opportunities & challenges in china’s automotive aftermarket compared to thailand and...

Build · Compete · Grow1

Opportunities & Challenges in China’s Automotive Aftermarket Compared to Thailand and Indonesia

May 2017

Build · Compete · Grow2 [email protected]

About Ipsos Business Consulting

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3 Build · Compete · Grow

About the Speaker

Natee RuengjirachupornHead of Consulting

[email protected]+66 2 088 0106

Natee is Head of Consulting with Ipsos Business Consulting, responsible for Thailand and the Indochina sub-region.

He has extensively assisted major global and local players in the automotive sector in their growth strategy development. His clients include OEM, tier 1 and tier 2 part suppliers as well as raw material suppliers. He specializes in business model generation, pricing strategy and growth strategy.

Some of his recent studies include:• Developing an understanding of the automotive parts

in the aftermarket channel for passenger vehicle and commercial vehicle segments in Thailand and Indonesia

• Market assessment of automotive battery products in the ASEAN and China markets

• Evaluation of automotive part distributor partners in ASEAN

• Identification of unmet needs and opportunities in the Thai heavy truck market

• Developing a business model for a leading lubricant manufacturer in the automotive and industrial segments

Build · Compete · Grow

1. Automotive Industry Overview2. Understanding the Aftermarket Distribution Channel

3. Car Owners’ Attitudes Toward Parts Origin

4. Implications of ASEAN-China Free Trade Agreement to Parts Manufacturers

5. Our Recommendations to Automotive Aftermarket Players


Among the three selected countries, China is projected to continue its lead in PV sales and population over the next 3 years

1.21.01.21.21.10.8 0.8

2014

17.9

1.3

2012

15.7

1.4

2011

14.4

0.8 1.0

2015

21.1

19.7

0.9

2013 2020F

27.9

ChinaThailandIndonesia

PV sales in China, Thailand and Indonesia, 2011 – 2020F

CAGR

CN: 10.0%

TH: -1.6%

IN: 5.7%

CAGR

CN: 5.7%

TH: 5.8%

IN: 4.5%

PV population in China, Thailand and Indonesia, 2011 – 2020F

14.710.29.58.57.56.7

11.3

2011

77.5

2014

133.6

13.2

244.4

2013

116.1

12.5 13.910.1

2012

152.4

93.2

18.2

2020F2015

ChinaThailandIndonesia

CAGR

CN: 18.4%

TH: 8.2%

IN: 11.1%

CAGR

CN: 9.9%

TH: 5.5%

IN: 7.7%

Unit in millions Unit in millions

Source: Ipsos Business Consulting analysis


Among three countries, Indonesia’s PV market remains relatively underdeveloped even in its tier one city, based on ownership data

PV ownership per 1,000 population, 2015

Indonesia

ThailandChina


https://en.wikipedia.org/wiki/File:Flag_of_the_People's_Republic_of_China.svg



A significant number of PVs are and will be out of warranty now and in 2020, which indicates promising demand for the aftermarket

1070%

30%

14 79% 21%

152 61% 39%

PV Population by Warranty vs. Out of Warranty in China, Thailand and Indonesia

Unit in millions

84%16% 18

24432% 68%

1577%23%

2015 2020


CAGR of out-of-warranty PV

12.3%

6.5%

10.5%

Out-of-warranty In-warranty




Among out of warranty PVs, Japanese makes dominate the Thai and Indonesian markets, while Chinese makes are most popular in China

24%

88%

92%

22%

12%

9%

23% 31% 94

100%

11

7 Others include European make, Chinese make and American make, etc.

Out of Warranty Population by Regional Brands, 2015

Others include mainly American make

Others include US make and European make, etc.


Chinese Make OthersEuropean MakeJapanese Make

Total number of out-of-warranty PVUnit in millions




1. Automotive Industry Overview

2. Understanding the Aftermarket Distribution Channel3. Car Owners’ Attitudes Toward Parts Origin




In China, due to an evolving distribution channel, auto parts manufacturers will need to develop new strategies to capture opportunities in the independent aftermarket

PO

SITI

VE

IMP

AC

T

Distribution channel of aftermarket parts in China

Auto parts manufacturers Online

Brand Executive Shop Self-Owned Online Shop

B2B E-commerce B2C E-commerce

End Consumers

4S dealers Independent / Chain Stores

offline

O2O

O2ODistributors

Evolving channel Traditional flow Evolving flow

B2B e-commerce platforms are perceived as ‘game changers’ as they directly supply parts to workshops

B2C e-commerce platforms are evolving towards both parts and service providers as most of them are either building internal service capabilities or cooperating with offline workshops to provide O2O services

Some parts manufacturers have also entered into distribution groups, leveraging on both online and physical executive shops



In Thailand, OEMs either distribute genuine parts through authorized dealers, or via authorized OEM parts suppliers who further supply parts to independent aftermarket channels or end-users

Original Equipment Service (OES) Channel

Independent Aftermarket Channel Genuine parts are normally

distributed via authorized vehicle dealers or authorized OEM parts suppliers.

