Auto trade policy under assessment
By Wang Yu (China Business Weekly)
Updated: 2004-11-19 14:40

Although the draft of China's auto trade policy issued recently by the Ministry of Commerce, China's commerce and trade watchdog, is still open for public assessment, the final version will not be hammered out until the end of this year. What has been presented has drawn close attention from people from all walks of auto businesses, weighing the pros and cons to see whether it will benefit local industry.

"I agree with those who believe that the new policy is a specific reflection of what was unveiled earlier this year. The content this time is closely based on the current market situation. It is designed to rule the market and to standardize it for future competition with foreign counterparts," said David Hu, president of China Business Update Information Resources Inc.

Hu's firm provides advice and market information for foreign automotive-related companies who wish to develop business in China.

The company regulates the demands of auto dealers, in terms of service quality, cash flow and other information, because, in accordance with the drafted new policy, auto dealers can only sell products under one brand in the future.

"This rule will surely help streamline the market, and make service provided by auto dealers more professional. For consumers, this is indeed good news, since the service they will receive from auto dealers will surely be better," Hu said.

On the other side of the coin, the new policy may bring about some negative influence to auto dealers, Hu indicated.

"Rather than granting an equal stance to auto sales agents with car producers, the new auto industrial guidelines will weigh heavy pressure on auto dealers, and may even lock them in an underdog position under car manufacturers," Hu commented.

Speaking from a product and technical perspective, if the vehicle manufactured by a particular automaker fails to meet market requirements, all its sales agents will have to endure the pain of the failure.

From a business strategy point of view, each sales agent will have to follow one particular car manufacturer's heels to draft their sales plan. This will certainly deprive auto dealers of the freedom of doing business independently.

Under such market circumstances, once the new regulation take effect, auto dealers will have to face an awkward situation.

"If one agent can only sell the products of one brand, it is not fair to the dealers. They have to take many more risks and the result may either be losing business or revenue," a auto sales agent at the Asian Games Village Auto Exchange Market said.

"Most of the second and third-tier auto dealers may be ousted soon after such new regulations were put into effect," Hu added.

Endorsing Hu's points, Jia Xinguang, a top analyst at the China National Automotive Industry Consulting and Development Corp, commented that the environment for most auto dealers to survive and develop would be extremely difficult if the drafted new policy was put into effect without any changes.

"About 80 per cent of the sales agents will be affected adversely. This only adds fuel to the fire, while domestic auto sales growth is choking," Jia commented.

The senior auto market analyst pointed out that instead of standardizing and maturing the market with government policy regulations, let the market decide who can survive and who will have to be kicked out.

"I think market-oriented mergers and acquisitions can replace authoritative policy to remove unqualified small dealers and drive the industry in a more positive way.".

Differing from its Chinese counterparts, auto sales agents in Europe want a multi-branded business, replacing the current one brand special shop system.

"Brand auto salons are fading into history in Europe. Only in this way can auto dealers and makers work on an equal footing and do business together," Hu pointed out.

The new regulations concern the used vehicle market as well; a great leap forward, experts say.

"The second-hand market is in more desperate need of a new policy than the new vehicle market to develop and mature. What is contained in the new policy draft for used car trade is favorable to the market's further development," Hu said.

In Hu's eyes, the second-hand auto market in China is in total chaos, lacking a unified value-appraising mechanism and transparent market operation system.

"It is hard for used-vehicle dealers to flourish in China. I would prefer more efforts from the authority to tackle problems existing in that first," Hu advised.

The new policy draft regulates that foreign capital can enter second-hand vehicle trading and a more flexible pricing and value-assessing system will be adopted.

"All these can give the currently sluggish market a big boost. The entry of foreign capital into the second-hand market will help oust inferior local players. International dealers can bring a higher standard of value-assessing and a more transparent operation mechanism, crucial to standardize the market," professed Lin Lei, president of Sinotrust Marketing Research and Consulting Ltd.

However, Yang Yang, a senior official with Zhonglian Second-hand Automobile Market (ZSAM) of Beijing said that since the new policy draft is not explicit enough to address specific problems, such as how much of a stake foreign companies can own, the policy needs further improvement to take effect.

According to the regulation issued in 1998 governing second-hand vehicle transactions, only one car market can exist in one particular city above a certain administration level in China.

The city government is actually involved in specific transactions by charging a commission and takes on the role as an industrial monopolist.

"It is an obvious monopoly, and various problems related with monopolies will arise," said Wei Zheng, an official with Market and Information Department of ZSAM.

In fact, instead of only designated car markets, auto analysts have been long crying for more market participants, such as auto dealers and even '4S' (Sale, Spares, Service, Survey) agents, to be granted the rights to sell second-hand cars if they choose.

"The current 'old for new' promotions adopted by various car makers and dealer are in fact, following a new way of trading second-hand cars. This will enhance sales of both new cars and old ones. It is very likely to be a breaking point for foreign capital to enter the market," Hu added.

The new auto trade policy draft published recently for public evaluation and criticism opens the auto part retail business to foreign giants, reiterating the nation's support and encouragement for the development of the domestic auto components business, especially auto-part exports.

This conforms with the auto policy issued by the National Development and Reform Commission earlier this year.

There are several approaches for local parts suppliers to squeeze into the global automobile supply chain.

One way is through original equipment manufacturing (OEM), but this can get complicated. Other ways are either through direct exporting or through after-sales service.

"According to my experience, it is hard for domestic component suppliers to gain OEM contracts from major global auto makers because of high requirement of quality and production capacities. After-sales service targeting the international market is, so far, the easiest approach for local players to tap into the international market because of the low labour costs in China. In fact, many, vehicle suppliers are doing a great job in the Middle-East and Latin America," Hu said.

For foreign auto-part giants, the biggest obstacle against their doing business in China is inferior and counterfeit products, but the policy sends a positive message to foreign firms, such as Delphi Corp.

"We fear imitation products. That is why we must be prudent in the local market. Still the policy will definitely improve local business," Jiang Jian, deputy president of Delphi (China) Investment Co, Ltd, said.

"We have started to build some channels. If our local channels are strong and stable enough, we may export components from China," Jiang stressed.

The new policy draft will remain in the spotlight for quite a while because it involves some great changes for both local and international players to escalate auto business and trade in China.

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