Market structure

The business of the automotive parts industry can broadly be categorized into two levels: the original vehicle manufacture (OVM) market and the after market. The OVM market means that the part/component manufacturers provide their products directly to the original vehicle manufacturers. For instance, Delphi Automotive Systems is the OVM supplier for General Motors and Volkswagen. The after market means that the part/component manufacturers distribute their products to the specified channels and the end users. Many part/component manufacturers are involved in both markets.

The OVM market

This is a regular and stable market with the following characteristics:

1. A B2B business model, where in most cases long- term contracts are maintained between the part/ component suppliers and the OVMs.

2. Routine orders placement by the OVMs with the suppliers carrying a quantity of inventory for after- sales service. OVMs require the identification of their own brand names on the spare parts and their unique packaging to be distributed through their authorized service centres .

3. Transparent information flow between suppliers and clients , ie suppliers appoint account managers on the OVM's sites to understand their real-time demands and requirements.

4. The delivery system is shifting from the traditional single part delivery towards module delivery. Module suppliers are responsible for the whole process chain, from pre-development to the spare parts business.

5. The prerequisites to be an original supplier of the big automakers are:

   • competence of quality;

   • correct ratio between price and performance;

   • security of delivery;

   • flexibility.

6. The suppliers' performance review is based on: “ client satisfaction;

   • flexibility; reactions to volume changes; “ competitiveness ;

   • reputation of delivery service; “ client orientation;

   • innovative participation in the producer's R&D activities.

7. Massive investment in marketing is not needed. For example, there is no need to purchase a great deal of advertising space in auto magazines; most expenses are related to corporate image promotion.

8. The most valuable market information for suppliers is the producers ' production plan, which forms the basis of the suppliers' sales, marketing and integrated business plans.

The after market is quite different:

1. The clients are distribution channels, business partners and end users and so the business model is much more dynamic and complex, and the products are considered consumer products. Therefore, the products need a unique brand identity and packaging. And the sellers have to segment their target markets and analyse the consumers' behaviour in order to establish a market differentiation strategy. For instance, some companies have developed a range of product portfolios with different prices, different brands and different packages to meet different markets.

2. More resources in marketing activities are required in order to improve brand awareness, recognition, preference and loyalty. An integrated marketing communication plan is needed, ranging from participation in auto shows, solo shows, brand launch events, technical seminars , dealer conferences, print ads, billboards, broadcasting, online promotion, POP etc.

3. The PARC, age information and the typical ownership of the vehicle are the most valuable marketing data for suppliers. The PARC data shows the total market scale, the age information indicates the product's lifespan and the ownership information shows the different consumer behaviour with regard to taxis, business and households.

4. The structure of the after market is more complex than for the OVMs and includes positions such as channel development manager; channel support manager; regional manager; brand manager; order processor; logistics manager and so on.

5. The market players are not only parts/components manufacturers: some are also trading companies. For example, General Motors' Service Parts Organization International (SPOI) sometimes purchases parts and components internationally, brands them 'AC Delco' and then sells them to after market channels.

6. Many OVM suppliers are involved in the after market business. However, OVMs do not generally encourage their OVM suppliers to serve the after market independently and therefore most suppliers have the role of 'purifying' the market for the OVMs who are, after all, the ' authentic ' parts providers

7. Customer relations management (CRM) is increasingly important. The customer database is the backbone of the whole business operation, ranging from identifying ways of generating sales leads, qualifying sales prospects, segmenting sales leads, setting up dealer extranets, retaining existing customers and enticing competitors ' customers to switch. And every detail of the whole value chain, from the supplier to the distribution channel and end users, calls for a specific strategy.

8. The competition is much fiercer than in the OVM market. The players have to enhance their overall competitiveness, from product portfolio including packages and services, pricing policies and promotion mix to channel management.

The after market

Apart from imported products, three sectors currently serve the domestic automotive parts/components market in China. The first sector is the localized manufacturing facilities of global suppliers such as Delphi Automotive Systems, Bosch GmbH, Lucas Varity and GM Service Parts Organization International (SPOI), who are involved in both the OVM and after markets. The second sector comprises local suppliers such as Wangxiang Group , some of which have already been included in the worldwide purchasing systems of major multinational OVMs. The last is the counterfeit and fake parts/components manufacturers. The three sectors' business behaviours are quite different and they apply different market strategies and market mixes . The first sector and part of the second have set up an entire distribution network, warehousing and logistics network and have unique brand identities and packaging. The different distribution channel networks are illustrated in Figures 6.2.1 and 6.2.2

Figure 6.2.1: After market distribution channel (local parts)

Figure 6.2.2: After market distribution channel (imported parts)

More and more suppliers are getting involved in the after market to extend their channel lengths. The after market potential is said to be worth around RMB50 “ 60 billion (US$6-7.2 billion) and the PARC is RMB13 “ 14 million, of which passenger cars account for a third.

Business is evenly divided among the service stations and the after market. This is why so many multinational automotive parts/components manufacturers and suppliers are involved in the after market business, especially in the car part sectors. The market is there, but how best to enter it and develop within it, how to realize the profit diversification and leverage the existing business models? The first step is to identify problems and obstacles.

Many multinational parts/components manufacturers are doing well in the OVM market, but it does not necessarily follow that they will be able to grab a sizeable share in the after market. The major OVMs are looking for new markets for growth and this is their reason for coming to China. They include Volkswagen, Audi, General Motors, Mitsubishi, Renault, Toyota, Volvo and BMW amongst others. The OVM suppliers pay close attention to localization requirements. In the past, the OVM projects in China that met the localization rate of 40 per cent in the first year were able to obtain government approval and so the original suppliers of OVMs set up manufacturing facilities, sales offices or service centres in China.

