1 June 2003
Emerging Opportunities in Auto Service Sector
Consumption of sedan cars in Guangdong currently accounts for almost one-third of the national total. Thanks to its rapid economic growth, the Pearl River Delta (PRD) region has become a leading automobile market. Industry statistics show that almost one out of every three automobiles sold on the mainland is destined for the PRD. As demand for motor cars continues to expand steadily, the auto services sector holds enormous growth potential.
Spurred by the momentum of continued rapid economic growth, consumption has received a strong boost in Guangdong. Auto consumption, in particular, has great market potential. According to a survey, the standard of living in Shenzhen has reached the wealthy level, the consumption patterns in Dongguan and Shunde are close to the wealthy level, while Foshan, Huizhou, Zhongshan and Guangzhou fall under the well-off category. Experts point out that private car consumption usually enters a peak period when per capita GNP exceeds US$3,000 in a country. At present, many cities in the PRD have surpassed this level. In 2002, the per capita GNP of Shenzhen and Guangzhou stood at US$5,237 and US$5,000 respectively, while Shunde, Nanhai and Foshan achieved close to US$4,000. All these cities are huge potential markets for auto consumption.
The position of the PRD in the national sedan car market can be reflected in the following findings. Results of a study conducted by Guangzhou Honda on its auto sales in China dating back to its establishment in the country reveal that almost one out of every three cars sold in China is destined for the PRD region. The figures released by Shanghai Buick also show the same "one in three" ratio. Meanwhile, world-renowned luxury car makers Bentley and Rolls Royce expect to sell more than 30 vehicles in China this year, of which eight of the owners will likely be in the PRD region.
According to a random survey conducted by the Guangdong Provincial Bureau of Statistics, car ownership rates per 100 households are the highest in Dongguan (20), Shunde (14) and Shenzhen (13). The figures are not only significantly higher than the provincial or national average but also exceed the "10 to every 100 households" index used to define popular car ownership according to international practice.
The environment for auto consumption has been improving steadily in the PRD region. Roads are well connected, traffic is smooth, market facilities are being enhanced, banks are offering auto finance, government policy encouraging auto consumption has been introduced, and car makers have launched numerous economical models of sedan car. The thrust of auto consumption is expected to continue in the small- and medium-sized cities in the PRD. The car ownership rate is forecast to grow by 40-50% annually among Guangdong households over the next few years, with sales concentrating in the PRD and in medium-sized cities of Guangong. It is estimated that Shunde and Nanhai will reach the "one car to every two to three households" level by 2005. As such, these two PRD cities will have achieved the car consumption level on a par with medium developed countries by that time.
Development Trend and Opportunities in Auto Services Sector
The rising number of cars on the roads has brought about vast development potential for auto accessories, parts and components. In the burgeoning auto services sector, policies governing foreign investment in the form of joint venture are being gradually relaxed. Restrictions on foreign participation in auto-related services such as auto finance, insurance, maintenance, rental and franchise operation are also being lifted. This development augurs well for growing foreign investment in this sector. Market experts predict that the auto services industry is set to gradually move towards the development of an integrated service system characterised by modernisation, environmental protection and networking. Against this backdrop, branding, economy of scale, standardisation and electronic informatisation are the trends. Abundant opportunities will emerge in the areas of after-sales service, auto parts retailing, auto insurance, auto clubs and car culture. Other related services that are more specialised and segmented, such as auto conversion, car audio and high-end car furnishings, will also become growth areas.
Car Repair and Maintenance
Demand for car repair and maintenance service is rising alongside growing car ownership in the PRD region. There is scope for development in various sectors of the car repair and maintenance market. Among these, car care and maintenance service is an increasingly flourishing sector, covering a wide range of professional services such as maintenance and inspection, cleaning and upkeep, car audio, air-conditioning and anti-burglary devices.
According to a survey conducted by the Shenzhen authorities, 64% of the car owners in the city spend less than Rmb5,000 a year on repair and maintenance while 32% spend between Rmb5,000 and Rmb15,000. As for imported cars, 33.9% of the owners spend less than Rmb5,000 on maintenance while 58.9% spend between Rmb5,000 and Rmb15,000. At present, there are about 2 million cars in the PRD region. If each car owner spends an average Rmb1,000 a year on maintenance, it will translate into a sizeable market.