— In minor cases, OEMs may only distribute genuine parts via authorized dealers (3S/4S), such as Honda and GM

— Toyota on the other hand, mainly distributes their parts through authorized OEM parts suppliers

Replacement parts manufacturers (REMs) rely on parts distributors to penetrate the market.

— These distributors have an extensive distribution network, and relationships with major part wholesalers/retailers/workshops across the nation

OES Parts Manufacturers

Vehicle OEMs

Replacement Parts Manufacturers (REMs)

Parts Retail Shops / Wholesalers

End-users

Authorized Dealers (3S/4S)

Authorized OEM Parts

DistributorsBranded

Workshops

Uncertified Independent Workshops

End Channel Workshops

Certified Independent Workshops

Parts Distributors(e.g. authorized REM parts distributors,

general distributors)

Primary Channel Secondary Channel



In Indonesia, authorized OEM parts distributors are assigned to distribute OEM genuine parts nationwide through authorized dealers and parts distributors

OES Channel

OES Parts Manufacturers

Vehicle OEMs

Authorized Dealers (2S/3S)

Parts Distributors(e.g. authorized REM parts distributors,

general distributors)

Parts Retail Shops / Wholesalers

End-users

Uncertified Independent Workshops

Branded Workshops

Primary Channel Secondary Channel

Authorized OEM Parts Distributors

End Channel Workshops

Certified Independent Workshops

Independent Aftermarket Channel

Evolving Channel

Replacement Parts Manufacturers (REMs)

For OEM genuine parts, authorized dealers (2S/3S) / sub-dealers (2S/3S) in dealer groups are the main end-channel to supply parts to vehicle owners in the aftersales market

Another channel for genuine parts distribution is parts distributors in the independent aftermarket channel. OEMs leverage this channel to penetrate other end-channels (i.e. workshops)

For replacement parts manufacturers (REMs), they closely follow the traditional practice by distributing the parts through multi-layered distribution channels

— Some REMs (e.g. Bosch) actively explore opportunities to sell to end channel workshops directly

Sub-dealers(2S/3S) in

Dealer Group



Across three countries, 4S/3S is favored by PV owners, due to the comprehensive and quality services it provides

4S/3S Branded workshopCertified independent

workshopUncertified independent

workshop

China

Most comprehensive services from maintenance to repair

Availability of OEM genuine parts

Consistently high repair quality

Experienced technicians and best repair capability

Advanced equipment for testing and repairs

Most favored channel by owners in both warranty and out of warranty periods

Good availability of OEM genuine parts

Reasonable price

Specialized services

High level of efficiency

High service quality

Lower price

Convenient locations

Ease of making an appointment

High level of efficiency

Thailand

Primarily affiliates of tire manufacturing companies

Mostly focus on changing consumable parts

Standardized services with various promotions

Convenient locations and short waiting time

Two major types: car painting workshops and bodywork workshops

Second highest repair capability after 4S/3S

More reliable than uncertified independent workshops

Low coverage

Limited service offerings compared to other channels

Highest geographic coverage and lowest price

Least reliable channel due to unstandardized service and parts offering

Indonesia

Most specialized in one type of service (e.g. AC repair, tire changes)

High availability for specialized parts types

Perceived as a fast-growing andreliable channel

Most specialized in body repair

Fewer than 10% of workshops can provide a wide range of service

Mainly stock parts for body repair

Generalist that provides a wide range of services (e.g. tune-up to overhaul)

Cheaper service fees compared to 4S/3S

Mostly carry fast moving parts



To remain competitive in the local market, different value chain players have been implementing various strategies, which are also observed in the China market

OEM

To transform from a manufacturer to a service provider

To establish or invest in parts supply centers and workshop chains

To optimize the cooperation strategy with parts suppliers

Parts Distributors

To expand product portfolios so as to broaden coverage and aim to establish regional distributor alliances and partnerships

To explore and leverage e-commerce for broader reach

4S Stores

To achieve more independence from OEMs, and transform away from a service orientation to become more customer-centric

To optimize supply chain cost in order to close the pricing gap relative to IAM workshops

Independent Channels

To improve technology, service levels, and ultimately credibility through establishment of brand reputation (potentially joining chains / franchise networks)

