Fierce competition in the Chinese auto market is leading to a major drive among foreign car manufacturers to improve their after-sales service. Initially, many investors hoped to use the local contacts of Chinese joint venture partners to set up sales and service centres. But, increasingly, foreign car firms have found it necessary to become more proactive in developing these networks.
After-sales service is now viewed as a key component in providing added value to customers and boosting new vehicle sales. In some cases service centres are also the sales agents for new vehicles, so improving after-sales service can assist directly in tackling the massive problems associated with the distribution of vehicles. In the medium-term analysts believe there is also a lucrative after-market to be tapped, providing genuine parts to service and repair outlets.
Ministry of Machinery Industry statistics for 1996 show that component manufacturers supplied US$2.5bn-worth of parts to the after-market in that year. But the official figures may. only be the tip of the iceberg as they cover only the 2,0(X) largest component manufacturers. There are an estimated 3,000 smaller component manufacturers which are geared exclusively towards sup-plying the after-market.
Foreign component manufacturers and vehicle assemblers find it difficult to compete in the after-market because of the low price of locally made parts, some of which are counterfeits of foreign branded products. But foreign investors are beginning to fight back. leveraging the strategic advantages they do possess such as technical expertise, marketing sous and knowledge of setting up centralised and efficient distribution networks.
The prospect of accessing the Chinese after-market while upgrading distribution and servicing capacities is all the more alluring because of the characteristics of the mainland car market. Congestion, had driving habits and poor roads all mean that cars on Chinese roads suffer stress leading to more frequent breakdowns. In 1989 it was estimated thatvehicles averaged just over 2,000km between breakdowns. While the Chinese vehicle pare (the number of cars on the road) is set to reach 18m by the year 2000, the parts usage rate may be as much as four times greater than in developed countries. This means that parts consumption in China could be equal to sup-plying a vehicle pare in excess of 70m within the next two years.
Back street garages
The difficulty of breaking into this market is exacerbated by the wide geographical distribution of vehicles and the fact that average journey lengths are relatively low. The result is that a large number of distribution points will he required to service the market. The synergies of expanding after- sales service in China with accessing the after-market seem bound to increase.
But co-operating with China's back street garages will bring its own dangers as many local workshops are small scale, lack technical expertise and have scant regard for thequality of service and components supplied. One newspaper estimated in 1996 that there were more than 10,000 auto repair work-shops in Beijing alone. A survey of 60 component shops in the city showed that more than 80 per cent dealt with pirated products. These include components vital for safety, such as brake linings and steering systems.
The Chinese government is trying to clamp down on sub-standard repair work-shops by introducing a licensing system. The Ministry of Communications will require 220,000 auto repair enterprises employing more than 2m workers to register with the ministry, it was announced last December. The ministry will conduct inspections of businesses over a two-year period and require mechanics to take special examinations before issuing licences and quality warranty cards.
While most repair shops are privately owned or run by individual entrepreneurs, 10 per cent of the enterprises are still state-run. The state-owned repair firms, which today account for 20 per cent of the industry's revenues, have traditionally focused on the truck repair business. But the increasing numbers of passenger cars on the roads means that this is beginning to change.
SVW tops consumer poll
The Beijing Automobile Repair Corporation, for instance, has spent more than Yn83m in the past five years upgrading its
equipment and adapting it to servicing the growing passenger car sector. One reflection of foreign manufacturers' demand for professional local service partners is the fact that six subsidiaries of the company have formed joint venture service stations with major car producers including Toyota, Ford, Volkswagen and Mercedes-Benz.
Manufacturers are taking note of the fact that the market-leading passenger car ?the Shanghai VW Santana, a vehicle with more than 50 per cent market share ?is also regarded by Chinese consumers according to a recent poll as the model with the best after-sales service. Volkswagen's venture with Shanghai Automotive Industry Corporation (SAIC) had set up more than 550 sales and service outlets across the country by 1996, promoting sales of the Santana. In 1996 SVW generated sales of Yn65.6bn (IJS$7.9bn) and recorded profits of Yn6.6bn.