Growing consumption of private car no doubt contributes to a stable client base for car maintenance service and accessories supplies. It also stimulates the demand for furnishings and decorative items such as adhesive films, interior decorations and hi-fi systems. Fitting out a newly purchased car usually costs more than Rmb1,000. If the car owner opts for a more deluxe package, the price can go up to Rmb20,000. As the manager of a car care shop in Jiangmen points out, business has doubled over the past three years and he is very optimistic about future prospects. A complete car care package is currently priced at over Rmb300 while the cost is about Rmb100. If the business is properly run, it can offer quick return on investment and good profit margin. This explains the mushrooming of car care shops in Jiangmen alongside rapid expansion of car consumption in recent years. Many of these shops are doing great business.
As shop owners point out, fitting-out for cars is going upmarket these days. Before, many customers were looking for the simple adhesive film for windows and ordinary seat covers. Nowadays, the most sought-after items include cherry wood furnishings, VCD playesr, DVD players and genuine leather seat covers. Cherry wood accessories priced at several hundred yuan and genuine leather seat covers at close to Rmb1,000 are among the most popular items. Imported super strong heat-proof, explosion-protected films priced over Rmb1,000 are also well received. Perfume and small, personalised decorative items also sell like hot cakes. According to market sources, the recent downward price adjustment of all kinds of middle- to upper-range car models has triggered a new round of car purchase which has in turn given a strong boost to the car care market.
The entry threshold for the car care market is not very high. At present, the PRD market has yet to reach saturation. Given that large sums of investment capital are available, now is the perfect timing for entering this market. However, industry sources also caution that, due to the high fixed investment input, interested investors should consider all factors thoroughly before venturing into this market.
The investment for opening a car care shop could range from Rmb100,000 to Rmb1.5 million. At present, high-end cars are increasing in number in the PRD region and car owners are more demanding about auto-related services. Shops that are equipped with advanced equipment complete with modern decor will more likely appeal to these car owners and satisfy their demand for individuality and comfort. Small investment of below Rmb100,000 is not likely to turn into huge success because it can only offer a limited range of service due to the small capital input. Shops with limited services will find it difficult to meet customer demand and therefore have lower chances of success. On the contrary, shops targeted at the higher-end market involving larger investments are usually equipped with a wide range of facilities such as car wash systems featuring washing, waxing and polishing functions, computer driven engines, computerised positioning equipment and cleaning machines.
Investment in the car care business may be in the form of independent shop or franchise operation. The latter is more suited to prospective investors who lack management experience and technical knowledge. Apparently, franchise offered by world-renowned chains will involve higher investment. At present, a number of large, well-established foreign players have already entered the market. Among these, 3M of the US is operating the largest chain of car care shops in China with over 300 outlets, of which more than 10 are located in Guangzhou. Novus has chosen Shenzhen as the launchpad for its chain of quick fix shops in China. The PRD and YRD (Yangtze River Delta) regions are its target markets. Meanwhile, the world's leading lubricant maker Castrol has launched in Shenzhen its first car care shop in China. So far, four shops have been opened.
Car care shops should be located at places with convenient transport links. Ideal locations include those near car marts, auto parts centres, petrol stations, bus stops, car parks and small residential districts. As a special service industry under existing policy, car care business has to undergo inspection and evaluation on its environmental impact conducted by environmental protection authorities before a business licence is issued. This requirement constitutes the biggest hurdle for market entry. Hence, investors have to make sure that environmental protection and shop construction work should run parallel to each other in terms of design, construction and implementation.
As a hub for external exchanges and business activities, the PRD is a fast growing market for car rental service. Car rental is a new type of service suited to the needs of business people operating in the region. More companies are now using the hire car plus chauffeur service on a long-term basis instead of keeping their own cars in order to cut costs. One of the enterprises which has made the switch points out that hiring a car translates into big cost cuts and up to 28% savings on administrative expenses. Keeping its own light van used to cost the company more than Rmb40,000 a year. The fees involved included road maintenance, insurance premium, vehicle maintenance, petrol and car parking. Hence, for companies and individuals that have the need but do not wish or cannot afford to buy and keep a car, renting one can be a good alternative.
In addition to private entrepreneurs and white collars, many ordinary workers have joined the ranks of "rented car patrons". As the number of driving licence holders is growing rapidly across the PRD region, the market potential is huge. For instance, 460,000 people in Dongguan are licence holders, while 600,000 people in Guangzhou took the driving test in 2002. In Shenzhen, about 300 people enroll to take the driving test every day. With rising income and changing consumption mentality, industry sources expect more people to hire cars and take to the road on long holidays. Hence, the car rental market holds great potential.
At present, car rental customers are mostly companies on weekdays and individuals during weekends and statutory holidays. While institutional customers usually opt for the more deluxe and comfortable models in the middle to upper range, family-type customers prefer the ordinary models that are more economical and practical.
