As China’s tremendous growth momentum slows and competition heats up, getting the retail experience right becomes all the more important for automotive brands. Most dealerships in the country have been pursuing the 4S model, a full-service approach that brings together sales, service, spare parts and surveys (customer feedback).
“The concept of authorised 4S shops is ideal for an OEM to build up customer relationships and to serve customers across their lifecycles, providing quality services and ultimately achieve higher cross- and up-selling potentials as well as higher retention rates,” observes Huu-Hoi Tran, Director, Automotive Sector, KPMG China. “For customers, 4S shops have the reputation of good quality work, are rich in maintenance and repair expertise and represent a place where the customer can trust that his or her car gets the right maintenance and care, including spare parts that are original and approved by the OEM.”
For the operators, the 4S approach helps retain customers for service as long as the car still has the OEM warranty, but as Tran cautions: “As soon as the car no longer has the OEM warranty, the price battle starts as Chinese consumers are very cost and price sensitive and could potentially choose independent service and maintenance shops.”
Arrival in China
While the retail concept has been around for some time in many of the world’s leading automotive markets, it was revolutionary when it first came to China. “In the late 1990s, if you wanted a service, you would have to take your car to a place down the road. There was a separation of the sales network and the service network,” explains Beatrix Frisch, Automotive and China expert for PROGENIUM. With the arrival in China of Volkswagen, this all changed.
“Volkswagen’s first sales joint venture, starting in 1997 with FAW-Volkswagen, started to revolutionise the whole sales system,” notes Frisch. The existing system wasn’t working, and the there was no OEM control over either sales or service. What the OEM did was apply in China the same approach it used in Germany – 4S. “The idea was to integrate the whole servicing around a car, because it was all split up and segmented, with no control at all,” she adds.
The one-stop shop approach was popular not just in Germany but also across most of Europe and North America as well. “If you bought a car, you went to your dealer and there you could service the car as well. You could buy spare parts and accessories. And usually everything around the services on the insurance side and registration was done by the dealer. But at the time, that was never done in China,” observes Frisch.
Not without challenges
The retail model became “an idol” in the Chinese market and other OEMs soon followed VW’s lead. However, the change entailed considerable challenges for dealers, starting with a hefty financial commitment. “You have to buy land to set up a 4S dealer. It was quite a high investment,” says Frisch, estimating the outlay at Yuan 30m – Yuan 40m (US$4.8m-US$6.4m) for every location. “Then you have to find the areas to exploit, because the land is still owned by the government.”
KPMG’s Tran echoes the sentiment, stating: “Establishing 4S shops is expensive in terms of setup and operations costs. And customer service excellence initiatives are very human capital intensive.” He adds that the current market slowdown only exacerbates the situation: “Especially in the ‘new normal’ environment, sales numbers are stagnating and 4S shops are forced to focus on service and aftersales to remain profitable and competitive.”
A 5th ‘S’
A few years ago, BMW took the 4S approach one step further with addition of a fifth ‘S’ – Sustainability. Its 5S locations introduced sustainable features as a reinforcement of the company’s corporate commitment to environmentally friendly building design, engineering and construction.
However, don’t expect to see any big impact on the industry. “The market doesn’t care. It is more about corporate social responsibility than any advantage for the customers,” says Frisch.
While she has little expectation of any great impact from an expanded approach including sustainability, Frisch does see another disruptor in the wings in the form of entertainment. “A lot of the luxury car brands in China offer things like cinemas, hairdressers and massages to customers. If they bring their car for a service, they don’t want to leave the car because it is much too valuable. So they or the driver wait for the car. That means that they need more services as entertainment for the waiting time,” she explains. Notably, this development is specific to China at the moment.
While 4S operators face an uphill battle on many fronts, Tran believes the most significant at the moment comes from the Independent After Market (IAM) reform with the de-regulation of the automotive parts channel. In September 2014, the government announced a guidance designed to transform the automotive maintenance industry. “This was considered the start of anti-trust actions in the automotive aftersales market,” states Tran.
One important aspect of the guidelines that will impact the aftersales market involves the opening of the technical information for maintenance to independent car services. “Automotive manufacturers will have to provide, with compensation. the repair technology data to all maintenance companies, repair shops and even customers instead of only providing to authorised 4S stores,” he explains. “The goal is to promote fair competition in the automotive maintenance industry and adjust the price level for service, maintenance and repair work.”
Another potentially important aspect of the guidelines involves the de-regulation of the automotive parts sales channel. “In the past, the car makers had strict control over the supply of parts, especially those at the 4S stores. This situation will change since the guidance encourages the parts suppliers to provide original parts and independent brand parts to the aftersales markets,” says Tran. It also permits authorised parts dealers and maintenance companies to re-sell the original auto parts to unauthorised maintenance companies. Furthermore, the guidance stipulates that customers have the right to independently choose the maintenance companies and aftersales services.
Guideline details have not yet been released, but as Tran observes: “It is expected to mainly focus on encouraging competition in the aftersales market, emphasising the consumers’ benefits and regulating the automotive market. As a consequence, lower original parts prices are expected and the traditional profit model of the whole auto industry needs to be redefined.”