The world’s largest new vehicle market, China, is now shifting into a booming phase in the used car business as economic slow-down and desire for more diverse driving experience arises.
In 2017, the new car market in China experienced the lowest growth rate over the last 12 years with only 1.4 % year-on-year increase. In the field of used cars, on the other hand, 12.4 million used cars were sold, nearly 20% more than the year before, and the total transaction volume was RMB 809.27 billion (USD 127.85 billion), a 34% year-on-year growth rate based on the figures release by China Automobile Dealers Association.
The low growth rate of new vehicles, as a standalone factor, does not necessarily imply a weak market given that cars as durable goods generally have a longer duration of use. However, further new vehicle growth requires strong support from a comprehensive used vehicle system. After decades of development, sophisticated market behaviour in the Chinese car industry demands a new market to generate value from the used and alternative.
In addition, considering the Chinese government’s regulation on licences and cross-regional trades for traffic and regional management’s sake, the strong growth of used cars is not simply a current fact but also an upcoming trend in the near future. In 2018, Chinese authorities will further remove the restriction on cross-regional transactions regarding second hand vehicles, encourage building information and credit systems for the business, and enhance transaction regulations on second hand cars, in order to further release the market potential.
By 2020, in the used vehicle business-to-customer market, Internet-based dealers will contribute 80% of total transactions, according to a report released by Roland Berger.
The fast growing second-hand business, especially through online platforms, has already attracted strong interest from investors who hold positive expectation regarding the aforementioned premium market cultivation conditions. More than USD 2.5 billion was injected into Chinese online used car dealers in 2017 and the absorption of the capital was highly centralized. Leading used car trading companies, such as Guazi, Youxin, and Dasouche, took away 75% of the total investment; 18% was taken by Renrenche and Chezhibao. Only 7% went to other platforms and startups.
Among the leading companies’ cases, Youxin rose USD 500 million funding co-led by PE giant TPG in January 2017, which was a record high in the business by then. Guazi completed a USD 400 million Series-B financing led by existing investor Sequoia Capital China, on June 15, the day when Chezhibao announced a RMB 500 million Series C+ financing. In early September 2017, Renrenche received USD 200 million investment; and two months later, Dasouche was backed up by Chinese E-commerce giant Alibaba by USD 335 million.
With huge amounts of investment, apart from regular business operation and cost expenses, those online used car platforms allocated a large portion of the funds toward their branding and advertising.
In 2016, Guazi spent RMB 900 million on advertising, while Renrenche spent RMB 500 million. The 1 minute plug-in TV advertisement for the Voice of China cost Youxin RMB 30 million.
Advertising is not the only cost. Lawsuits kicked in as marketing campaigns intensified. In 2017, the advertising conflict relating to second-hand car dealers, especially among Youxin, Guazi and Renrenche, drew wide market attention. Besides continuing to spend billions of yuan on commercials, Guazi and Renrenche, the two rival companies, even filed lawsuits by suing each other for unfair competition using misleading advertisements.
However, the massive expenditure on marketing failed to bring its expected consumption power. The market even suspected that a few companies’ marketing expenses have exceeded gross annual business revenue. To survive the used vehicle market battle and be determined to be the last one standing, online car dealers attempt to merge offline stores into core online businesses.
Guazi announced that it will open 300 physical stores last March. Youxin, by September 2017, already opened over 300 brick and mortar used car stores, and was planning to expand the number of stores up to 2,000 by 2020.
The conflict among those online rivals will continue and may even become more intense, since the market keeps on growing at a high-speed. Better customer services can be provided with new business models, but it also means higher cost and more pressure on business operation.
Meanwhile, relevant laws and policies relating to used car businesses are still not fully developed. The market lacks standardized regulation on aspects such as car resources, penalties for fake information, quality inspection and after-sale services.
The market will soon experience a big reshuffle. Let’s wait to see who will finally wear the crown.
（Top photo from Sohu.com)