The Internet Spent Years Trying to Remake the Car Market — and It May Have Been Aiming at the Wrong Target All Along | 2016 Corporate Digitization ⑥

Online car sales, used cars, car washes — last year's most heavily funded sectors have all gone cold.

Traditional large companies are still scrambling to reach younger consumers, while digitization is reshaping supply chains and competitive dynamics across industries. QDaily is publishing a year-end 2016 digitization series — ten articles over one month, focused on what large companies have gained and lost in the digitization process. This is the sixth installment.

Every year on Double 11, beyond the astronomical headline transaction figure, Alibaba publishes category sales rankings in its "battle report" — telling you which brand sold the most TVs, whose phones crossed 100 million yuan first, and so on.

In both 2014 and 2015, cars were stars of those rankings and a focal point of Alibaba's public messaging.

In 2014, the talking point was that more than 30 car brands had joined, together representing 80 percent of China's auto market. In 2015, it was full online payment — 700 million yuan worth of vehicles sold in a single day — for which Alibaba even applied for a Guinness World Record for the highest 24-hour online retail sales by a single company.

This Double 11, Alibaba was noticeably less excited about selling cars online. The big screens at the media center no longer refreshed a live auto sales tally.

When it was over, there was only a brief news item saying 100,000 cars had been sold. What it left out was that the vast majority involved only a few hundred yuan paid online as a deposit, with the customer later heading to a 4S dealership to pay and collect the car. Online car sales had reverted to a simple traffic-referral business, no longer pushing customers toward full online payment to juice the sales total the way it had a year earlier.

As for the Double 11 gala, where users could shake their phones to win a two-year lease on a Smart for one yuan — that's a marketing trick banks have been running for years.

That online car sales had cooled off from last year came as no surprise to the carmakers.

At the Guangzhou Auto Show, which wrapped up last weekend, a China-region executive at an American-brand joint venture told QDaily that online car sales had failed to dent the traditional 4S dealership model. The reason, he said, is that selling cars involves both the sale and after-sales service — "those two cannot be separated; they form a complete whole."

A senior executive at another American-brand joint venture put it this way in an earlier interview: "Every company that has tried automotive e-commerce, is trying it, or is thinking about trying it — not one of them, in my view, has thought about this business model from the perspective of the whole supply chain. They all split off sales from after-sales. Whether it's a vertical site like Autohome or a general platform like Tmall or JD.com — it's like pitting a single link against the entire system."

Neither was optimistic, yet both carmakers were happy enough to join the fun for a bit of marketing. Both executives declined to be named.

When the internet invades an industry, the most direct move is always to put sales online. Alibaba's $234 billion market cap was built on exactly that.

But with cars, Alibaba spent more than two years digitizing sales — and the effort has proven to have little future.

Unlike Almost Any Other Product, a Car's Brand Decides What Consumers Buy — but the 4S Dealership Pockets a Large Share of the Revenue

Alibaba sold 100,000 cars this Double 11 — roughly what 1,000 4S dealerships sell in a month.

But the promotion didn't mention that almost all of those sales involved only a deposit paid online, making them little more than e-commerce discount or rebate coupons. Every subsequent step — paying the balance, taking delivery, registering the car, buying insurance, and the maintenance and repair spending that accumulates over the years of use — all happened at the 4S dealership, with no involvement from Alibaba at all.

And of all the money a car costs over its life, beyond the one-time profit the manufacturer takes at production, most comes from the stages after the car is sold.

For most buyers, a car is the largest single purchase of their lives after a home. What consumers care about when deciding which car to buy is the brand itself.

In a supply chain like this, the brand holds all the power. That is partly because cars themselves are so complex, and partly because carmakers are always among the advertisers every media channel values most.

Car brands hand 4S dealerships monthly or quarterly purchasing and sales quotas, then keep most of the profit on each car for themselves.

Since 2015, most manufacturers have set annual growth targets above 20 percent — which, against a backdrop of slowing domestic growth, looks somewhat unrealistic. To hit their volume targets, 4S dealerships have had to discount cars, sometimes selling at a loss.

That new car sales make almost no money is common knowledge in the trade. Dealerships still borrow to stock cars and sell at a loss partly to earn the manufacturer's sales-target rebates — but the bigger reason is that the revenue from auto loans, insurance, maintenance, and repairs tied to after-sales service flows overwhelmingly into their own accounts.

