Digitalization, Impact the Future: Aftermarket Industry Transformation

2020 White Paper of China Auto Aftermarket

Auto stock market in China is poised to emerge as the world's largest single market, with both large scale and rapid growth attracting attentions of an increasing number of companies and capital. According to all-round analysis in policy, capital, customers and business logic, Deloitte automotive sector team published Digitalization, Impact the Future: Aftermarket Industry Transformation – 2020 White Paper of China Auto Aftermarket, sharing Deloitte's insights and judgement to the future trend in auto aftermarket industry transformation.

1.Market: Golden opportunity for magnificent transformation to high-quality development as the world's largest single market has been just grown up

Affected by economy, industry foundation and social factors of Chinese characteristics collectively, some particular features have taken shape in the development of auto maintenance market in China, including large market scale and rapid growth; prominent social benefits and low industry maturity.

In market end, China auto market has a bright future and will continue to grow at a high rate in the next ten years. Maintenance market capacity continues to grow at a respectable rate, expected to reach 1.7 trillion by 2025.

In policy end, there was no policy issued in the earlier stage. New policies have been frequently issued recently but the implementation effect needs to be further improved. We may identify from a review of the detailed policies on auto aftermarket in the past five years that the regulation mainly focuses on three regulation ideas and directions: openness, transparency and standardization. At last, in capital end, auto aftermarket is still a capital-focused track, industry reform has been boosted by capital over the past three years. The number of individual financing greater than RMB 100 million in the industry is more than 50, while capital investment has started to tend rational apparently.

Embracing the future, the cores of macro opportunities of China's auto aftermarket maintenance industry are digital and customer-oriented. Deloitte believes that the development of digital technology has reached a position that can relatively support the transformation. The traditional pain points are expected to be improved with high quality, great efficiency and scale effect through digital technology, and the key to the success of future industry change lies in the persons who can use digital technology and based on the deep understanding of the industry to complete the deep match of digitization and business.

2.Consumer: online retailing experience, the key to consumers aspiring for "quality assurance, one-stop convenience and comfortable experience"

Basic characteristics of Chinese consumers include: low intensity of car use, lack of knowledge about autos, the attitude towards consumption of autos is relatively sensitive, more willing to pay for convenient services.

And a busier lifestyle gives rises to a higher expectation of consumer for maintenance service of "quality assurance, one-stop convenience, comfortable experience and cost efficiency". In the auto maintenance market, Chinese consumers are more willing to embrace digitalization to obtain the maintenance information and service experience with higher quality and efficiency. The digital touchpoints provide differentiated opportunities for the highly competitive auto aftermarket.

Figure: Maintenance Focuses on Consumer in Auto Aftermarket

Source: Researched and sorted by Deloitte

China is the world's largest online retail market, and the Chinese people are world leaders in online consumption habits. Meanwhile, the auto aftermarket also shows a clear online trend. In view of incomplete statistics and industry expert interviews, Deloitte estimated, after modelling, that the online rate of domestic auto maintenance significantly increased over 22% from 2019 to 2025.

Age of online users is tending younger and female users grow rapidly. The middle class of society occupies a dominant position, Users with auto age of over 4 years are more concerned about cost-performance ratio, and therefore the absolute majority of online users. According to Deloitte's estimation, at present, tire has become the single category with the largest market share of auto parts sales network and it is still growing. Among maintenance consumables, "engine oil, battery and tire" are with the highest online retailing rates ranging from 5% to 10% in general, and the penetration rate of online retailing will be further improved in the future. Under the trend of consumption: as competition intensifies, buyers begin to take the initiative, forcing the industry to complete industrial upgrading centring on consumer demand.

3.Industry Development Trend: Digitalization reshapes "Man, Goods, Payment, Customer and Store", transforming value chain integration from capital integration to dataflow integration

Under DIFM model, the original factory maintenance demand is still the largest market demand from the aspect of share of terminal consumption output value, but in the medium and long run, it is highly probable that the share will be continuously converted by non-original factory maintenance demand, which are primarily caused by: decline in number of networks, higher service price and inconvenient location.