S V W's service network provides valuable marketing flexibility. Last year the venture, frustrated by Shanghai municipal authorities' policy curbing individual car purchases, was able to expand in the Beijing market. More than 7,400 Santana series cars were sold there in the first half of 1997. In August the firm promoted sales in Beijing by offering free test drives, in a package which also included a one-year free maintenance and repair service.
VW's second major China joint venture with First Automotive Works has its own independent sales and service network. Again the setting up of service centres has played a crucial role, with sales of the VW Jetta produced by the Changchun-based venture beginning to take off in 1997 after the establishment of 150 service centres.
Service station boom
Toyota, through its controlling stake in Daihatsu, accounts for about 20 per cent of the passenger car sector in China. Daihatsu's joint venture with Tianjin Automotive has been producing the Charade (known locally as Xiali) under licence since 1986.
It has been steadily building up a network of service stations for several years. In September last year the firm organised an _eight vehicle convoy travelling 5.000km from Beijing to Urumqi, capital of Xinjiang Uygur autonomous region. Mr Masami Urayama, Toyota's after-sales service manager for China, said the `caravan' was a useful exercise in assessing the state of roads across the country. During the trip, when research into road operating conditions was also carried out, the Japanese firm signed contracts in Zhengzhou, Lanzhou and Urumqi, bringing to 56 the number of Toyota service stations in China.
"For authorised service centres we pro-vide training and service manuals as well as advertisement materials, including some nine-metre high signage," says Urayama. Some parts sales to these service stations are also channelled through 32 authorised parts dealers, he explains. Toyota hopes to have a further 10 service stations up and running by the end of this year, bringing closer the medium-term target of 100 service outlets. China Daily reported last year that Toyota had so far helped train 2,700 mechanics in China and sold parts and components to the after-market worth US$1.2rn each year.
GM of the US currently has 28 appointed service centres in China servicing a wide range of imported GM vehicles. The exact nature of co-operation in after-sales service with GM's sedan manufacturing joint venture with SAIC has not yet been finalised. But Mr Peter Negus, in charge of after-sales service for GM in China, states that the US firm will be "working alongside" the networks of its manufacturing joint venture and may introduce dual-appointed service stations.
"In the past year we have provided 440 free training days to ensure that service agents are capable of meeting international quality standards," says Negus. As well as investing in a training centre in Beijing to train the trainers, the firm has set up toll-free customer service lines to point customers in the direction of their nearest GM retail and service outlets.
Mr Roger Chen of Shanghai Delco Battery International, a GM-invested US$30m joint venture, represents GM's spare parts operation in China. As well as supplying GM dealerships with spare parts, the firm uses wholesale distributors to supply parts to a wide range of customers including owners of non-GM vehicles. He believes that GM has good opportunities in supplying batteries, chemical additives and detergents to the after-market. GM's parts division, which is already making an operational profit, is currently exploring the possibility of setting up a parts distribution centre in Shanghai.
Ford has also been stepping up its after-sales service in China in advance of plans to sell its China Transit passenger van being produced by Jiangling Motor Corp. (JMC) in which Ford bought B-shares in 1995. Last November, Ford launched its network of 44 authorised service centres which will service the China Transit as well as imported Ford cars. This network is separate from the internationalisation of after-markets is also creating opportunities for Chinese firms exporting to overseas car after-markets, according to Asia Intelligence Wire. In the first half of 1996 Chinese car part exports to the US topped US$70m representing a 20-fold increase in only three years. Brake drums valued at US$22.3m made up nearly one-third of these exports. American car industry experts say most of the other goods being imported from China are more easily-broken parts such as safety bolts, headlights and radiators.