That revenue is far greater than what selling cars brings in.

The CFO of a Jiangsu dealership group that represents five brands told QDaily that, broadly, 40 percent of a 4S dealership's gross profit comes from after-sales service. "That's pretty much the whole industry," he said. "If you can avoid losing money on a new car, you're doing well. Everyone is really trying to make money through after-sales and maintenance."

The dealership's grip on the margin begins the moment a customer walks through the showroom door.

During the sale, staff will try to talk customers into accessories — usually overpriced dash cameras, window tint, roof racks, and the like.

Once the configuration is settled and it's time to sign and pay, the salesperson will usually ask whether the customer wants financing.

Next comes commercial insurance, and closing that sale in-store is often one of the salesperson's performance metrics. When dealerships discount new cars, they frequently attach conditions — insurance must be bought in-store, or the customer must finance through them.

In a city like Shanghai, where license plates must be won at auction, the 4S dealership will offer to bid on your behalf, charging fees pegged to different "success rates."

Once the car is legally on the road, the owner follows the manufacturer's service manual, bringing it in roughly every 5,000 to 10,000 kilometers. A staff member at a Shanghai Volkswagen dealer in Foshan told us that within the warranty period, about 95 percent of owners service their cars at a 4S dealership. Once the car exceeds the warranty mileage or term, that share drops to around 75 percent.

For more serious accidents that require replacing major parts like a bumper or headlights, the owner's first choice is almost always to go back to the 4S dealership — because of the tie between the brand and its dealers, it is genuinely hard to find authentic new factory parts anywhere else.

Of all these steps, accessories, financing, insurance, and maintenance are the ones the 4S dealership controls. That gives salespeople an easy incentive to nudge customers into spending more.

Powerful manufacturers could rein in that behavior, but few do. To some extent that's because, without 4S dealerships to stockpile inventory and supply working capital, the manufacturers would face heavy inventory pressure themselves.

This "partnership" lets 4S dealerships survive the money-losing sales phase and reach the money-making after-sales phase — so they have no incentive to use digital tools to improve their own sales and service.

In March this year, Maserati sold its new Levante on Tmall — an SUV priced at 999,800 yuan. The 100 units they had in stock sold out in 18 seconds.

At this year's Guangzhou Auto Show, an employee at a Maserati 4S dealership in Guangdong, asked what he made of it, told QDaily that dealers generally neither oppose nor go along with such manufacturer-driven promotions. They don't oppose them because an online order is only a deposit — the customer still has to show up at the physical store with a redemption code to pay the balance and collect the car, so the dealer can still profit from after-sales service.

The reason they don't actively go along with them is that under this model, the 4S dealership has no final say over price. If a dealership could sell a car for 1 million yuan but the manufacturer sets the promotional price at 900,000 yuan, that 100,000-yuan "gap" comes out of the dealer's pocket. "So it's usually the dealerships that already rank near the top of their region that are more willing to support these events — because they sell more cars and can get better prices from the manufacturer," the employee told us.

In the end, online car sales are nothing more than a traffic-generation and brand-exposure channel that carmakers and 4S dealerships are happy enough to accept.

The online experience of buying a car may be far better than walking into a 4S dealership — but it doesn't touch the dealership's revenue. That's exactly why, after years of complaints, 4S dealerships still have no incentive to use new technology to improve their service.

Internet Companies Have Tried to Remake the Auto Business from Three Directions — None Has Gotten Anywhere

Auto e-commerce is living on heavy subsidies

When the internet sets out to remake a business, the most direct angle is advertising, marketing, and sales.

The rise of vertical sites like Bitauto and Autohome can be seen as the first wave. They changed how consumers got information about cars and widened the advertising channels open to carmakers, dealers, and aftermarket brands.

Today, checking a vertical site before buying — for detailed specs, dealer quotes in your city, and user reviews — has become routine homework for the average buyer.

Having built up a base of users and credibility, these sites tried to pivot into, or expand into, automotive e-commerce.

During this year's Double 11, Autohome processed 134,225 new car orders worth 19.692 billion yuan in total, double last year's. Bitauto released more detailed numbers: 138,970 orders worth 21.207 billion yuan, with more than 1,100 models from over 140 brands taking part.

