03 Jun China turns to second-hand cars to rev up consumption
The Financial Times, May 31, 2016
As China revs up its shift to a consumption-led growth model, policymakers are trying to get more mileage out of a sputtering part of the economy: the used car market.
In most developed economies, sales of second-hand cars outnumber those of new vehicles by about two to one but the opposite is true in China, the world’s largest market for new vehicles.
“The majority of the vehicles in China are still owned by the first owner; secondary-owned vehicles are the minority,” says Bill Russo, a Shanghai-based consultant. “That is unlike any other country.”
To help stimulate the nascent market, Beijing recently introduced a policy that allows old cars from big cities to be resold in smaller ones, a move that will take full effect at the end of May. Previously, to protect local businesses, government regulations prevented cars being sold across provincial borders.
This will “open the pipeline”, according to Mr Russo. “Cars [in China] may be born in upper-tier regions but they tend to retire in lower-tier regions,” he said.
Though huge, China’s car market is in its infancy. Until 1984 it remained technically illegal for individuals to own a car and low personal wealth meant sales did not take off until the mid-2000s.
The country’s transition into a “new normal” of annual economic growth below 7 per cent following years of double-digit rises is potentially painful for carmakers accustomed to breakneck demand for new models. For used-car sales, however, newly thrifty consumers and a growing number of ageing vehicles are a promising combination.
Rising supply, combined with government support and moves by manufacturers to encourage car-owners to upgrade sooner, promises to see the second-hand market grow at more than double the speed of that for new cars, according to Alex Klose, founder of JZWcars.com, a used car website.
The entrepreneur, Volvo’s former chief executive for China, set up his company in 2014 with the aim of becoming a trusted platform for a nascent market. “One thing holding people back from buying a used car is not knowing whether they can trust it,” he says.
Mr Klose is not alone in seeing the potential for second-hand cars. A flock of online platforms and technology start-ups have recently entered the sector.
“Everyone thinks that the space for growth in second-hand cars is very big — they think the sector is a very big cake,” says Li He, founder of Limiku.com, a used-car financing platform.
The government sees the used-car market as a way to boost consumption among those with lower incomes.
Mr Li, a tech industry veteran, believes online platforms are helping to improve the supply chain — a job he says big distributors are failing to do.
“The vast majority [of major distributors] have a second-hand car department but in reality they don’t have standards for the whole supply chain, including pricing and evaluation,” he says.
Big carmakers are now encouraging their dealerships to stop dragging their feet, however, as they seek a new source or profit for dealers.
Over-dependence on a single stream of revenue has sparked tensions between manufacturers and dealers in the past, when distributors asked for compensation for their losses during slow sales periods.
As dealerships look to evolve their business models, there is one set of people who are watching with trepidation: the original used-car salesmen.
Dong Wei has been selling used cars from his shoebox office at Beijing’s oldest and largest “old car market” since the 1990s.
“Before they [big dealerships] didn’t bother with second-hand cars, because the profits for new cars were so high,” he says. “Now they are starting to change their model.”
Mr Dong is nervous that disruption in the sector means the glory days for small-time salesmen are over.
“Before, the market would be full of people,” he says waving a hand at the unattended rows of shiny cars roasting in the heat. “These days, people prefer to go online.”