Major issues in the auto-parts after market


Major issues in the auto- parts after market

The environment of the automotive parts/accessories after market in China is currently still in its infancy. A summary of the major problems follows :

Fragmented and complex distribution network

Using local distributors might in theory offer a cost advantage, but the distribution channels can be highly fragmented. Most foreign companies found that their Chinese joint venture partners have hundreds of direct distributors. For instance, a typical state-owned brewery in a large city has over 2,000 primary distributors, many of whom resell to hundreds of secondary wholesalers and thousand of independent 'street hawkers'. Many companies felt that their distributors were inadequate in terms of delivery, sales, merchandising , promotion and collection. Few had the most basic customer tracking, customer care and credit rating systems.

Unfortunately, a better distribution system is unlikely to emerge soon, again because of government restrictions on foreign investment. Currently, with a few exceptions, joint ventures are strictly limited to distributing goods that they manufacture themselves .

With regard to the channel characteristics of the automotive industry at present, while the number of dealers in automotive parts/accessories amounts to 220,000 nationwide , few can achieve US$24 million sales revenue. Take Shanghai as an example, since it is the biggest OVM manufacturing site with Shanghai Volkswagen and Shanghai GM amongst others, and the biggest automotive parts/accessories warehouse. Many distributors from other regions order their products from Shanghai:

Figure 6.2.3 shows that it is not easy for after market suppliers to select the right distributors and manage the whole channel, vital to the success of the business.

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Figure 6.2.3: Shock absorber distribution map, volume flows

Valuable after market-oriented information is hard to find

Information and intelligence for the OVM market are more complete and integrated than for the after market. Consulting companies can track monthly, quarterly and yearly production and sales by using their network around the country. While production and sales figures are not difficult to obtain through newspapers, automotive magazines and online services, there is not enough information for the after market that covers the vehicle population, vehicle utility purposes and the vehicle age.

The process of segmenting the market and evaluating market potential involves many challenges. Not all official vehicle management organizations in China have computer-aided statistical systems and this is even more a problem in remote areas. Furthermore, there is almost no way to assess the number of imported cars, because some cars are sold to China through illegal channels. Although there are some automotive consulting institutions who claim to have data to hand, they can only provide the vehicle population by general categories. These figures can only tell which car models have a larger market share, but not the car's life span and so the replacement rate of different car models must be identified.

Companies might choose regional distributors in some specific areas according to their product lines and current market circumstances and so a multi-dimensional survey showing the car population by purpose, brand and region is essential. Annual sales revenue, financial standing, management skills and industry reputation are the basic assessment criteria when selecting distributors.

Strong domestic and international competition is imminent

The competition in after market business is much more intensive than for OVM. Figure 6.2.4 shows how fierce the competition is in the automotive parts/accessories after market field.

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Figure 6.2.4: After market suppliers

The major OVMs do not expect OVM suppliers to develop their distribution channel independently

OVMs have different attitudes towards the fact that their suppliers are developing their after market business independently. Major OVMs do not encourage their suppliers to develop their distribution network independently and to sell their parts/accessories outside OVM service stations. When OVMs place orders with suppliers, they will order extra products for their service stations . They put their brand names on their unique packaging, display the price tag including their mark- ups and distribute the parts to the authorized service stations. Most OVMs have their own complete service network, and some have adopted '4S' policies, which integrate car selling, part supply, car repairing and information feedback into one system. For instance, Shanghai Volkswagen suppliers have to follow the regulation that SVW supplier should provide service parts only to SVW. However, it has a dual supply system for each component purchase and the market is shared between two or three suppliers; sometimes the suppliers is not satisfied with their OVM business split share and looks elsewhere for markets to supply. Furthermore, SVW's prices for these parts are always higher, leading many suppliers to sell their cheaper parts via other channels. The suppliers have to promise that they will only supply parts to territories unoccupied by SVW, and that they will sell the parts at a higher price to the free market than to SVW. They state that their major function is to help the OVMs purify the market.

Accounts receivable is another problem after market suppliers need to consider seriously

Not all the multinational players have enough experiences of dealing with accounts receivable. Products selling well or in huge volume does not necessarily mean the business has gained significant profit. After the products are sold, if the money cannot be collected, profit is lost.

As stated above, the distribution channel, consisting of authorized distributors, a dealer and wholesalers, is the mainstay of the after market. Whether the whole value chain is healthy or not will determine its business success. Therefore, selecting the distributors, financial status and credit must be the priority. Only with these in mind can the supplier initiate a payment policy according to the channel structure and characteristics (see Figure 6.2.5)

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Figure 6.2.5: Payment terms

However, at the beginning of the business, if you tell customers that you require them to accept the 'Cash on Delivery' payment term , your customers might switch to other brands, and not come back again. So the suppliers are in a dilemma. They will certainly want to sell their products, but they must risk bad debts .

Fake and inferior products are prevailing in the markets.

Apart from original equipment suppliers (OES), there are some small local producers in the markets selling fake and inferior parts to the retailers and the end users. While family car and company car owners prefer authentic parts, many taxi drivers are willing to get their cars fixed at roadside shops whose prices are cheaper because they source their products from the small producers who duplicate OES technology or put the OES brand name on the products they make themselves.

Why are some consumers willing to buy those products? There are two reasons. Firstly, some drivers lack the knowledge to distinguish fake parts from authentic ones. Secondly, there is a significant price advantage against the original parts. Sometimes it is not only the roadside shops who sell the fake parts, but also a few authorised dealers. After the authorized dealers gain the title of 'Brand Authorized Distributors', they actually stock both authentic and fake parts. They will sell the cheaper parts to their price-sensitive buyers and so jeopardize the OES's interest.

Faced with counterfeiting and arbitrary pricing, some companies are using counterfeit-proof packaging. By printing retail prices on packages and marking production runs differently by channel, counterfeits should be easier to identify. Nevertheless, the sheer scale of these problems increases the level of complexity for managers in China.




Doing Business with China
Doing Business with China
ISBN: 1905050089
EAN: 2147483647
Year: 2003
Pages: 648
Authors: Lord Brittan

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