Last August, Lightglow of the US signed an exclusive manufacturing agreement with a Chinese firm producing neon lights. Other after-market deals concluded at the time covered the supply of wooden shift knobs, hand-sewn leather upholstery and DC-to-AC inverters. Existing suppliers to Japanese and American after-markets are also setting up in China. One such firm is the Taiwanese-owned rim maker Yuan Feng which recently began production of steel and aluminium wheel rims from a plant in Fujian province. While Japan made up 40 per cent of firm's exports of aluminium rims, another 20 per cent was supplied to the US after-market. The firm was initially persuaded to invest by the move of China Motor Corporation ?one of its major customers — to set up a plant in Fuzhou.
ities in China produce spark plugs, oil pumps, hydraulic brakes and car engines. In May of this year Bosch moved to rationalise the management and distribution of parts to the after-market by setting up a trading company in Vaigaogiao. "This marks a significant change in the Bosch distribution strategy and locates us directly in the centre of China's rapidly growing market for the auto-motive after-market business," said Mr HP Bauer, head of Robert Bosch International Trading (Shanghai).
The trading company is responsible for supplying service stations. "The share of Bosch auto parts being distributed via the Bosch service network is still small compared with the number of components distributed via a non-exclusive wholesale organisation, but its share is growing with double digit numbers", says Ms Claudia Wang of the Pudong-based concern.
Another major parts manufacturer seeking to expand in China is Federal Mogul. The US-owned.firm currently has four joint ventures in China producing pistons, piston rings, gaskets and brakes. Its interest in new markets typically begins with an OEM focus, says Mr Jim Carano, Federal Mogul's After-market Vice President for Latin America and Asia. He is hoping to expand co-operation, in particular with GM.
"But the real opportunity is in the after-market and we are hoping to put together a package 'of engine parts for the after-market," he says. The potential. he believes, is particularly great because of the high consumption of parts in China.
While a car engine in developed countries usually needs an overhaul every 10 years, repairs in China are commonly
required every four to five years. In China a combination of the age of the existing car pare, poor maintenance and road conditions means that overhauls may be necessary every two to three years. The firm has recently been in discussions with several independent distributors, each one averaging four to five outlets with the largest possessing 10 to 12 outlets.
The provision of parts to the after-market is made difficult by cheaper. low quality, non-branded and counterfeit spare parts. Bosch has been facing a serious problem with counterfeit products in the China market for many years. Claudia Wang points out that the problem not only harms the good reputation of genuine Bosch products but also has serious safety implications: "If genuine Bosch products are replaced by unreliable copy products, car drivers can risk their lives. Just imagine your brake pads, your airbag or ABS-system being changed or serviced by unqualified mechanics in a doubtful workshop with spare parts of unknown origin."
Bosch has hired a professional investigation company to assist its fight against counterfeit manufacturers but it believes that the Chinese government needs to pay more attention to trademark and copyright infringements in this area.
Roger Chen of GM's spare parts operation believes that there is no easy way to fight counterfeit products which are a problem in all of its distribution channels. "A lawsuit might last one or two years, but after one year you have already lost your market. In many cases the counterfeiters are protected by local governments trying to maximise their tax rev-
enues," he adds. He notes that the problem is particularly severe in the case of oil filters where the difference in price between genuine and counterfeit products can be large. The firm has also recently come across incidents of counterfeit batteries.
Federal Mogul's Casano observes that, "we used to have the same problem in places such as Taiwan and Malaysia but as people's purchasing power increases they will start to demand genuine parts". His firm is introducing holograms onto some of its products to make them more difficult to reproduce.
Toyota's Urayama says: "We are doing some advertising at the moment pointing out the advantages of genuine parts, including posters and flyers at service stations." He feels. however, that many Chinese consumers are often well aware that the parts they buy are not genuine but carry on buying counterfeits and non-branded products because of the significant price differential.
Dealers to define brand
"The next stage is for dealer networks to become the principle agents for brand definition in China," says Mr Malcolm Harbour of the UK-based distribution consultants Wade Harbour.
But resistance to change is substantial, he believes, pointing out that the distribution of cars in China has long been viewed as a conduit for producers rather than an active inter-face with consumers. With the car industry designated as a strategic pillar industry, state regulation remains strong. Vested interests in the current inefficient distribution net-works will continue to impede growth and the "national planning authorities are not yet in tune with customer-driven supply".
