Honest Jian's Used Cars: China's Next Auto Market

In 2009, China ended the United States nearly century-long reign as the world's largest auto market. But, we probably should add a qualifier--that's the new car market. Also, although the Chinese make some nifty products, let's just say that mostly homegrown products may not yet have similar stature with Western brands (who many Chinese concerns make for on an OEM basis anyway). In cultural anthropology, there is a phenomenon of "colonial mentality" that may be at work of colonized countries displaying an inferiority complex towards the products or even the culture of the former colonizer. The reasoning is that they must be superior since they managed to occupy us for some time.

China has of course undergone occupation and domination by Japan and Western powers in recent centuries. Given the long-term memory of many Chinese compared to the zero-planning horizon of most Americans for example, this history may also play out in consumer attitudes towards the superiority of foreign brands to domestic makes.

Accordingly, the WSJ has an interesting new article on how this longstanding preference for foreign brands may be advantageous for the same at this point in time. You see, the Chinese used car (pre-owned, if you prefer that euphemism) market is dwarfed by the new care one--something that isn't really the case in many Western nations with their extensive secondary dealerships, auctions for used vehicles and so forth. Foreign brands introducing used car sales with official warranties and other guarantees may be fuelling a trend of "colonial mentality" in motion by eating into Chinese brand new automobile sales by offering more car for less via used vehicles. That is, the "lemon" issue is solved by clever marketing via backing from established foreign brands which command a premium in the PRC:

China's auto industry is so new that there are few used-car businesses today and little involvement by big dealers. Buyers and sellers now meet at stadium-size, open-air markets, some with luxury-car sections. That's about to change with used-car sales likely to reach 4.1 million vehicles this year, up 7% from last year, according to an estimate from Daimler AG's Mercedes-Benz.

In response, auto makers including Daimler, Nissan Motor Co. and Volkswagen AG are racing to build used-car operations that can take trade-ins for new cars and offer dealer guarantees and services on used vehicles. One big Chinese auto retailer says it plans to increase its focus on used cars to help improve profit margins.

And:

China's used-car sales today are less than a quarter of the 19 million new cars expected to sell in the country this year. But the number of used-car sales should soar as the new-car market in China slows and matures, industry officials say. "How we handle this as an auto maker will determine who is going to be a winner and decide who is going to survive and possibly thrive long term in China," says Hideki Kimata, a senior sales executive for Nissan's China sales arm, based in Guangzhou.

The biggest threat they pose is to China's homegrown brands, such as BYD and Zhejiang Geely Holding Group Co. Chinese consumers generally prefer foreign brands; an overwhelming majority of China's top selling cars in recent months were from global auto makers' joint ventures with Chinese car makers.

One reason for that is the lack of cachet among home-grown Chinese auto makers, stemming from their "lack of competitiveness" in creating quality cars, says Dong Yang, deputy chairman of the China Association of Automobile Manufacturers.

It's an increasingly competitive market, and homegrown Chinese manufacturers do need to improve their overall image in terms of providing dependable vehicles, superior customer service, lengthy warranties and so forth to compete not only in the new car market but also in the used car market. As we have seen again in many Western countries, second-hand cars are quite attractive given the longevity of modern designs as well as their significantly lower prices since someone else has already borne the brunt of most of the depreciation.

Lastly, the emergence of a used car market highlights the growing sophistication of Chinese consumers. Used cars are a potential minefield with tampered odometers, incomplete service records, and other cheap tricks. Sellers thus need to establish good reputations in helping to alleviate "moral hazard"-type problems.