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Article / 21 August 2014 at 3:48 GMT

Why China's used car industry has a shiny new appeal

China Watcher / Shanghai
China
  • Sales taxes are extremely high on foreign imported cars
  • Ads for used car dealers are more common in tier 1 cities
  • Bitauto is working with dealerships and auction houses

By Neill Flynn

There has always been a stigma about buying second hand goods in China, such as cars or houses, because it’s seen as a sign that you can’t afford the brand new equivalent. Seemingly, showing people that you’re wealthy is more important than actually being wealthy, so much so that there are always several Ferraris and Bentleys parked outside my apartment on an evening, driven by 18-year-olds whose parents just want another way to show that they have money.

The problem is that the sales tax on foreign luxury goods is very high, so keeping up appearances is an expensive game. If we compare the prices of the BMW range in the UK and China, we see that the premium is very high.

Comparing BMW Prices In The UK & China











The negative stigma isn’t the only reason why second hand car sales have traditionally been low. Moving away from the tier one cities, the quality of the roads is generally poor, which means that once a car has driven 50,000 miles, the damage to the chassis is too great to sell on. Tier 1 and Tier 2 tend not to have this problem, and hence there is a developing market for second hand cars.

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China's obsession with new cars has become increasingly unrealistic. Photo: Thinkstock

Over the past year, it’s become more and more common to see advertisements for used car dealers here in Shanghai, as it becomes more socially acceptable. Obviously, the potential size of the market is huge, given that China is the world’s largest automobile market. 

However, it will take time to develop, and I believe that we will have to wait five years before we see this potential fulfilled. Nevertheless, some companies are getting an early start on building their market share, both in terms of content and automobile inventory. One such firm is Beijing based Bitauto.

Bitauto expanding used car network

Bitauto is a provider of internet content and marketing services for China’s auto industry. Baidu announced in June that it had signed an exclusive deal with Bitauto to provide auto related content on Mobile Baidu’s open data Aladdin platform. 

However, PC-based content will be provided exclusively by rival Autohome, which has already seen Bitauto’s PC traffic drop by 10%. It remains to be seen how much of a problem this will be to Bitauto, because the Autohome deal was signed at the same time as the Bitauto deal, so we have yet to see the effect over a full quarter.

However, most people will likely look at cars on their PCs as opposed to their mobile phones, since buying a car isn’t as impulsive a purchase as a new shirt, so the overall shift of traffic may be detrimental.

Last week, Bitauto announced that it has formed a joint venture with auto dealership Yongda and online car auction service Youxinpai to improve its used car website taoche.com. This will help Bitauto to expand its inventory of available-for-sale used cars. As the market potential grows, buyers will not only have access to a large inventory of cars, but also Bitauto’s vast information database.

This deal comes after the announcement that it has formed a separate joint venture with auto dealership Lentuo and Youxinpai to focus on the high end used car market. This is the most important part of the market to start with, because people are more willing to buy a second-hand BMW or Mercedes, because of the social status that comes with owning such a car.

The Lentuo joint venture will help to build the largest online to offline platform that focuses exclusively on premium used cars, and will initially focus on Beijing, before expanding into other provinces. Bitauto will be responsible for listing a car on its taoche.com site, and if the car hasn’t sold after 45 days, it will be sent to Youxinpai’s auction site, where it will be sold to the highest bidder.

This is an efficient business model, because it ensures that inventory is sold quickly, and depreciation expense is minimal. After the car is sold, Lentuo will take care of delivery and aftersales service. Likewise, the Yongda deal is similar, and will be based in Shanghai, as well as neighbouring provinces Jiangsu and Zhejiang, collectively known as Jiang-Zhe-Hu, and regarded as the wealthiest region of China.

With these two joint ventures, Bitauto is developing a large market share of a growing market in China’s wealthiest areas. Whilst strong profit growth may not be immediate, the growth of the used car market in China will revolutionise the world’s largest automobile market.

-- Edited by Adam Courtenay

Neil Flynn is head equity analyst at Chinese Investors
5y
Martin O'Rourke Martin O'Rourke
Neil, here in Denmark, bikes are the weapon (I use that word deliberately having cycled in Beijing) of choice for getting to and from work and the benefits of it are obvious. Is there any sense at all that China, where bikes once ruled supreme on the roads, might rediscover its legacy and begin to pursue a proper cycling strategy?
5y
Neil_Flynn Neil_Flynn
Although i've never cycled in Beijing, i have been stuck in endless traffic jams enough times to know that i'd probably risk my life on a bike if i lived there. Fortunately, Shanghai's traffic isn't quite as bad as Beijing.

Nowadays you can buy an electric scooter for the same price as a decent bike so most people prefer to do that. Also, there seem to be no rules for scooters or cyclists, so riding on the pavement, ignoring red lights and riding into oncoming traffic is common, so there's no real need for a scooter or cycling strategy. Plus, some scooters can now connect to your iPhone, so a lot of people are consigning bikes to history.

One thing that i didn't mention in my article is that you have to pay for a license plate for a non-electric car. Whilst it varies from city to city, the fee in Shanghai is US$10,000. The hope is that it will discourage people from buying cars, and buying a scooter instead (or a Tesla), which in turn will reduce pollution.
5y
Martin O'Rourke Martin O'Rourke
That seems like a good move especially given the horrendous traffic jams in China. Maybe not so good for the pedestrians though!
5y
amanda amanda
This comment has been redacted

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