Behind those record order volumes and transaction totals, however, were 300 million yuan and 500 million yuan in subsidies respectively — handed out through red packets, half-price flash sales, cash vouchers, and the like.

They ran into the same problem as Alibaba: they never got the money spent after the sale. Once the customer paid a deposit on the e-commerce site, every yuan from the balance onward stayed with the 4S dealership.

Autohome's third-quarter earnings showed operating costs up 266.3 percent year-on-year to 585 million yuan, driven most directly by rising auto sales costs. Its inventory value for the quarter climbed from 110 million yuan a year earlier to 182 million yuan.

The new path auto e-commerce is exploring is parallel-import cars — overseas-market models brought into China by traders without the manufacturer's authorization. But it remains very niche.

The one-yuan at-home car wash has all but disappeared

In 2015, on-demand home services were on fire: food delivery, house cleaning, manicures, haircuts, errand-running. Turning the 4S dealership's work into an at-home service was one more thing to try.

The hottest piece of automotive home services was car washing. Bopai Auto, eBaoyang, Bimawen, YiKuaixiu, Ganji Car Wash, and Guagua Car Wash all wanted to hook users with one-yuan washes and then convince them to stay on their platforms.

But washing and servicing cars isn't like ride-hailing. When the Bopais of the world copied the Didi model, they overlooked two things. First, this is a market that turns on service quality — it needs word-of-mouth, not bargain-basement prices.

Second, there's almost no barrier to washing a car: cycling through a few companies at one yuan a wash, a user could try every major on-demand service for 12 yuan a year.

And being willing to let someone wash your car is not the same as trusting them to service it. Even with servicing, a car only needs routine maintenance two or three times a year.

A Skoda owner who tried Bopai's at-home servicing told us that his routine service — an oil change plus oil filter and air filter — normally runs just under 400 yuan. Bopai's discounted price was 90 yuan. Add the labor of dispatching three technicians, service fees, and materials, and each 90-yuan Bopai job needed a subsidy of nearly 250 to 300 yuan.

Subsidies that steep were never a business that could last. One after another, O2O car-wash ventures began to fold. First was eXiche, which billed itself as the country's largest O2O car-wash platform and formally shut down in October 2015.

Around the same time, Ganji Car Wash merged with 58.com's Guagua Car Wash; before that, Car8, Zhifuhui, Yunxiche, Dida Car Wash, and a long line of on-demand car-wash startups had all closed their doors, most just months after opening.

Bopai, valued at as much as $600 million at its peak, held on until April this year before it, too, went under.

Of the businesses that drew dense investment from 2014 on and still hold some heat, only used-car trading is left.

The transparency problem used-car e-commerce talks about doesn't exist for the seller

Starting in 2015, wherever you lived in China, you could hardly escape the ads for the used-car platforms Renrenche, Uxin, and Guazi. Their campaigns ran from first-tier cities down to third-tier ones, from billboards to TV show sponsorships; the companies themselves claimed advertising spend of more than 2 billion yuan. In July 2016, Renrenche said its monthly orders had topped 15,000.

Yet every one of these used-car platforms has at some point been reported for faking sales figures and inflating its advertising spend.

What excites investors is that China's used-car market really is enormous. According to traffic management bureau figures, as of June this year there were more than 180 million registered vehicles on the Chinese mainland. According to the China Automobile Dealers Association, in the first eight months of 2016 national used-car transactions ran to roughly 6.5 million vehicles at an average price of around 80,000 yuan.

Even taking the monthly sales figures Renrenche and Guazi publish at face value, they account for only a tiny slice of national used-car volume.

But the used-car market is already quite transparent for the seller. Model, trim, mileage, accident history — these few numbers set a used car's price, and 4S dealerships, local traffic radio stations, and used-car markets around the country all use similar methods to value a car.

Beyond subsidies, used-car e-commerce has no real way to attract sellers.

And for buyers, the problem hasn't been solved yet.

A used car's condition is highly unpredictable, and a reliable inspection is a necessary step to avoid buying a refurbished car, a welded car, or other problem vehicles. Even at a local used-car market, finding a car whose odometer hasn't been tampered with isn't easy.