To capitalize on e-commerce by leveraging O2O service models




2. Understanding the Aftermarket Distribution Channel

3. Car Owners’ Attitudes Toward Parts Origin4. Implications of ASEAN-China Free Trade Agreement to Parts Manufacturers



OEM parts are preferred by PV owners, primarily due to a perception of reliable quality and performance

19%

51%

46%

66%

36%

42%

15%

11%

12%

2%

0%

0%

Source: online surveys among out-of-warranty drivers and Key Opinion Leader interviews; Ipsos Business Consulting

OEM unless it’s too expensive

NO PREFERENCE

OEM ONLY

ALWAYS PREFER NON-OEM

PV Owners’ Preference for OEM Parts vs. Non-OEM Parts

Consumers in three countries have a great preference for genuine parts in both warranty and out of warranty periods. This tendency is mainly attributed to a perception of higher product quality, suitability and price assurance.

This preference for genuine parts has a negative correlation with the car as it ages, which means that customers’preference for genuine parts could reduce as the car age increases, especially after 5 – 7 years.

In China, relatively small portions of car owners show an interest in non-OEM parts, which presents a challengefor non-OEM parts brands to grow in this market.







4. Implications of ASEAN-China Free Trade Agreement to parts manufacturers



ASEAN-China Free Trade Agreement requires member countries to reduce tariffs significantly, including tariffs on auto parts

Normal track: 0% - 10% tariff E.g. Textile materials Certain types of apparel (e.g. gloves, mittens and mitts)

Dif

fere

nt

trac

ks f

or

trad

e in

go

od

s

Sensitive track:Reduce tariff to 0 – 5% by 2018E.g. Toys Certain types of apparel (e.g. footwear, ski boots) Auto parts (e.g. tires)

Background:

ASEAN-China Free Trade Agreement (ACFTA) established in 2010

Sequential approach to reduce tariffs step by step. The average tariff rate on Chinese goods sold in ASEAN countries has decreased from 12.8% to 0.6%, and tariffs on ASEAN goods sold in China decreased from 9.8% to 0.1%

China has become ASEAN's largest trading partner and ASEAN has emerged as China's third biggest trading partner

What implications does this have for

auto parts manufacturers in

China, Thailand and Indonesia?

Highly sensitive track:Tariff is 50%E.g. Tobacco Most auto parts (e.g. engines, rear view mirrors, suspension

shock-absorbers)



After the launch of ASEAN-China Free Trade Agreement, the trade value of auto parts between selected countries increased gradually

Before ACFTA

ACFTA - Now

Future

756

324

202

20152014

+93%

2016

High tariff among countries

Thailand and Indonesia mainly focused on exporting low value added products to China, e.g. agricultural products (Thailand), and fossil fuel (Indonesia)

Auto parts trading was active in grey market

How to increase each country’s trading and collaboration within the auto parts business?

Auto parts export from Thailand to China (million USD)



Insufficient R&D capability and investment

— Chinese companies currently invest ~1.4% of total sales revenue in R&D, as opposed to ~6.5% among international players

Lack of core/advanced technology

Only a limited number of players are able to compete with international players, especially players from mature markets

— Only small number of players can offer system / systematic solutions for PVs, or focus and perform well in niche markets

— A large number of players are small-sized, encountering problems such as standardized products, low profit, and low value added potential

Over-capacity issues appear in some auto parts factories

Limited numbers of Chinese auto parts players are active in the Thailand/Indonesia market, and this situation could be improved

Domestic Parts manufacturers development in China

Chinese players’ performance in Thailand and Indonesia

Limited number of players active in the Thailand and Indonesia markets, mainly due to:

— Lack of understanding of the local market in terms of culture, business environment and demand

— Perception that the local market demand is limited

— Insufficient knowledge of the benefits brought by the Free Trade Agreement

Currently major players from China’s automotive industry are still auto OEMs instead of parts manufacturers

— Few OEMs enter new markets by either exporting vehicles or building manufacturing plants in the target countries

How to win in the Thailand and Indonesia markets

⇨ Understand the local market, local customer needs, and expectations toward parts

⇨ Improve parts manufacturers’ awareness of the FTA, and understanding of the benefits of the FTA

⇨ Increase exposure in the local market to build a brand image among distributors as well as car owners

⇨ Educate the market to improve the consumer image where “Made in China” equals cheap and poor quality products

⇨ Explore partnership or M&A opportunities with aftermarket players to have direct contact with the end channels (e.g. branded workshops, certified independent workshops)



To compete with foreign players, local players in Thailand should focus on improving brand awareness, enhancing partnerships with relevant distributors, and prioritizing high-growth regions

