

Rate of New Car Sales to Dip in Much of China as Aftermarket Products, Services Rise

At the national level, in order to implement long overdue structural reforms and contain a looming financial crisis, Beijing has had no choice but to put the brakes on overall economic growth. At the same time, in cities such as Beijing, Shanghai, and Hangzhou, local governments are imposing new vehicle sales restrictions to combat severe traffic congestion and air pollution.

In fact, the product and industry life cycles have already started to decouple, a key moment that typically results in high levels of overcapacity, significant price and margin pressure, and, eventually, a massive shakeout. As a result, the underlying industry and competitive dynamics will likely look very different within a few years. The business model itself will change from today’s “hunter-gatherer” model, focused primarily on generating profits from new vehicle sales, to a “seed-harvest” model, wherein profits come mostly from selling complementary and aftermarket products and services.

At the same time, customer demand will become increasingly binary. Tier 1 cities in the coastal provinces will be characterized by much lower growth rates, replacement demand, and rising price points. In contrast, the lower-tier cities in China’s interior will see much higher growth rates, but at lower price points, as demand will increasingly come from new buyers who are crossing the mobility threshold and exchanging their motorcycles and electric bikes for cars.

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At the national level, in order to implement long overdue structural reforms and contain a looming financial crisis, Beijing has had no choice but to put the brakes on overall economic growth. At the same time, in cities such as Beijing, Shanghai, and Hangzhou, local governments are imposing new vehicle sales restrictions to combat severe traffic congestion and air pollution.

In fact, the product and industry life cycles have already started to decouple, a key moment that typically results in high levels of overcapacity, significant price and margin pressure, and, eventually, a massive shakeout. As a result, the underlying industry and competitive dynamics will likely look very different within a few years. The business model itself will change from today’s “hunter-gatherer” model, focused primarily on generating profits from new vehicle sales, to a “seed-harvest” model, wherein profits come mostly from selling complementary and aftermarket products and services.

At the same time, customer demand will become increasingly binary. Tier 1 cities in the coastal provinces will be characterized by much lower growth rates, replacement demand, and rising price points. In contrast, the lower-tier cities in China’s interior will see much higher growth rates, but at lower price points, as demand will increasingly come from new buyers who are crossing the mobility threshold and exchanging their motorcycles and electric bikes for cars.

Read Full Article

Rate of New Car Sales to Dip in Much of China as Aftermarket Products, Services Rise