Yet judging by how used-car e-commerce platforms market themselves, they are still leaning on heavy subsidies to drive transaction volume and pull in new investment — while the reliability that buyers care about most is not yet the priority.

What Openings Are Left for Internet Companies in the Car Business?

The Volkswagen Passat, which sells around 170,000 units a year, is one of the most widely owned B-segment cars in China. Figuring on a ten-year ownership cycle before replacement, the total outlay comes to roughly 325,000 yuan, of which about 125,000 yuan — 40 percent — is spent after the car is bought.

• The car itself, 200,000 yuan — the profit sits with the manufacturer; there is almost no margin at the point of sale.
• Tax and compulsory insurance, 19,334 yuan in total — paid to the state, including 17,904 yuan in purchase tax, 480 yuan in vehicle and vessel usage tax (1.6–2.0L), and 950 yuan in compulsory traffic insurance.
• Commercial insurance, about 55,000–60,000 yuan (the total over a ten-year ownership term, enough only for 500,000 yuan of third-party liability coverage, with no-claim discounts already factored in). The first year's 7,087 yuan must be bought at the 4S dealership, 9.3 percent of the total.
• Maintenance, 30,000 yuan — covering engine oil, oil filter, cabin air filter, spark plugs, transmission fluid, tires, and so on, per the official service manual. Within the warranty period, more than 95 percent of owners service their cars at the 4S dealership, accounting for 10,656 yuan, or 14 percent of the total. After the warranty expires, the share still serviced at the 4S dealership falls to around 75 percent.
• Car care, 6,400 yuan — figured at one wash a month at 20 yuan each, and one wax every three months at 100 yuan each.
• Aftermarket accessories, assumed at 10,000 yuan — including 5,000 yuan for window tint and 5,000 yuan for a dash camera, GPS, reversing camera, new lights, and the like.
• Selling it as a used car: –50,000 yuan.

What's left — the big-ticket categories the 4S dealership doesn't control, where the internet could meaningfully improve the experience — are insurance, maintenance, and used cars.

These are also the areas still pulling in heavy investment this year.

Internet-based auto insurance is a business that has sprung up in the past two years. Since last year, startups in auto insurance have raised a combined 7.6 billion yuan. But for the near term, this market still belongs to the big insurers.

China Life, China Pacific, and Ping An together hold 67 percent of the auto insurance market; the top eight companies by assets hold 85.3 percent. The remaining less-than-15 percent is split among 47 small insurers.

To break into this market, startups will likely have to solve two problems: trust and cost.

When a driver needs to file a claim, the last thing they want is to be unable to reach their insurer — and that is exactly what auto insurance startups need to prove they won't do.

The big companies have already started selling auto insurance online, at prices that are quite transparent; quotes between them generally differ by no more than 5 percent. When existing customers renew, insurers sometimes team up with 4S dealerships to hand out labor vouchers — in effect a discount on the premium.

After the subsidy-fueled O2O car washes collapsed, the auto-care companies still running today — the likes of Youyishou and Tuhu Auto — are each tackling trust and cost in their own corner of the aftermarket. Youyishou raised 62 million yuan in a Series B in April this year, to be used for new outlets. It offers a standardized work environment with experienced technicians providing bodywork and paint services — a 3S shop that acquires customers online. Tuhu Auto grew out of selling tires and oil in the first place; its work with Michelin's Shanghai-area distributor on sourcing and offline installation has made it seem genuinely workable to buy major auto parts online.

With used cars, solving the trust problem matters even more. If this market were transparent enough for buyers, a Mercedes-Benz sedan with about 70,000 kilometers on it, no major accidents, and an original price of 500,000 yuan should sell used for roughly 250,000 to 300,000 yuan.

Buying a middle-aged Mercedes at close to half price actually makes good sense — provided the trust problem can be solved.

So far, no internet company has managed to truly pry apart the alliance between carmakers and 4S dealerships.

But policy isn't fixed. The reforms to auto insurance and maintenance rules are one example.

Consumer habits are shifting too. This Double 11, more than 80 percent of transactions were completed on phones. There's no reason to assume users will accept the rules 4S dealerships set forever.

If carmakers don't think about improving, then when change does arrive, whether they still hold the upper hand is anyone's guess.

Cover image: pexels.com