1 2 3Parts Branding Channel Development Geographical Landscape

64% of surveyed customers are comfortable with using non-OEM parts, due to:

• Lower product price

• Quality is perceived to be equivalent to OEM parts

Brand awareness is closely linked to quality perception

Develop a targeted and relevant value proposition to ensure brand awareness in the emerging independent aftermarket

Workshop equipment suppliers will benefit from branded service providers and independent workshop equipment upgrade demand, while independent aftermarket parts and accessories brands will need to closely follow the development of this channel to benefit from its development

Track the development of the channel, identify relevant distributors and develop partnerships with them

With large populations, low average household income, low overall vehicle ownership rates and high second hand car transactions, the North and Northeast will be the key regions outside of Bangkok driving demand for independent aftermarket services

Prioritize the development of distribution coverage in regions where demand growth is expected to be highest



1 2 3Distribution Optimization Competition in IAM Consumer Purchasing

Challenges faced by parts players:• Identifying qualified distributors to

partner with• Tracking and controlling

distributors’ channels for purchases and sales

Stabilize and identify relevant partners to become distributors through standardized screening procedures

Grow modern channels to generate opportunities for direct selling and enforcing greater control on product sales channels

Consumers’ preference shift towards OEM genuine products• Perceived to be higher quality and

reliable products• End channels enjoy higher

margins and turnover

• Localize and re-assess product offerings

• Redefine price positioning• Enhance branding and

communications with end channels and users

Consumers’ level of parts knowledge is highly influenced by workshop mechanics • Mechanics prioritize genuine

products for parts critical to vehicle engine and usage

• Consumers remain loyal to trusted and reliable mechanics and particular brands

• Consumers show minimalwillingness to learn or try new brands

Target promotional strategies toward mechanics to ensure that theyrecommend specific parts brands

Players in Indonesia should focus on retail channel coverage, navigating the growth of OEM genuine parts and targeting workshop mechanics as consumers’ key influencers


Parts manufacturers/distributors, aftermarket service providers and auto insurance companies are the key stakeholders in the automotive aftermarket value chain


AUTOMOTIVE VALUE CHAIN

• 1st Tier• 2nd/ 3rd Tier

• Car manufacturers

• OEM parts suppliers

• Authorized vehicle dealers

• Independent vehicle dealers

• Parts producers/ distributors

• Aftermarket service providers

• Auto insurance companies

• Second-hand car dealers

• Vehicle recycling service providers

• Car leasing companies

• Car financing companies

Raw Material & Parts

ManufacturingFinancial Services

AftermarketUsed Car

SalesRecyclingNew Car Sales

AUTOMOTIVE AFTERMARKET KEY STAKEHOLDERS

Aftermarket service

• 3S/4S• Branded workshops• Independent workshops

⁻ Certified⁻ Uncertified

Parts distribution

• Parts manufacturers• Authorized dealers for genuine

parts• Sole distributors and general

distributors for aftermarket parts• Parts retail shops

Related services

Auto insurance companies:


M&A Opportunities in The Automotive Aftermarket


Synergy Benefits

‣ Increase credibility and reliability of independent workshops

‣ Facilitate and provide greater convenience for aftermarket service

‣ Boost the growth of the motor insurance market as a whole

‣ Decrease the operational cost of both workshops and insurance companies due to economy of scale if consolidated

‣ Maximize resources utilization with well-established sources for vehicle owners who seek service from independent workshops

Synergy Benefits

‣ Decrease operational cost of workshops and increase profitability due to lower spare parts cost

‣ Ensure parts availability and shorten lead time delivery,thereby improving service and reducing customers’ waiting time

‣ Increase credibility of workshops as counterfeit issue is minimized

‣ Increase the growth of the automotive parts market as a whole

‣ Match the supply and demand needs for automotive parts

INDEPENDENT WORKSHOPS

INSURANCE COMPANIES

PARTS DISTRIBUTORS/

MANUFACTURERS


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Proven track record in the automotive sector Our Clients

Other Vehicle Related Products

• Tires

• Lubricants

• Accessories

• Paints

• Charging stations

PV OEM

• Luxury vehicles

• Mass market

Vehicle Parts Including

• Filters

• Propeller shaft

• Air bags

• Starters

• Alternators

• Batteries

• Turbocharger

CV OEM Off-Highway

• Excavator

• Bulldozer

• Forklift

• Dump truck

CV OEM On-highway (Truck and Bus)

• Light duty

• Medium duty

• Heavy duty

2 Wheeler, 3 Wheeler

• Luxury motorcycles

• E-Scooters

• ATV / SSV

Other Vehicle Related Services

• Fuel Management Solutions (CV)