Figure: Status quo of the pattern of China's auto maintenance market

The value chain integration is accelerated, promoting the improvement of industry concentration. At present, the S2c model has begun to take shape, and compared with the traditional model and M2B2b2c model, it will have the optimal supply chain efficiency and production and sales synergic relationship, achieving deep optimization of stocks from all links in the supply chain and the most advantageous spare parts cost. M2B2b2c and S2c models already become the mainstreams of transformation.

Figure: Comparison of traditional model, M2B2b2c and S2c

Source: Deloitte Research

According to Deloitte's observation, there are four mainstream models as showed in the figure above:

Model 1: M2B2b2c value chain model. Under the traditional multilevel distribution model, major enterprises are original factory after-service chains (i.e., the original factory 4S network system) represented by traditional dealer group, as well as the maintenance chain brands represented by traditional third-party auto service chains, traditional OEMs and traditional parts manufacturers.

Model 2: S2c value chain model. The S2c value chain model is currently dominated by enterprises with internet background, and the general development path is to start from the e-commerce platform in the value chain, to complete the integration of the value chain upstream and downstream at the same time. Therefore, Deloitte believes that the S2c value chain integration model has many competitive advantages compared to the traditional vertical integration model, and provides a guarantee with more differentiated value in terms of customer operation, cost of spare parts and operation quality of auto service network compared to the traditional model and the M2B2b2c model. This model has great development potential.

Model 3: Vertical integration model of flow intermediary. Simple flow intermediary is unable to achieve a triple-win of consumers, platform and maintenance service network, and the business logic cannot support its sustainable development.

Model 4: B2B auto parts e-commerce model. Vertical integration of B2B auto parts is an integration model with very clear business logic. From the perspective of supply chain integration, B2B large-scale e-commerce engaged in auto parts will inevitably arise.

Phenomenal reconstruction of industry promoted by the tide of digitalization will include the key points below:

  • Digitalization reshapes "Man" – Releasing training efficiency for mechanics and improving value of mechanics driven by digitalization
  • Digitalization reshapes "Goods" – ultimate flatness and good faith which is not seen for ages
  • Digitalization reshapes "Payment" – from liberating accountants to Fintech endowment
  • Digitalization reshapes "Customer" – quality assurance, one-stop convenience and comfortable experience
  • Digitalization reshapes "Store" – utmost Standardization and Asset Efficiency

By shifting back to basics of business, it is suggested that the following five capacities should be constructed on the underlying core competencies: capability of data acquisition and data increment, capability of supply chain, maintenance technology and criteria, capability of construction for industry ecology and iterative innovation.


4. Suggestions for enterprises in the auto aftermarket

Aftermarket, especially the maintenance market, Deloitte will share with you suggestions on future development in combination with research of the trend from the upstream to the downstream of the value chain:

Upstream enterprises of the value chain: active exploration of new channel and participation in vertical integration by relying on self-positioning advantages, including actively embrace innovation model of product distribution, positively construct the direct-to-consumer capability, and vigorously engage in non-standard maintenance businesses with one's own strengths.

Midstream enterprises of value chain: active exploration of new opportunities for data realization by deep endowment and enhanced vertical integration, including gain control of terminal data by deepening B2B endowment values and constructing competitive edges, in-depth vertical integration as the wisdom bridge to merge product and distribution, exploration of Fintech opportunities relying on supply chain data capacity.

Downstream enterprises of the supply chain: inevitable trend of the industry to upgrade the capabilities driven by digitalization and standardization, actively seeking supply chain platform endowment, expanding insurance businesses while consolidating non-standard businesses.

Great changes of auto industry in the past five years have been epic, the trend has quickly ignited the enthusiasm of market participants and investors, leading to the emergence of game changers accelerating the iterative upgrade of the industry. New models come out thick and fast, with division of labor and position of value chain changing constantly. But one thing for sure, returning to the business essence of aftermarket, end user service quality and experience on the basis of resource integration will be the key to eternal success.

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