The Asian economic downturn has had a damaging impact on China's travel industry. The number of tourists arriving from South Korea has ground to a halt after years of rapid growth, the government in Seoul imposing restrictions on its citizens wishing to travel abroad. It is estimated that the number of tourists from South Korea, Thailand and Indonesia will fall 40-50 per cent this year from last year's 1.1 m total. Japan poses greater concern because it is one of the most significant sources of inward tourism, accounting for in excess of I.5m travellers to China a year.
Kleinschmidt, managing director of travel and tourism consultancy PKF Consulting Asia-Pacific. "Compared with other centres in the region, China has been impacted in a very minor way. Occupancy and rates have held reasonably firm." Between April and June, however, Kleinschmidt has witnessed a softening of the market for example, business travel to Shanghai is falling off, he says.
Falling passenger demand
The abundance of discounted air tickets is a clear sign of falling passenger demand, while the traditional summer reductions offered by hotel groups are significantly more generous than usual and are being extended for longer.
Operating conditions have been difficult for China's 30 airlines. Most of these groups are small operators, not big enough to enjoy economies of scale. However, even the big groups have been feeling the pressure. "We bought too many aircraft as a result of the government's policy to promote foreign relations but the number of new routes are few and this led to a low utilisation rate of aircraft," said a China Eastern Airlines official reported by South China Morning Post.
The downturn has reduced the number of flights taken by passengers in the region and China and Hong Kong have suffered doubly since their currencies have not been devalued. Meanwhile, intra-China travel has been hit by state-owned enterprise reform which has meant a reduction in travel by officials.
Domestic carriers were given permission by the Civil Aviation Administration of China to discount air fares by up to 40 per cent with a view to forcing a consolidation of the industry but this has not happened due to local protectionism, according to official sources. Instead, the overall impact was to cut revenues within the industry, prompting CAAC to reset the discount ceiling to 20 per cent. China Eastern admitted to losses of Yn240m (US$29m) in the first four months of 3998, while Air China and China South-ern posted losses of more than Yn600m (US$72m). The 11 largest airlines lost Yn 1.7bn in the first quarter, while load factors fell from 68.8 per cent to 58.8 per cent over the same period.
The outlook for hoteliers is a little better. "In the first three months of 1998, hotels in China were holding their own or were slightly behind previous years," says Mr Steve.
Hotel rate wars
"The economic crisis has had a negative impact on our hotels," concedes Mr Andreas Obrist, vice-president of Holiday Hospitality in China. "There has been an enormous increase in the number of new hotels coming up and this forces down rates and starts rate wars." The group's revenue per available room in the first five months of 1998 was down by about 10 per cent on the same period last year. "The discounted periods [this summer] are running longer and are deeper than before," says Kleinschmidt.
"This may bolster occupancy but it is really beginning to bite into profitability."
Holiday Inn's 23 hotels in the mainland have been affected to different degrees. Properties in places such as Guilin and Xian have been most affected. "We didn't see the surge we normally do after the Spring Festival," says Obri.st. Kleinschmidt says a lot of the group travel business to China originates from Southeast Asia and this market has died in recent months.
The story is similar for the luxury hotel group Shangri-La, its Beihai property going through a "tough time" according to Ms Joanne Watkins, group director of communications. This resort destination is affected by individual belt-tightening and poor flight connections to Hong Kong.
Properties with a high proportion of business guests have fared relatively well. For example the Radisson SAS in Bering, a joint venture with the nearby China International Exhibition Centre, has achieved occupancy rates of 65-75 per cent in the first six months of 1998. Likewise, the Jinling Hotel in Nanjing has enjoyed similar occupancy rates this year, buoyed by the fact that 90 per cent of its guests come from the corporate sector. However, like in other secondary cities, Nanjing's hotel industry is becoming much more competitive. Holiday Inn and Hilton are just two new chains to set up in the capital of Jiangsu province.
Overheads are being cut across the industry in response to the downturn. "Streamlining management structures has been very effective." says Obrist, "and it has also increased customer satisfaction because.