• Connected cars - Innovative auto service model

development

• Intellectual property strategy

• Automotive finance and leasing

OUR EXPERTISE AND CAPABILITIES


Regularly published thought leadership showcasing our automotive industry expertise

PROVEN TRACK RECORD IN THE AUTOMOTIVE SECTOR

TRENDS IN CHINA’S AUTOMOTIVE COMPONENT MANUFACTURING INDUSTRY

CONNECTED CARS -DEVELOPMENT OF ALTERNATIVE REVENUE STREAMS

TRENDS AND OPPORTUNITIES IN THAILAND AND INDONESIA’S EMERGING AFTERMARKET

THE BOOM OF CHINA’S AUTOMOTIVE AFTERMARKET IS IMMINENT

AUSTRALIA

Level 13, 168 Walker StreetNorth Sydney 2060NSW, AustraliaE. [email protected]. 61 (2) 9900 5100

GREATER CHINA

BEIJING12th Floor, Union PlazaNo. 20 Chao Wai AvenueChaoyang District, 100020Beijing, ChinaE. [email protected]. 86 (10) 5219 8899

SHANGHAI31/F Westgate Mall1038 West Nanjing Road 200041Shanghai, ChinaE. [email protected]. 86 (21) 2231 9988

WUHAN10F HongKong & Macao Center118JiangHan RoadHanKou Wuhan, 430014Wuhan, ChinaE. [email protected]. 86 (27) 5988 5888

HONG KONG22/F Leighton CentreNo 77 Leighton RoadCauseway BayHong KongE. [email protected]. 852 3766 2288

INDIA

MUMBAI5th, 6th and 7th Floor, Boston HouseSuren Road, Andheri (East) 400-093Mumbai, IndiaE. [email protected]. 91 (22) 6620 8000

NEW DELHI801, 8th Floor, Vipul SquareSushant Lok, Part 1Gurgaon-122016, HaryanaE. [email protected]. 91 (12) 4469 2400

INDONESIA

Graha Arda, 3rd FloorJl. H.R. Rasuna Said Kav B-6, 12910KuninganJakarta, IndonesiaE. [email protected]. 62 (21) 527 7701

JAPAN

Hulic Kamiyacho Building4-3-13, ToranomonMinato-ku, 105-0001Tokyo, JapanE. [email protected]. 81 (3) 6867 8001

KENYA

Acorn House97 James Gichuru Road LavingtonP.O. Box 6823000200 City SquareNairobi, KenyaE. [email protected]. 254 (20) 386 2721-33

MALAYSIA

18th Floor, Menara IGBNo. 2 The BoulevardMid Valley CityLingkaran Syed Putra, 59200Kuala Lumpur, MalaysiaE. [email protected]. 6 (03) 2282 2244

NIGERIA

Block A, Obi Village Opposite Forte OilMM2 Airport Road, IkejaLagos, NigeriaE. [email protected]. 234 (806) 629 9805

PHILIPPINES

1401-B, One Corporate CentreJulia Vargas cor. Meralco AveOrtigas Center, Pasig City, 1605Metro Manila, PhilippinesE. [email protected]. 63 (2) 633 3997

SINGAPORE

3 Killiney Road #05-01Winsland House I, S239519SingaporeE. [email protected]. 65 6333 1511

SOUTH AFRICA

Wrigley Field The Campus 57 Sloane Street BryanstonJohannesburg, South AfricaE. [email protected]. 27 (11) 709 7800

SOUTH KOREA

12th Floor, Korea EconomicDaily Building, 463 Cheongpa-RoJung-Gu 100-791Seoul, South KoreaE. [email protected]. 82 (2) 6464 5100

THAILAND

21st and 22nd Floor, Asia Centre Building173 Sathorn Road SouthKhwaeng TungmahamekKhet Sathorn 10120Bangkok, ThailandE. [email protected]. 66 (2) 697 0100

UAE

4th Floor, Office No 403Al Thuraya Tower 1P.O. Box 500611Dubai Media City, UAEE. [email protected]. 971 (4) 4408 980

UK

Minerva House5 Montague CloseSE1 9AYLondon, United KingdomE. [email protected]. 44 (20) 3059 5000

USA

Time & Life Building1271 Avenue of the Americas15th FloorNew York, NY10020United States of AmericaE. [email protected]. 1 (212) 265 3200

VIETNAM

Level 9A, Nam A Bank Tower201-203 CMT8 Street, Ward 4District 3HCMC, VietnamE. [email protected]. 84 (8) 3832 9820

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