Antitrust law may reshape vehicle sector

PwC and Strategy & 's new survey of vehicle industry experts sheds light on the expected impact of antitrust law enforcement on the automotive value chain in 2015 and beyond.

The latest guidelines on China's antitrust law, jointly issued by 10 government ministries in September, the renewed discussion on parallel imports in the China (Shanghai) Pilot Free Trade Zone in November, and the Automobile Dealers Association's letter on dealer inventories and original equipment manufacturers' controls in December - these will likely be the catalyst for significant change, according to the survey by PwC and Strategy & of more than 30 executives involved in the automotive sector.

The survey's findings point to important implications for revenue, compliance and the competitive environment across the entire vehicle value chain, including manufacturers, after-sales parts suppliers, dealerships, independent repair shops, and, of course, consumers.

The survey also underscores how much will depend on regulatory development and enforcement. For instance, will regulators look next at decoupling OEM control over dealerships once automakers no longer control aftermarket players? Will enforcement remain "high level" or will regulators drill down into cross-region sales restrictions, minimum vehicle sales prices and sales targets?

Findings from the survey suggest that the after sales parts industry will emerge as the big winner from the new regulations. These players will now be able to supply spare parts directly to both independent repair shops and to so-called 4S dealers (sales, service, spare parts and surveys).

For manufacturers, the implications may be nuanced. Experts consulted by PwC expect that vehicle producers will experience tangible price and margin reductions.

New regulations requiring technology disclosure and warranty coverage could drive down parts prices to consumers, undercut margins from counterfeit products and enable aftermarket parts suppliers to legitimately build market share.

In addition to genuine OEM parts suppliers, industry experts expect branded aftermarket parts suppliers to quickly set up distribution channels leveraging on e-commerce platforms such as Tmall and JD.com.

Of particular note is the emergence of independent aftermarket service and repair shops, widely expected by the experts surveyed to follow the liberalization of the after sales vehicle market.

In Beijing and Xi'an, for example, former 4S repair shop managers are opening independent repair shops on exactly the same streets as the original 4S stores. Under the new regulation, these independent players will have legitimate access to parts, the requisite technical skills and established client bases made up of former 4S clients.

They could quickly compete with established 4S stores by undercutting costs for consumers.

New players, especially online-to-offline quick maintenance and service players (for example, Kaladin) and platform providers (for example, Taobao Car Service) are already active on the scene.

In the longer term, the survey suggests that these regulations could mean profound change in the structure of the auto sector.

The high-profile single-brand 4S store model could evolve into multi-brand outlets and expand into used car, auto finance and car leasing/sharing services.

Local brand vehicle OEMs will also need to evolve from a manufacturer to a comprehensive service provider if they are to flourish.

Parts suppliers are expected to develop different channels, quality assurance processes and tracking systems with brand names on parts becoming increasingly important.

They could also form upstream partnerships or joint ventures with OEMs, or integrate with repair and maintenance chains. Large Chinese spare part players are also expected to emerge.

Large dealer groups contacted by PwC and Strategy & reported they have plans to develop multi-brand centralized repair shops, while others said they were planning to develop quick service chains.

Based on the feedback given by PwC and Strategy &, enforcement of the antitrust law will almost certainly have important consequences for the shape and structure of the auto industry in China.

Some of these consequences may be more predictable and have been highlighted above, for instance, the emergence of independent parts suppliers.

Others may be less foreseeable - for example, OEMs'control over dealerships - and will depend on the approach taken by regulators.

At a minimum, participants across the entire vehicle value chain still need to monitor developments and be ready to adapt to new market demands if they are to survive and flourish in 2015 and beyond.

John Jullens is partner, automotive and industrial leader at Strategy &, and David Wang is associate director at PwC China Consulting.