Suppliers normally establish joint ventures to produce different parts. Table 6.2.1 shows how this can work, using Robert Bosch as an example.

Table 6.2.1: Bosch joint ventures

Name of venture	Major customers	Major products	Bosch ownership (%)	Sales revenue (US$ million)	Total investment (US$ million)
Bosch Braking Systems	DCAC, BJ Jeep	Brake	70	N/A	21
Nanjing Huade Spark Plugs	N/A	Spark plug	51	1.2	35
Wuxi Euro-Asia Diesel Injection	N/A	Diesel injection	26	4	322
United Automotive Electronic	DCAC, SVW; FAW-VW	EMS	50	48	322

OVM business is the focus of multinational auto parts/components manufacturers and so their organizational behaviour and operations bear strong B2B characteristics, which eventually impact upon the after market.

1. Different marketable product portfolios and product re-engineering

   Automotive parts and components include slow-moving and fast-moving products. Fast-moving products are marketable products in the after market, as are other consumer products. So companies that maintain wider product lines should select marketable products. For example, batteries, with a life span of around two years , fall into the fast-moving category, whereas steering columns are slow-moving and are not usually after market marketable products. In addition, the OVM business prefers module and systems supplies , while the after market treats modules and systems as the separate components and accessories. When something goes wrong with the fuel pump in the fuel pump modules, the consumer demands replacement of the exact part and is reluctant to pay extra money for the whole module, which includes the fuel pump, racks and filters. If the consumer is using the fuel pump assembly branded Bosch, you must know whether your fuel pump is fit to replace the Bosch or not. So, on your product catalogue , you must state that your product number XXXXXX is equivalent to Bosch product number XXXXXX. The engineering process is more complicated and requires engineers ' expertise not only in the whole module, but also in the separate parts. Unlike OVM supplies, the after market business requires the installation manual in the package.

2. Support from the whole organization

   Given the differences between the OVM market and the after market, the OVM business is, in most cases, paid more attention by management. Most financial and manpower resources are traditionally allocated to the OVM business. However, once management decides to develop the after market and expects it to be a significant contributor to corporate revenue and profit diversification, the management must attach more importance to the after market. A complete and integrated team should be set up, which might range from 4 to 30 or even 60 people. Furthermore, marketing activities need considerable investment in order to improve brand awareness, to get brand recognition and build brand preference and loyalty. The after market needs support from every function, especially in the early stages when the business is small and low profile. It will take two or three years for the after market business to break even. So when the management conducts a performance review it must be remember that in the early stages profit alone is no indication of performance.

3. Differentiation strategy in terms of product, price and marketing activities is essential

   In the OVM business, the same products are set at the same price and quality level but the after market business faces a dynamic environment and its customers cannot be treated as a homogenous group. Different sectors behave differently. Taxi drivers tend to buy the cheapest products; and are reluctant to pay a higher price. Private car owners are most concerned with the authenticity of the parts, and institution car owners will pay even more. Marketing intelligence must make a detailed study to support the different products strategies with appropriate brand names and promotion plans.

4. Channel development and management experiences are crucial to the business success

   The OVM business requires the ability to deal with business partners and car manufacturers. If the whole organisation has very strong B2B experience, they will do well in dealing with business partners. After market products are sold through distribution channels, typically from the authorized exclusive distributors, authorized regional distributors , dealers, and wholesalers to retailers. So it is of utmost important to understand how to develop and manage the distribution channel, how to impact the channel with the organization culture, particularly in the current Chinese parts industry. The distributor selection procedures, price structures, warranty terms, channel support, distribution contracts and incentive programmes must be well established. Otherwise, the whole distribution channel will be in a mess. The distributor will fight for profits in the territory and will cut their price against others.

5. Brand building experience is valuable

   OVM-oriented companies are typically engaged in corporate image building. While they promote their corporate identities through various marketing communications tools, they tend to ignore product brand promotion and so they need to learn the whole process of building product brand awareness, brand recognition, brand preference and brand loyalty. They will learn how to carry cross-promotion with their distribution channels. The pull and push strategies need to be applied simultaneously .

6. Quick response plays an important role in customer retention

   The OVM business is comparably stable, since the business relationship between the OVM and its supplier is based on a long-term commitment, or the supplier carries over the OVM business from its overseas companies and so the suppliers are not worried about their business. In contrast, the after market is dynamic. In spite of the customer base available, if they are not treated properly (eg their purchase inquiry is not replied to), they will switch to competitors' brands; it is unlikely they will choose to wait. Meanwhile, even if customers are ready to buy, they can hardly be retained if the sellers cannot provide the right products or services in a timely fashion. Even worse , they will tell their friends and relations about their disappointment. Losing one customer can mean losing five or six business opportunities.

Internal record is different from that of OVM business

Normally, the marketing information system of OVM- oriented organizations is relatively simple. It usually includes the major customer books, macro economic environment, government policies, competitor intelligence and automotive production information. Most information can be obtained from internal records and key accounts. In contrast, the marketing information systems for the after market will be much more complex and should cover a broader area. Apart from the content mentioned above, it should include information about the distribution network, the end user profile and consumer behaviour analyses, vehicle population and product life span, all of which are crucial to the after market business. The intelligence is not easy to obtain and cannot be found internally; it will require a third party to conduct the research or the company might introduce successful marketing information systems from companies which manufacture or sell mass non- durable products.

Solving internal problems does not guarantee a bright future. The after market players must also understand what is going on within the industry and deal with the question of how to avoid the disadvantages, how to transcend the barriers and formulate their core competitiveness. The after market suppliers have to closely monitor the external environment.