In the PRD region, the majority of car rental companies have a small scale of operation, low degree of chain operation, limited capital input and constraints in management and operation. And as such, few companies are able to offer customers the service of returning rented cars in a different city or province. Industry sources expect demand for rental cars which can be picked up and returned at different locations to rise sharply in the future, and that both business cars and institutional customers will increase steadily. Car rental chains offering the convenience of returning vehicles at a different location have great development potential.
At present, rented cars are in short supply in the PRD. For instance, the 7 million population of Shenzhen is served by 13 car rental companies which only offer a total of some 400 hire cars. In Jiangmen, there is hardly any car rental company. Three companies have been registered with the relevant government department, of which only one has completed all the registration procedures. This company is currently focusing on pre-launch marketing and has yet to offer any new cars to the market. The gap is being filled by individual operators but these operators can only provide one or two light vans which are usually rather old and have not gone through the proper registration procedures. In Guangzhou, about 40 car rental companies offer 1,500 vehicles. However, less than 1,000 of them are for short-term leasing, the rest are committed to long-term customers. Among the vehicles available, those that have been in use for over three years account for more than 80%. The proportion of new cars is relatively low and the replacement rate is even lower. The predominant models of rental cars are domestically produced middle-to-high and low-to-middle range sedan cars, such as Jetta and Citröen. Seven-seat vans make up 20% of the total number of rented cars.
According to the Provisional Regulations on the Administration of Car Rental Business, a car rental company should have a fleet of at least 20 vehicles worth no less than Rmb2 million in total. Besides, car rental companies must be holders of business licence, tax registration certificate, road transportation licence and vehicle licence. Properly registered rented cars have to undergo two inspections every year as well as regular maintenance. They also have to take out al risks insurance.
In Guangzhou, market entry requirements are higher. For instance, a car rental company should have at least 30 vehicles worth at least Rmb3 million in total. Alternatively, it should have at least 25 vehicles of which 15 or more have to be deluxe models and the fleet must be worth at least Rmb3.5 million. The fleet of a car rental company should comprise new cars or cars that are of first-grade technical standard. To apply for setting up car rental agency business in Guangzhou, the applicant should have a fleet of at least 50 vehicles. It should also produce financial proof such as credit checking report, capital certification or capital guarantee of more than Rmb3 million, and have working capital equivalent to at least 5% of the value of the fleet. According to the Provisional Measures on the Approval and Administration of Foreign-invested Car Rental Companies, foreign companies may establish equity or contractual joint ventures to offer car rental service.
Before, there was hardly any market for auto clubs due to the sluggish growth of car consumption. Following China's WTO accession, the import duty and price of motor vehicles have been slashed. Auto consumption has increased sharply generating demand for auto-related services. Auto clubs which offer a range of auto services have become the latest investment hotspot.
Understandably, many private car owners are inexperienced and need practical advice and assistance on matters such as vehicle maintenance and annual inspection, driving licence annual review, and payment of road maintenance fees. According to a survey conducted in Guangzhou, 36.6% of the respondents say well-known car service centres are their first choice in getting car repair, maintenance and care service. Auto clubs are the second choice. With 40% of the respondents indicating they intend to join auto clubs, the market potential is great. Another 60% say they are interested in auto clubs. If auto clubs step up their marketing efforts, more people are likely to join. More than 60% of the respondents say they hope auto clubs can provide a full range of service to make auto consumption hassle-free.
Other Auto Services
In addition to the above-mentioned services, industry sources also predict that consultancy on private car purchase will become one of the emerging services that has immense market potential. As the sources point out, people with car purchasing power are rising rapidly in number in the PRD. Unlike professional drivers, many of the prospective buyers are not familiar with the functionalities of motor vehicles and often do not even fully understand their own needs. Car purchase consultancy service will help people with the buying power and the need to choose the most suitable models. And as such, the service becomes part of the consumer's actual purchasing process.
Auto conversion is another emerging market in the PRD. Car repair centres in Shenzhen, Guangzhou, Foshan and Nanhai are offering auto conversion service based on the specific requirements of individual customers. Most of the conversion involves car audio and interior fitting which is intended to give the car a facelift and more character. In recent years, conversion involving the overall functionality of the car has also gained in popularity. Some Hong Kong companies are already offering professional auto conversion service in Shenzhen and Guangzhou.
Staying Ahead of Competition
As more industry players are flocking to offer auto services, the market is set to become increasingly competitive in terms of capital input, operation scale, sales and marketing, as well as the range of services being offered. To stay ahead of competition, operators should aim to provide customised, professional service with a personal touch to their target customers. For example, they should build a database of their clients’ maintenance records, analyse the causes of mechanical problems (and remind customers where appropriate), give customers regular follow-up calls, remind customers of maintenance schedules, and disseminate useful car information.